The past week has proven eventful for Poland. By ratifying the Lisbon Treaty, the Polish government not only became an official signatory to one of the EU’s most monumental transformations, but additionally quelled any remaining doubts over its long-term commitment to the European project. It also demonstrated Poland’s desire to improve its standing within the EU, boost its credibility on the international stage and gain legitimacy as an emerging mid-size European power.

In recent years Poles have sought recognition and respect from the international community for its decisive role in bringing about the end of communism, its successful accession to the EU and NATO and for having one of Central Europe’s most robust and stable economies.

Prudent policies prior to and during the global financial crisis showcase Poland’s potential for leadership and regional crisis management. Poland has recently demonstrated this by lending over $200 (zł.570) million to Iceland’s ailing banking sector as well as joining a consortium of donors to provide financial aid to Latvia.

During this weekend’s annual World Bank-IMF meetings in Istanbul, Poland’s delegation confirmed its interest in continuing to access broad-range lending, analytic and advisory services. Whether they are giving Poland a $20 (zł.57) billion flexible credit line, granting credits for Polish SMEs or lending to Poland for infrastructure development, the World Bank and IMF have re-emerged as important partners for Poland's economic growth and sustainability.

At the same time, Poland is seeking to increase both its financial (via increased donor contributions) and physical presence (increasing staff quotas) within the international financial institution. As leaders from emerging and developing economies call on the World Bank-IMF to redistribute voting and decision-making power, Poland (with the 18th highest nominal GDP) stands to benefit and should push to be at the front of the receiving line.

Corruption and nepotism, which had thrived throughout communist Central and Eastern Europe for decades, continues to this day.

Though attempts to unmask high-level corruption have improved, as demonstrated by the recent resignation of Sports Minister Mirosław Drzewiecki due to evidence presented by the Central Anti-Corruption Bureau (CBA), the majority of graft takes place at the local and municipal levels. This has long permeated Poland’s local justice system, tax authority, contract procurement, and university entrance and grading practices. 

However, unlike their Warsaw counterparts, local officials lack the required resources and personnel to address these challenges head on.

According to Transparency International’s 2008 Corruption Perceptions Index, Poland ranks 58th out of 180 countries surveyed. Among Central Europe’s EU members, it outranks only Romania and Bulgaria, two countries that have been openly criticized, even financially reprimanded by the EU for their inability to adequately tackle corruption, fraud and organized crime.

Recent events in Poland not only highlight the severity of the problem, but demonstrate that repercussions go beyond politics. Specifically, high levels of corruption negatively affect a country’s economic progress and development. For one, perceptions of corruption serve as disincentives for investors considering opening or sustaining business operations in Poland.

At a time when financial institutions and multinational firms are increasingly risk averse, higher corruption perceptions in Poland may make it increasingly expensive (and more competitive) to tap global capital markets or attract foreign direct investment. 

Both the Polish government and the EU need to take a more active role working with local and high-level officials in setting clear metrics for success. Poland must require greater transparency and follow through with legal enforcement, otherwise it risks not only its political, but also its economic legacy.

Now that the Obama White House has officially scrapped plans for an Eastern European Missile Defense shield (on the 70th anniversary of the Soviet invasion no less!), many have been left to wonder if there is anything the US could or should do to redeem their standing in the eyes of many slighted Poles and disillusioned Czechs. In short, the answer is yes. And it comes in the form of greater economic engagement.

For many Poles, the missile defense system symbolized more than just the promise of military and geopolitical security. It also brought the prospect of long-term economic stability, in the form of American trade, capital and foreign direct investment. Along with ground based interceptors, came expectations of increased defense knowledge sharing, military equipment sales and logistics support by both Polish civilian and military personnel.
 
While US-Polish defense cooperation is far from finished, there has been a clear shift in US priorities. However, there are still opportunities to further US-Polish ties through greater economic cooperation, particularly in the manufacturing, IT and environmental technologies sectors. Both US and Polish small and medium-sized enterprises (SMEs) stand to benefit from improved trade relations and expanded export markets. This is especially true for US manufacturers – many of them located in the recession hit Midwest – struggling to compete with cheaper producers in Asia.

