The oldest coffee shop in Warsaw has been in operation nearly without interruption since the end of the 18th century. In the upstairs room, a young Frédéric Chopin played one of his last concerts before emigrating to Paris. During the Nazi occupation from 1939 to 1945, the cafe was strictly for Germans. When the city rose up at the end of the war, the building, like much of the old city around it, was completely destroyed—then reconstructed from photographs in the years following. The cafe was state-owned under communism and privatized in 1989 after the fall of the Iron Curtain, sold to a journalist and a jazz musician. “And now,” says Polish businessman Adam Ringer, sitting in the cafe in early October, “it’s been bought by an international company.”

Ringer, 64, reopened the cafe earlier this year under the name Green Caffè Nero, a coffee chain co-owned by Ringer, another Polish partner, and the U.K.-based chain Caffe Nero. “Here you have the whole history of Poland,” he says. “Look at that wall. Each brick is different. They were gathered from the ruins of prewar Warsaw.” Although they’re always aware of the past, Ringer and his countrymen are charging ahead. Revenue at most of his chain’s locations is up 10 percent from the year before, and the company is in the midst of a rapid expansion. “People are much richer than they were, and you can easily feel it,” he says.

With much of Europe still struggling to recover from the impact of the 2008 financial crisis, Poland stands out as an unlikely island of economic success, a place where companies and individuals plan for growth rather than decline. In 2009, when the gross domestic product of the European Union contracted by 4.5 percent, Poland was the only country in the union to see its economy grow, by 1.6 percent. The EU economy as a whole remains smaller than it was at the beginning of 2009 and isn’t expected to recover its losses until the end of next year. In that same period, Poland is projected to enjoy a cumulative growth of more than 16 percent. “Poland didn’t feel the crisis, really,” says Ringer.

There are various reasons Poland, a country of 38.5 million with more than 200 years of tragic history, suddenly finds itself in a position of envy. It has a large internal economy, a business-friendly political class, and the hypercharged potential of a developing country catching up with its western peers. It is playing an increasingly influential role in EU negotiations, often providing a voice of restraint during discussions on how to rebalance an off-kilter euro zone.

The secrets of Poland’s resiliency trace back to the postcommunist era, when its leaders pushed through a set of painful but ultimately effective reforms. Two decades later, the country benefited from an infusion of foreign assistance at the precise moment other EU members were getting clobbered by the financial crisis. The story of the Polish miracle is a testament to the importance of prudent policymaking—but it’s just as much about luck.

“I remember how it was 20 years ago,” says Ringer. “Gray, dirty, with nervous people, always running.” The street outside his cafe, until recently a tarmac thoroughfare, is now a narrow cobblestone lane flanked by wide sidewalks, where in the evening tourists mingle with students from the nearby university. A 20-minute walk away stands what was once the headquarters of Poland’s Communist party, squatting over a small city block. From 1991 to 2000 it was home to the Warsaw Stock Exchange. Today a Ferrari (F:IM) dealership neighbors a Montblanc outlet.

Since the fall of the Iron Curtain, Poland has refashioned itself as a model of free-market economics. From 1989 to 2007 its economy grew 177 percent, outpacing its Central and Eastern European neighbors as it nearly tripled in size—the result of a series of aggressive measures taken by the government after the collapse of communism. Price controls were lifted, government wages were capped, trade was liberalized, and the Polish currency, the zloty, was made convertible. The policies left millions out of work but freed Poland to begin to recover from decades of mismanagement. The economy got a further boost with the country’s entry into the EU in 2004.

At the onset of the global financial crisis, Poland’s burden of public debt was below 50 percent of GDP, low compared with many European countries—in part the result of a clause in its 1997 constitution limiting government borrowing to 60 percent of GDP. Individual and corporate debt was relatively restrained, kept in check by strict financial regulation and a cultural aversion to borrowing. “Which countries suffered the biggest busts?” says Leszek Balcerowicz, an economist and former deputy prime minister who was the architect for the country’s most important reforms. “Those that previously had the booms. One of the main reasons why we did not suffer a recession is because we didn’t allow the boom to develop.”

