The euro is not for Poland - not anytime soon

As recently as ten years ago, the euro zone was the icing on the cake for Polish EU integration. Today, after a long-lasting economic crisis and turmoil involving the common currency, the European pie has ceased to be sweet enough for Poland

By Sergiusz Prokurat

After Lithuania adopted the common currency this year, only one of Poland’s EU neighbors remains outdside the euro zone – the Czech Republic. In theory, Poland could also adopt the euro. According to the convergence criteria (conditions for standardizing the European currency) – Polish inflation cannot exceed the respective rate in the three countries with the lowest scores, plus 1.5 percentage points. Poland meets this criterion. The same is true for the second condition – total sovereign debt, which cannot exceed 60 percent of GDP. Resulting from the fact we borrowed some time ago and continue to do so, Poland sustains continued budget deficits. Nonetheless, the Polish sovereign debt is at 50 percent of the GDP. This figure is worse for the public finance sector – although the deficit amounted to 3.6 percent at the end of last year, an improvement is foreseeable. Nevertheless, it means that Poland is under the European Commission’s Excessive Deficit Procedure (EDP) right now. “Next year, the deficit criterion, will most probably be met by Poland,” said Jakub Borowski, chief economist at Crédit Agricole Bank. The last criterion is the yield on debt. The percentage on Polish 10-year bonds cannot exceed the average of three countries (with lowest HICP inflation) by more than 2 percentage points. Then the only thing left is a two-year period of maintaining the ERM II mechanism – the European Exchange Rate Mechanism, wherein the PLN/EUR exchange rate can fluctuate within ± 15 percent of a set rate. When all these conditions are met, Poland may enter the euro zone. However, at present, this is not feasible.

Common distrust of the euro

Support for EU integration has melted away in Poland since the accession. The figure that’s most affected is the number of euro adoption advocates in Poland. They amount to 22 percent according to data from GfK Polonia. Meanwhile, 42 percent of Poles are strongly opposed to the notion, with a further 32 percent opting towards the “no” camp. In a study conducted by TNS OBOP in March 2015, as many as 63 percent of survey participants think that adopting the common currency will be detrimental to the situation of households. It is far harder to investigate what this opinion is based on. Mainly, concerns center on rising prices. It is true that after swapping the local currency for the euro, a short-term, slight (one to two percent) price increase was observed in most countries. But do these concerns overshadow the positive aspects of euro adoption by Poles?

The euro challenge for politicians

The euro zone will further integrate within its 19 member-strong group, it will become an elite club within the European Union. The head of the European Commission Jean-Claude Juncker continues to stress that he strongly believes in the principle of joint action and development of the European Union. He does however admit that not everyone has to grow at the same pace, and those who want to develop at a higher rate should receive an opportunity to do just that. This may mean certain ”fiscal incentives” in the not-so-distant future for countries in the euro zone. “Polish accession into the euro zone is a strategic goal of our policy,” said Finance Minister Mateusz Szczurek at the Retail Banking Forum in late 2014. He also noted, however, that having the common currency is less profitable currently than it was a few years back. “Adopting the euro is an opportunity for us to grow at a higher pace, but this opportunity must be leveraged in an intelligent way,” said Prime Minister Ewa Kopacz. “Poland will enter the euro zone when it’s ready, and when the euro area itself is ready for such a move.” This is a far different opinion than the one voiced by PM Donald Tusk in 2008. He then reckoned accession would be executed in 2011 or 2012. A year later, Tusk thought Poland would be ready in 2015, changing his opinion again in 2010, stating that Poland would be ready “at the correct time.” We do, however, know that this time will not be before 2020. These are the conclusions from the newest report by the National Bank of Poland (NBP). This is an important document because it presents the viewpoint of the institution responsible for monetary policy. The report sees Polish accession as a way of accelerating growth and raising the wealth of Polish society, albeit these effects are by no means guaranteed. Relevantly, it specifies the conditions which have to be met for this opportunity to be harnessed. And these can be summarized as impossible to meet in the near term, so the euro will not come to Poland soon.

The consequences and plans

Entering the euro area is a very important decision, which, on the one hand, may positively impact Polish business – easier trade exchange, no currency risk; on the other hand, it may limit the competitiveness of the Polish economy, for largely the same reasons. Economists in favor of the common currency, including economist and former Finance Minister Grzegorz Kołodko, say that Poland should join, but the most important issue which must be agreed upon by economists is at what exchange rate this would happen. It is important that the złoty would not be overvalued, in consequence hampering the competitiveness of Polish exports. Paradoxically, the question not only revolves around meeting the criteria adopted by the European Union, the so-called Maastricht criteria, but also around the competitiveness of our goods and services. Thus, Poles should not worry about the rounding up of prices but focus on labor productivity and modernization of the economy and keep a keen interest in what is happening in the euro area itself. “An important question is whether the euro zone is stable enough for accession to be a good idea?” Borowski stated.

Is the Union printing?

At present, a watering down of the common currency by the European Central Bank can be observed. This is the carefully planned program of quantitative easing. Mario Draghi, the head of the ECB, is saying that the central bank will inject €1.1 trillion into the European economy (around €60 billion a month), by hoarding the bonds of member states. Draghi’s plan is supposed to weaken the euro, whose value is nearly on par with the US dollar. This would be the greatest historical drop of the euro to the dollar. Deutsche Bank expects the currency to go as low as $0.85 by 2017. This is great news which may lead to an economic revival. But not everyone will benefit. Companies will come out on top, as confirmed by Moody’s, which published a list of industries which will gain on the euro’s depreciation. Consumers will lose out, because their currency will not be as strong outside Europe, and even the euro zone itself may be at a loss. Is printing more currency to fight the dollar a good example for countries considering entry, such as Poland? Borowski, however, does not see any problem with this, “QE is a tool for fighting deflation. It will lead to improved public finances. Higher economic growth in the EU will lead to higher wages, and exporters will buy more Polish products. Apart from strengthening the złoty, QE in the euro zone should be positive for the Polish economy.” Currently, the Polish government is not keen on starting a public debate on the costs and benefits of entering the euro zone. It is watching the results of QE with a keen eye. “Although entering the euro club is a political decision, we also have to remember that Poland needs to change its constitution to adopt the euro. Thus accession is a long term perspective,” Borowski claimed. So the Czechs, Romanians, and even the Bulgarians may adopt it sooner. However, we still do not know if this icing on the cake of EU membership will help them or cause indigestion.