Poland flexes muscles in East-West EU stand-off

WARSAW (Reuters) - Poland's brinkmanship on an EU- wide sales tax deal showed the bloc's newcomers are a force to be reckoned with while cementing Warsaw's reputation for aggressive tactics in asserting itself in the enlarged Union.

The Poles, backed at first by the Czech Republic and Cyprus, clashed with "old" European Union members by opposing a deal to prolong reduced rates of Value Added Tax on haircuts, home improvements and bike repairs, in the first major row pitting the bloc's long-time rich members against its newcomers.

Prague and Nicosia dropped their opposition at the weekend leaving Warsaw holding out alone until it struck a compromise with EU president Austria and the European Commission on Wednesday, averting another major blow for the 25-member bloc.

Poland earned mixed reviews for its handling of the crisis.

To critics, it lived up to a reputation as a troublemaker. To supporters, it won concessions and cemented its role as a champion of the bloc's poorer eastern underdogs.

The stand-off showed the EU's founders and heavyweights and Brussels establishment could ill afford to ignore the newcomers' interests and sensitivities, analysts and diplomats said.

"That episode reinforces the message that, yes, now we have 10 new members who are willing to fight for their interests," said Katinka Barysch, chief economist at the Center for European Reform London-based think-tank.

Some analysts said the VAT talks, like a December compromise on the EU's long-term budget, showed only Poland among the new members had the muscle and nerve to risk an open confrontation with the EU's biggest powers -- Germany, France and Britain.

"Poland is a large country and it has acted mainly in its own interest, but also reinforced the identity of other new members which are at a similar stage of development," says Eugeniusz Smolar, president of the Warsaw-based Center for International Relations think-tank.

Polish Finance Minister Zyta Gilowska, who negotiated the deal with Brussels and Vienna, said Warsaw had opposed an initial deal because it was unfair to newcomers, giving rich long-time members better terms than poorer eastern neighbors.

NATIONAL CHARACTER

But others are skeptical about whether it can play a larger regional role, contending that other smaller nations can achieve as much with quiet behind-the-scenes diplomacy and skillful compromises as Warsaw has by grandstanding.

"I don't see any leading role for any of those new members," a Brussels-based diplomat from another new member state said.

"What the VAT conflict showed was more a difference in national mentality. You could see that the Poles proceeded in this manner several times -- very vocal, with an 'all or nothing' attitude. Other countries, for example the Czechs, are used to negotiate more," the diplomat said.

The Czechs said they won virtually the same concessions as the Poles in the VAT row -- assurances that they will be able to extend low tax rates to much of their housing sector -- without taking the bloc to the brink of a crisis.

"Poland is missing a great opportunity. Instead of being one of the large members that give the direction to the European Union policy, the government is taking on a role of a defender of its own and others' interests, even against their will," said Cornelius Ochmann of the Bertelsmann Foundation in Berlin.

Commentators say Warsaw, which counts on billions of EU aid to modernize its economy and narrow the wealth gap with the rich West, may yet pay a high price for its confrontational style.

Poland's new conservative government, which made an election promise fiercely to defend national interests in Brussels, is also locked in a row with the EU over its opposition to a bank merger that the European Commission has already cleared.

Upping the stakes in a battle that legal experts say it is bound to lose, Poland threatened on Thursday to declare void a 1999 privatization deal if Italy's UniCredito bank went ahead with a merger of two Polish banks which Warsaw opposes.

Some diplomats say a combination the government's lack of experience and distrust of Brussels may yet backfire.

"Poland's approach to EU issues now is a mix of mistrust and inability of acting within the bounds of European diplomacy," a senior Polish diplomat said.

"If the EU wasn't so preoccupied with overcoming its institutional crisis, the VAT debate could have ended up in a great confrontation. I am afraid that the UniCredito case may be the last straw," he said.