Figuring the convergence factor
Polish politicians have become a familiar sight in the Brussels airport of late.
Officials have been ratcheting up the air miles while laying the groundwork for Poland's entry to the eurozone, which has become something of a national obsession. Poland took its seat at the EU table last year, and has found the single-market menu to its liking. Now it is hungry for the single currency, but the road to convergence is proving long and difficult.
A clear win
A EUR50 (zł.197) billion operation to introduce the single currency to 12 European countries might have seemed a bold, if not hazardous move, on January 1, 2002. Jolly French and Germans rushed to ATMs straight from New Year's Eve parties, while some isolationist Brits, having secured their currency's independence, gloomily forecast a scenario of economic stagnation and financial breakdown under euro rule. And indeed, dark clouds gathered above the single currency market, when it was revealed that Greece had done some illegal lifting to the country's fiscal balance sheet in order to comply with strict convergence rules. Germany and France also fell below the three percent of GDP budget deficit maximum during the last three years. But that does not change the general picture-the $6.372 (zł.19.029) trillion-a-year euro economy reported a 1.9 percent GDP growth in 2004. Economist have deemed the operation a success and the euro has enjoyed a significant, though some say undeserved, appreciation against the dollar over the last few years.
Bending Brussels
Given the above, it is little wonder that new member states are chomping at the bit to enter the eurozone, believing that the benefits would be enormous.
President Kwasńiewski's chief economic advisor, Professor Witold Orłowski, identifies perhaps the biggest single benefit of eurozone membership: "The importance of credibility. We easily buy good money straight off."
However, the road to the single currency is fraught with difficulties. The Minister of Finance, Mirosław Gronicki, and other officials have fought to convince their counterparts from the other 24 member states and the European Commission that regulations from the Stability and Growth Pact (particularly the three-percent budget-deficit limit) should not apply in Poland's case. Warsaw sees the deficit cap as an unnecessary punishment for reforming social benefits, which regulated how a share of obligatory pension payments were directed to private-owned funds. Now the Polish government would like to treat this money as state revenue, but the European statistics office and Brussels' eurocrats do not agree.
"We'd like to be allowed to adopt the euro without having to come down to the three-percent limit," Gronicki told Bloomberg. According to the Minister, expensive pension reform awaits eurozone countries anyway, and they will face the same difficulties as Poland does now. The EU interpretation is forecasted to inflate the budget deficit from the planned 2.2 percent of GDP in 2007 to 3.9 percent. This would mean the country will exceed the convergence regulations by rougly one percent in the year it is supposed to enter the 24-month waiting room for the euro, called ERM2. During that period, the fluctuation of local currencies against the euro is controlled, typically within a 15 percent range. Therefore, the Polish government is lobbying widely for favorable interpretations before the EU finance ministers discuss the possibility of easing the rules on March 7 and 8. Poles argue that these limits have already been violated by France and Germany.
Belt tightening
But even Gronicki admits that Brussels will most likely dismiss the plea. True, some countries, having binged a little since the euro's introduction, cannot now keep their economic waistlines within the tight three-percent deficit belt. But their figures all added up when they first sat at the table.
"Who will guarantee that Poland will not pay fines in 2010?" asks Professor Orłowski. He gives the example of Portugal, which joined unprepared, but was lucky in that it had a large deficit at the same time as two of the EU's leading economies. This insulated it from the wrath of Brussels. However, Poland may not enjoy such favors once in the zone and breaking budget discipline may not be an option. That is why Gronicki is proposing stricter financial policy to meet the requirements by 2007, regardless of EU decisions.
"The convergence program still stands, no matter the classification of the pension funds. It just needs a more restrictive fiscal policy," he said. President of the National Polish Bank, Leszek Balcerowicz, agrees, saying: "The best strategy for Poland is to meet the [convergence] conditions as soon as possible." He later laid responsibility for meeting the conditions with those in power: "It's up to the government and to the parliament." And the Polish deputies who will likely make up the next right-wing government have already stated their intention to jump through hoops in order to be ready for ERM2 entry in two years' time.