Private borrowing had begun to edge up in the two years before the crisis, but not so much that when the bottom dropped out of the global credit market, companies or individuals found themselves dangerously in the red. “We were late to the party,” says Marcin Piatkowski, an economics professor at Warsaw’s Kozminski University. “And it was over before we had time to get drunk.”

Many of the characteristics of the Polish economy are shared by its Central and Eastern European neighbors, all of whom suffered deep if not catastrophic recessions in the early years of the crisis. Poland, though, had an additional advantage: It was the beneficiary of an almost accidental Keynesian stimulus that arrived just in time, boosting domestic consumption and saving the economy. “While other countries followed policies of austerity, government spending in Poland actually went up,” says Gavin Rae, a professor at Kozminski University in Warsaw and author of Poland’s Return to Capitalism. “At the point of the crisis, the foot was put on the pedal.”

A series of tax cuts, including a drop in Poland’s top rate from 40 percent to 32 percent, took effect just as the crisis’s first shock waves were sweeping the world. Meanwhile, the EU budget for 2007-2013—which, among other things, distributes aid from richer countries to the union’s poorer members—made Poland the biggest beneficiary of subsidies, showering the country with some €101.5 billion ($137 billion). Although it was not labeled a stimulus package, Poland’s combination of increased spending and tax cuts was half again as large in per capita terms as the U.S.’s $800 billion American Recovery and Reinvestment Act of 2009.

Poland spent it quickly. The country had been elected along with Ukraine to host the 2012 European soccer championships, one of the biggest events in world sports. Polish officials from city councilmen to the president were eager to use the tournament as a national showcase, adding government spending to the incoming funds. The result was transformative. All across Poland, large cities and small towns underwent much-needed makeovers. In addition to new stadiums, everything from rail stations to city squares to airports were upgraded. Before the recent surge of infrastructure, Poles like to say, the country’s only real highway was the one built by Adolf Hitler. Stretching from the western town of Wroclaw to the border with Germany, it was once known as the longest staircase in Europe for the sensation caused by driving over its disjointed concrete slabs.

For older Poles such as Ringer, who can remember the way things used to be, the contrast can be breathtaking. Even those too young to have lived under communism feel a palpable sense of acceleration. “It’s hard to imagine how things were compared to what we have right now,” says Grzegorz Inglot, executive adviser to the board of directors of Inglot, a major Polish cosmetics company. At 23, he was born the year after the fall of the Berlin Wall. “Poland is growing year by year,” he says. “New investments, new roads, new buildings. It’s just more of everything.”

In the Continent’s other capitals, shopping centers usually rise on the periphery, squeezed out of the centers by property prices and existing buildings. In Poland, wartime destruction and communist-era stagnation have left plenty of unused or underutilized lots ripe for redevelopment. Warsaw’s iconic Palace of Culture and Science, a Stalinist skyscraper built by the Soviet Union in the 1950s, is flanked on both sides by shopping centers, offering brands ranging from Guess? (GES), Hugo Boss, and H&M to Nike (Nike), Adidas (ADS:GR), and Timberland (VFC)—not to mention Burger King (BKW), Subway, KFC (YUM), and McDonald’s (MCD). “We’ve had 20 years of transformation and growth, but we still have to catch up,” says Leszek Baj, a business reporter at the daily newspaper Gazeta Wyborcza. Adds his colleague, Patrycja Maciejewicz: “We want to buy what everybody in Europe is buying.”

Even as subsidies from the EU fueled its growth, Poland has benefited from remaining outside the common currency. From September 2008 to February 2009, the zloty lost about a third of its value relative to the euro, before stabilizing later that year at about 70 percent of its peak value. The resulting boost in global competitiveness for Polish companies quickly accomplished a rebalancing that the euro area’s weaker economies are still struggling to achieve. Measured in euros, the value of Polish exports dropped 15.5 percent from 2008 to 2009—but in zloty terms it grew 4.4 percent.

