First the country, now the currency
According to the Finance Minister, Mirosław Gronicki: "Poland could, in the year 2006, have a budget deficit lower than three percent of GDP." This is one of the toughest criteria Poland has to comply with to enter the euro zone.
Although the government is supposed to set the adoption date at the beginning of January 2005, experts and government officials indicate that Poland will comply with all Maastricht requirements by 2007 and will adopt the euro in 2009.
The euro is based on a high level of economic convergence by all EU countries. There are five main criteria Poland has to fulfill before joining the eurozone: annual inflation should have a maximum fluctuation of plus or minus 1.5 percent of the average of the three best performing EU countries; long-term deposit rates should fluctuate by no more than plus or minus two percent of the average of the three most stable EU countries; the budget deficit must be stable and of no more than three percent of GDP; the national debt has to be less than 60 per cent of GDP; and the złoty must have a stable exchange rate. The latter condition means entering the EU's Exchange Rate Mechanism (ERM), where currency exchange fluctuations have to fit between plus or minus 15 percent for two consecutive years.
Where is Poland?
Estimations made at the beginning of 2004 said that national debt should reach 53.6 percent of GDP by the year-end. But a greater inflow from privatization and the appreciation of the złoty decreased the government's debt demand and the value of foreign debt. A new prognosis based on these figures has been made, under the condition that the current exchange rate, hence the strong złoty, stays put. Therefore, public-debt figures presented in mid-December, calculated in accordance with the Polish methodology, should be below 51 percent of GDP by the end of 2004. Estimations for 2005 show that it will increase slightly, but should stay between 53-55 percent of GDP.
The budget deficit in 2004 should be lower than the estimated figure by zł.3 billion, and reach around zł.40 billion, instead of zł.45 billion. Current forecasts for next year expect it to decrease even further to zł.35 billion by the end of 2005. These figures show that entering the ERM is indeed possible in 2006, and then, with the Polish National Bank's (NBP) and the Monetary Policy Council's help, it will be possible to stay within the bands for a further two years.
Parliament has already voted for the 2005 budget, which has an estimated zł.35 billion deficit, but it also allowed increased government spending and did not pass two acts of the saving plan. This led to speculation that the government has underestimated the deficit by zł.3 billion.
The president of the NBP, Leszek Balcerowicz, said that Poland would gain by adopting the euro as soon as possible. "We have to obey all the criteria anyway. We have ill public finances and we need a quick reform. If we enter the euro zone later [he had earlier mentioned 2007] it will only be due to a delay in curing public finances." However, according to Professor Witold Orłowski, economic advisor to President Aleksander Kwaśniewski: "With a large effort... 2008-9 are realistic dates".
If the złoty stays strong without damaging GDP growth in the next year, the euro adoption should go ahead as planned. But one must remember that the Polish market is relatively small and the demand for złoty is inextricably linked to foreign speculative capital, which depends on the whims of volatile investors.
Although the government is supposed to set the adoption date at the beginning of January 2005, experts and government officials indicate that Poland will comply with all Maastricht requirements by 2007 and will adopt the euro in 2009.
The euro is based on a high level of economic convergence by all EU countries. There are five main criteria Poland has to fulfill before joining the eurozone: annual inflation should have a maximum fluctuation of plus or minus 1.5 percent of the average of the three best performing EU countries; long-term deposit rates should fluctuate by no more than plus or minus two percent of the average of the three most stable EU countries; the budget deficit must be stable and of no more than three percent of GDP; the national debt has to be less than 60 per cent of GDP; and the złoty must have a stable exchange rate. The latter condition means entering the EU's Exchange Rate Mechanism (ERM), where currency exchange fluctuations have to fit between plus or minus 15 percent for two consecutive years.
Where is Poland?
Estimations made at the beginning of 2004 said that national debt should reach 53.6 percent of GDP by the year-end. But a greater inflow from privatization and the appreciation of the złoty decreased the government's debt demand and the value of foreign debt. A new prognosis based on these figures has been made, under the condition that the current exchange rate, hence the strong złoty, stays put. Therefore, public-debt figures presented in mid-December, calculated in accordance with the Polish methodology, should be below 51 percent of GDP by the end of 2004. Estimations for 2005 show that it will increase slightly, but should stay between 53-55 percent of GDP.
The budget deficit in 2004 should be lower than the estimated figure by zł.3 billion, and reach around zł.40 billion, instead of zł.45 billion. Current forecasts for next year expect it to decrease even further to zł.35 billion by the end of 2005. These figures show that entering the ERM is indeed possible in 2006, and then, with the Polish National Bank's (NBP) and the Monetary Policy Council's help, it will be possible to stay within the bands for a further two years.
Parliament has already voted for the 2005 budget, which has an estimated zł.35 billion deficit, but it also allowed increased government spending and did not pass two acts of the saving plan. This led to speculation that the government has underestimated the deficit by zł.3 billion.
The president of the NBP, Leszek Balcerowicz, said that Poland would gain by adopting the euro as soon as possible. "We have to obey all the criteria anyway. We have ill public finances and we need a quick reform. If we enter the euro zone later [he had earlier mentioned 2007] it will only be due to a delay in curing public finances." However, according to Professor Witold Orłowski, economic advisor to President Aleksander Kwaśniewski: "With a large effort... 2008-9 are realistic dates".
If the złoty stays strong without damaging GDP growth in the next year, the euro adoption should go ahead as planned. But one must remember that the Polish market is relatively small and the demand for złoty is inextricably linked to foreign speculative capital, which depends on the whims of volatile investors.