According to the Polish Information and Foreign Investment Agency (PAIiIZ), the US ranks 6th in terms of FDI in Poland – behind Germany, France and even Luxembourg – making up only five percent of Poland’s total. Equally, Poland’s exports to the US do not even place it in the top 15.

Thus, both countries have a lot to gain economically and therefore politically.  President Obama and Secretary of State Clinton should be more aware of this, especially since both have roots in Chicago, a city well-known for having the one of the largest Polish (among other Eastern European) communities in the US.

As the dust settles on the battered economies of Central Europe, winners and losers have clearly emerged on this the one-year anniversary of the global financial crisis.

Poland, along with the Czech Republic and Slovakia, stand ahead of the pack due to prudent economic policies, manageable current account deficits and lower macroeconomic imbalances (including lower levels of indebtedness).

Romania's and Bulgaria's growth prospects, which face stiff competition from healthier CEE economies, will continue to be burdened by deep political and economic deficiencies. Unless major initiatives, both at the local and EU level, address chronic corruption and structural asymmetries, the two countries are headed for stagnation.

Finally, the Baltic States and Hungary, saddled with debt and strict austerity programs, have the toughest road ahead and the least amount of flexibility in their recovery programs.

Despite their various predicaments, Central Europe has the opportunity to emerge stronger and more economically viable. The key is to learn from previous mistakes (domestic, US and wider EU), resist reform fatigue and continue to converge with the EU-15. That responsibility must not rest solely on Central Europe.

The EU, particularly its wealthier members, must ensure that Central Europe continues to be deeply anchored in market principles and EU institutions. Most importantly, they must convince the region that they are critical players in Europe’s overall recovery and prosperity.

For Poland, the best path forward includes keeping public spending low, taking advantage of EU funds for major reforms (healthcare, education, infrastructure and business climate) and setting a date for euro entry that is most favorable to its economic development.

Most importantly, Poland must refrain from excessive expansionary fiscal policies. Not only will Poland be unable to afford the extremely high interest rates required to cover the cost of borrowing, it will further delay euro entry.

Instead, Poland should accelerate critical structural market reforms to gain a competitive edge, before the window of opportunity closes.

Even though Poland has managed to avoid recession as the only EU member to post positive growth forecasts for 2009, its economy remains susceptible to sluggish recovery. At a time when EU-wide solutions are essential, some Western European governments continue to prioritize domestic agendas over upholding tenants of the common market.

This leadership gap is most evident in Germany, a country whose historical legacy makes it a natural choice for encouraging convergence efforts and strengthening economic ties with Central Europe, especially Poland.

Instead, Germany has fallen victim to increased protectionist and domestic political pressures, heightened by this month’s national elections. Germany’s response to the crisis has been timid from the start, with harsh criticism by Angela Merkel towards EU-wide bank bailouts for Central European subsidiaries and other pan-European coordination efforts. In May, the German government announced that it was keeping labor restrictions on workers from Central Europe.

The controls were meant to expire in 2009, but Germany invoked a clause allowing two more years in case of “serious labor-market disturbances.” The idea that the free movement of Poles or Slovaks would threaten “serious” disruption does not have much credibility, as Germany still has sizable shortages of skilled labor in certain areas. Moreover, Berlin’s preference for a Magna-Sberbank bid for Opel was driven by promises to keep auto jobs in Germany, not operational efficiencies.

The outcome of Germany’s elections will not only be a referendum on its free market policies, but will also have a substantial impact on future Polish economic prospects. As Poland’s largest trading partner, Germany will determine its willingness to diversify beyond export-driven growth and increase internal demand through additional trade and market access for cost competitive Central Europe.

In the past, Germany has realized the importance of tying its security to improved economic relations with neighbors like France (EU Coal and Steel Community) and Russia (Nord-Stream/Gazprom). It is time it did the same with Poland.