The drop in the zloty not only made Polish exports more competitive but also raised the relative cost of imports. The result was a boon for local companies, which increasingly are concentrating on quality. Standing in the Inglot flagship store in the upscale Galeria Mokotów mall in Warsaw, Greg Inglot says his company “felt a little slowdown, but it was nothing big. Our numbers were going up year to year.” Inglot, which produces 95 percent of its cosmetics in Polish factories near the Ukraine border, has continued a rapid domestic expansion, opening 113 stores since 2009, most of them in new shopping malls. The company opened its first flagship store in the U.S. in 2009, in New York’s Times Square. It now has 31 locations in the U.S. and outlets in 50 countries, including Belarus, Dubai, Guatemala, Malaysia, and the Philippines.

As Poles have gotten wealthier, their tastes have grown more sophisticated. Three years ago, when Jacek Rusiecki and his brother Michal opened their restaurant in the town of Jawor, not far from the border with the Czech Republic, the beer market was dominated by multinational breweries marketing mass-produced Polish brands. Theirs was the only establishment to introduce beers from the country’s rapidly multiplying microbreweries. “Now they’re all over the place,” says Michal, 31. Poles of their generation are starting to demand the quality products sought by consumers across much of the rest of Europe. “Our parents remember a time when somebody high up [in the Communist Party] knew better than they did how the beer should taste,” says Jacek, 28. Adds Michal, “We’re coming back to explore the tastes that were here before the World Wars.”

“The consumer has changed,” says Małgorzata Starczewska-Krzysztoszek, chief economist at Lewiathan, Poland’s private employer’s confederation. “They want to have good quality for a good price.” When Starczewska-Krzysztoszek surveyed small and medium enterprises in 2009, 60 percent of respondents said they were planning to compete on price and nothing else. “I was very worried,” she says. “I tried to explain that we can’t compete with China and India.” In 2012, when she ran the numbers again, only 10.6 percent said they planned to compete on price. Nearly half said they were focused on quality.

Despite its expansion, Poland hasn’t been totally shielded from the vicissitudes of the business cycle. A slight rise in unemployment in 2012, coming not long after the Euro Cup splurge, led to a sudden plunge in consumer spending. Many construction companies had drastically underbid for Poland’s infrastructure projects, leading the industry to slip into recession.

Cities found themselves with giant modern stadiums but no plans to fill them. The stadiums are largely unprofitable, pulling in too little through conferences, concerts, and the occasional game to pay for their maintenance, much less to pay down the loans that were taken to fund them. “The spending gave the economy a boost, but in the long term it wasn’t necessarily a wise investment for the country,” says Rae.

Poland also must address some long-deferred fiscal challenges. The government is pushing up against the constitutional debt limit and is desperate for funds. Many Poles say a recent change to the pension system, in which privately held funds are being transferred into the state system, is motivated by an effort to shore up the balance sheets. “They’ve done a lot of creative accounting to keep the deficit down,” says Andrew Kureth, editor-in-chief of the Warsaw Business Journal, an English-language newsweekly. Unemployment remains stubbornly high at 10.3 percent; among the young, the figure is 26 percent. In September the country’s trade unions organized one of the largest demonstrations since 1989, protesting working conditions. Prime Minister Donald Tusk recently reshuffled his cabinet, fired his finance minister, and pledged “an acceleration of economic growth.”

Despite some inevitable problems, Poles have reason to remain optimistic. Growth next year is projected to be 2.5 percent, driven in part by a recovery in parts of the EU, especially Germany, the destination of more than 25 percent of Polish exports. The EU budget for 2014-2020 was the first in the union’s history that saw cuts in total spending, but the money allocated to Poland rose nonetheless. Because of a mix of factors—including its size and proximity to Germany, the EU’s biggest economy—Poland is eligible for €105.8 billion, making it once again the biggest beneficiary among member states. The funds are expected to start flowing by the end of 2014.

It isn’t just money that’s pouring in. In addition to Green Caffè Nero, Ringer runs a training center that helps doctors prepare for positions across Europe. When he started 13 years ago, the students were almost exclusively Poles. In recent years, as Polish doctors began to receive attractive wages at home, the school has suddenly found itself catering to Greeks, Spaniards, Portuguese, and Croatians. “Can you imagine a Greek doctor coming to Warsaw to learn Norwegian and then moving to Western Europe?” says Ringer. “That’s the European Union right there.” And Poland is one place where, for now, anything seems possible.

http://www.businessweek.com/printer/articles/170132-how-poland-became-europes-most-dynamic-economy