The short term development that continues to dominate is Poland’s agreement, on August 20 2008, to allow the US to install 10 interceptor missiles on Polish territory. The agreement calls for deployment of interceptor missiles in Poland and an advanced radar station in the Czech Republic. The defenses are designed to protect U.S. European allies from the threat of long-range ballistic missiles and are, in particular, aimed at protecting Europe from potential attack by Iran. All 26 NATO allies are backing the deployment, which is, however, vehemently opposed by Russia. The U.S. denies that the missile defense poses any threat to Russia’s ballistic arsenal, but their deployment has strained relations between Poland and Russia. In response to the development, Russia could make an ‘asymmetrical response’ by supplying Venezuela with the superior S-300 air-defence system.

Poland is also currently attempting to reduce its troop numbers, in line with NATO requirements. Thus far the scheme has proven successful, with the armed forces having fallen drastically from a post-Cold War level of 400,000 to 148,670 in 2007. The 2007 level is expected to remain constant through the forecast period. Key to reform plans is the creation of a more professional defence force. In 2010, Polish armed forces will be around 70% volunteer compared with less than 65% in 2004. By 2010, the armed forces should have 110 fully professional units, with 40% of all units compliant with NATO standards.

The political situation in Poland is still dominated by its push for Eurozone entry in 2011. We are doubtful that this timeline will be reached and forecast entry for 2013. Given that the EU will be faced with managing the aftermath of the global financial crisis and the Eurozone economic downturn, as well as potentially bailing out troubled states such as Romania and Bulgaria, resources will be stretched thin and the political will to expand the Eurozone within the next few years may be lacking. Though the EU will have to accept Poland's application at some point, we still maintain that 2011 will be too soon given that we expect the Eurozone slowdown to linger on well into 2010.

The Polish economy continued to unwind during the second quarter 2008, with growth of 5.8% year-onyear marking the third successive quarter of slowing expansion. While we expected to see economic activity continuing to moderate during the second half, we also believe that our full-year growth forecast of 5.4% was still on target. Moreover, with external demand from the Eurozone likely to remain subdued over the medium term, and with tighter global liquidity feeding through to household spending and domestic investment, we expect economic growth to continue moderating towards 3.5% in 2009 and 2.8% in 2010. While we believe that Poland's broad-based economy, relatively stable banking sector and moderate degree of external exposure will deflect the worst of the credit crunch, we nonetheless continue to highlight the risk of economic growth undershooting our forecasts. Indeed, should the Eurozone slowdown prove to be more severe and protracted than we had expected, or a financial crisis breaks out and spreads through the more vulnerable economies in the emerging Europe region, our relatively robust growth forecasts may be compromised.