Had it not been for politics...
Lars Christensen is a senior analyst at Danske Bank Polska
The strength of a country's currency is an easily observable and somewhat reliable indicator of the general state of its economic well-being. Judging by the strength - or rather lack of strength - of the złoty, one would surely conclude that something was fundamentally wrong with the economy. And to some extent this is right.
We could mention the huge structural problems facing the economy, a catastrophic labor market situation, an inefficient agricultural sector, public finances in disarray and an infrastructure that leaves a lot to be desired. But the fact is that this obvious problem has had very little impact on the recent weakening of the złoty. Instead politics and, to some extent, geopolitical tension have been the main causes of the złoty's weakness.
Since the beginning of the year the currency has weakened more than 10% against the euro and more than 6% against the otherwise weakened U.S. dollar. It has very much been an annus horribilis for the złoty, and this is primarily a result of an annus horribilis in domestic politics. We have all seen the headlines in the newspapers about top ministers being fired or resigning, the full-blown corruption scandal - Rywin-gate - and the departure of the PSL from the SLD-led coalition government. These headlines have most definitely also been observed by the currency market.
This year has unfortunately not seen many days without some kind of scandal. Lately, the very unfortunate Rywin-gate affair has confirmed that there is something seriously wrong with the country's political system. And, even worse, the political misgivings now threaten to postpone the recovery in the economy even further, as the political turmoil could threaten the outcome of the European Union referendum in June. That could make foreign investors postpone or even cancel their investment plans here.
Unfortunately, we probably haven't seen the last scandal in domestic politics, and so it is also hard to imagine a very strong comeback for the złoty, even in light of an underlining improvement in the economy and the expected yes vote in the EU referendum. The fact is that the government under the leadership of Prime Minister Leszek Miller is slowly but surely falling apart. Last week we saw the resignations of treasury minister Sławomir Cytrycki and health minister Marek Balicki.
These resignations in themselves were not major news, but the pattern is increasingly clear. The leading SLD party is obviously internally divided on personal and political matters, and the government looks more and more fragile. Had it not been for the EU referendum in June, we most probably would have seen a general election in the coming months. A few weeks ago, President Aleksander Kwaniewski for the first time said that he wouldn't mind an early election. The relationship between him and the prime minister is at an all-time low, and the general impression is that this government will not survive for long - at least not under Miller's leadership. Just last week the prime minister proposed to move the general elections ahead to June 2004 instead of having them in 2005 as previously scheduled.
New elections after the EU referendum could change the country's political landscape fundamentally and would probably mean that antireform parties, such as Samoobrona and the LPR, would gain more power. This would ultimately affect two key policy decisions of the year. First, the budget proposal for 2004; and second, the decision about who the new members of the national bank's Monetary Policy Council (RPP) would be. The most likely outcome of new elections would be that domestic politics would move in a less reformist and less fiscally conservative direction, most likely bringing the appointment of more dovish RPP members than would otherwise be the case and an even looser fiscal policy. All in all, the financial implications would be a weaker złoty and higher interest rates.
This column is called "Economist Eye." Another column in this newspaper is called "Government Eye." Perhaps the editor should merge the two since it seems impossible to separate the state of politics from that of the economy. We can only hope that the remainder of the year brings more political stability and rationality than the early months because if this does not happen, the economic recovery might be derailed.