Chasing the pack
Many are advocating joining the euro sooner rather than later in order to avoid being left behind by the other new member states. Lithuania, Estonia and Slovenia formally joined ERM2 last June and will adopt the single currency in 2007. Latvia and Cyprus may follow suit in 2008. Others hope for a 2009 debut, and Poland could end up one of the last new members left in the euro land queue, with just Malta for company.
"Financial markets assumed Poland will have the euro. The question is, what will happen if they assume it won't," warns Orłowski, adding that investors hesitating between Slovakia with the euro and Poland with złoty will have an easy choice. Thus, the Minister of Finance proposed a 'big-bang' eurozone accession of Slovakia, Czech Republic, Hungary and Poland in 2010 to "prevent the competition in attracting capital."
The other reason for taking quick steps is to capitalize on the advantages of the still solid economic growth that, according to Orłowski, could last a maximum of four to five years. In his opinion, the transition should only be made in a strong economy, as that would take some pressure off the state budget. "If we are late for 2010, the next chance could be 2015," he argues.
What is there to lose?
Adding more ingredients to the euro melting pot, such as complex reforms limiting budget spending, are not the only obstacles the government and single-currency supporters face.
"With the elections in autumn [of 2005] there will be no time for necessary reforms in 2006," says chief economist of BPH bank, Ryszard Petru. Moreover, the society, now in favor of everything from Brussels, such as the EU constitution, could quickly shift to the opposing side after learning that around two-thirds of consumer products will rise in price to align themselves with EU levels. Moreover, the National Bank will cede some of its powers to the European Central Bank and lose some of its tools for commuting temporary fluctuations. Finally, implementing the euro requires changes in the constitution, which requires a 66 percent majority in parliament. This quorum is often difficult to find in an election year, which 2009 might well be. That is why the director of analysis at the Warsaw Investment Group, Piotr Kuczyński, while a euro-supporter himself, believes Poles will spend their New Year in ATM queues for the euro no sooner than 2012.
In all, throwing accession dates at the public might not be the most effective solution. Rafał Antczak, an economist at the Center for Social and Economic Research, says: "With such an amount of factors totally out of one's control [the date] is impossible to define." For now, the strong signals from the Polish government indicate that the authorities are doing their best and have set a clear goal. The variety of obstacles considered, though, their best may not be enough.
Officials have been ratcheting up the air miles while laying the groundwork for Poland's entry to the eurozone, which has become something of a national obsession. Poland took its seat at the EU table last year, and has found the single-market menu to its liking. Now it is hungry for the single currency, but the road to convergence is proving long and difficult.
A clear win
A EUR50 (zł.197) billion operation to introduce the single currency to 12 European countries might have seemed a bold, if not hazardous move, on January 1, 2002. Jolly French and Germans rushed to ATMs straight from New Year's Eve parties, while some isolationist Brits, having secured their currency's independence, gloomily forecast a scenario of economic stagnation and financial breakdown under euro rule. And indeed, dark clouds gathered above the single currency market, when it was revealed that Greece had done some illegal lifting to the country's fiscal balance sheet in order to comply with strict convergence rules. Germany and France also fell below the three percent of GDP budget deficit maximum during the last three years. But that does not change the general picture-the $6.372 (zł.19.029) trillion-a-year euro economy reported a 1.9 percent GDP growth in 2004. Economist have deemed the operation a success and the euro has enjoyed a significant, though some say undeserved, appreciation against the dollar over the last few years.
Bending Brussels
Given the above, it is little wonder that new member states are chomping at the bit to enter the eurozone, believing that the benefits would be enormous.
President Kwasńiewski's chief economic advisor, Professor Witold Orłowski, identifies perhaps the biggest single benefit of eurozone membership: "The importance of credibility. We easily buy good money straight off."
However, the road to the single currency is fraught with difficulties. The Minister of Finance, Mirosław Gronicki, and other officials have fought to convince their counterparts from the other 24 member states and the European Commission that regulations from the Stability and Growth Pact (particularly the three-percent budget-deficit limit) should not apply in Poland's case. Warsaw sees the deficit cap as an unnecessary punishment for reforming social benefits, which regulated how a share of obligatory pension payments were directed to private-owned funds. Now the Polish government would like to treat this money as state revenue, but the European statistics office and Brussels' eurocrats do not agree.
"We'd like to be allowed to adopt the euro without having to come down to the three-percent limit," Gronicki told Bloomberg. According to the Minister, expensive pension reform awaits eurozone countries anyway, and they will face the same difficulties as Poland does now. The EU interpretation is forecasted to inflate the budget deficit from the planned 2.2 percent of GDP in 2007 to 3.9 percent. This would mean the country will exceed the convergence regulations by rougly one percent in the year it is supposed to enter the 24-month waiting room for the euro, called ERM2. During that period, the fluctuation of local currencies against the euro is controlled, typically within a 15 percent range. Therefore, the Polish government is lobbying widely for favorable interpretations before the EU finance ministers discuss the possibility of easing the rules on March 7 and 8. Poles argue that these limits have already been violated by France and Germany.
Belt tightening
But even Gronicki admits that Brussels will most likely dismiss the plea. True, some countries, having binged a little since the euro's introduction, cannot now keep their economic waistlines within the tight three-percent deficit belt. But their figures all added up when they first sat at the table.
"Who will guarantee that Poland will not pay fines in 2010?" asks Professor Orłowski. He gives the example of Portugal, which joined unprepared, but was lucky in that it had a large deficit at the same time as two of the EU's leading economies. This insulated it from the wrath of Brussels. However, Poland may not enjoy such favors once in the zone and breaking budget discipline may not be an option. That is why Gronicki is proposing stricter financial policy to meet the requirements by 2007, regardless of EU decisions.
"The convergence program still stands, no matter the classification of the pension funds. It just needs a more restrictive fiscal policy," he said. President of the National Polish Bank, Leszek Balcerowicz, agrees, saying: "The best strategy for Poland is to meet the [convergence] conditions as soon as possible." He later laid responsibility for meeting the conditions with those in power: "It's up to the government and to the parliament." And the Polish deputies who will likely make up the next right-wing government have already stated their intention to jump through hoops in order to be ready for ERM2 entry in two years' time.
Chasing the pack
Many are advocating joining the euro sooner rather than later in order to avoid being left behind by the other new member states. Lithuania, Estonia and Slovenia formally joined ERM2 last June and will adopt the single currency in 2007. Latvia and Cyprus may follow suit in 2008. Others hope for a 2009 debut, and Poland could end up one of the last new members left in the euro land queue, with just Malta for company.
"Financial markets assumed Poland will have the euro. The question is, what will happen if they assume it won't," warns Orłowski, adding that investors hesitating between Slovakia with the euro and Poland with złoty will have an easy choice. Thus, the Minister of Finance proposed a 'big-bang' eurozone accession of Slovakia, Czech Republic, Hungary and Poland in 2010 to "prevent the competition in attracting capital."
The other reason for taking quick steps is to capitalize on the advantages of the still solid economic growth that, according to Orłowski, could last a maximum of four to five years. In his opinion, the transition should only be made in a strong economy, as that would take some pressure off the state budget. "If we are late for 2010, the next chance could be 2015," he argues.
What is there to lose?
Adding more ingredients to the euro melting pot, such as complex reforms limiting budget spending, are not the only obstacles the government and single-currency supporters face.
"With the elections in autumn [of 2005] there will be no time for necessary reforms in 2006," says chief economist of BPH bank, Ryszard Petru. Moreover, the society, now in favor of everything from Brussels, such as the EU constitution, could quickly shift to the opposing side after learning that around two-thirds of consumer products will rise in price to align themselves with EU levels. Moreover, the National Bank will cede some of its powers to the European Central Bank and lose some of its tools for commuting temporary fluctuations. Finally, implementing the euro requires changes in the constitution, which requires a 66 percent majority in parliament. This quorum is often difficult to find in an election year, which 2009 might well be. That is why the director of analysis at the Warsaw Investment Group, Piotr Kuczyński, while a euro-supporter himself, believes Poles will spend their New Year in ATM queues for the euro no sooner than 2012.
In all, throwing accession dates at the public might not be the most effective solution. Rafał Antczak, an economist at the Center for Social and Economic Research, says: "With such an amount of factors totally out of one's control [the date] is impossible to define." For now, the strong signals from the Polish government indicate that the authorities are doing their best and have set a clear goal. The variety of obstacles considered, though, their best may not be enough.
