The quest for the euro
Polish Prime Minister Donald Tusk set the bar high when he announced his government's desire to adopt the euro in 2011, an announcement that's politely described as "ambitious" by economists.
This is the government's firmest statement yet on when the largest economy of the EU's 2004 accession class could adopt the euro. However, PM Tusk's plan still faces a number of obstacles.
As per its accession agreement, Poland is obliged to join the euro zone at some point. Economists are skeptical that 2011 is realistic, though.
"If the Constitution needs to be changed, then 2011 is not realistic," said Kai Stukenbrock, director at Standard & Poor's. "Parliament needs to change the Constitution and a two-thirds majority is needed," he told WBJ.
In order to adopt the euro, the Polish Constitution needs to be amended to give the European Central Bank the right to print and distribute money. The ruling centre-right government would need the support of the conservative opposition in order to change the constitution and President Lech Kaczyński, co-founder of the opposition Law and Justice party, has expressed skepticism about quick adoption.
Hurdles ahead
There are other challenges in addition to constitutional amendment. According to Stukenbrock, there's still the issue of inflation, having the central bank on board and being a member of ERM 2 system, which Poland would need to enter before the end of the year in order to meet the 2011 goal.
Piotr Kalisz, senior economist at Citi agreed. "Poland should have entered ERM 2 in the first half of 2008. We are now in the second half of 2008 and we cannot turn back time," he told WBJ.
One of the reasons President Kaczyński has been hawkish on euro adoption is fear of rapid inflation. Currently, inflation is at 4.8 percent and the Monetary Policy Council has raised rates eight times since April 2007. Another hike is expected in October.
"I thought two more hikes may be needed. But now, after the prime minister's declaration [on euro adoption], more may be," Dariusz Filar told TVN CNBC in an interview.
Standard & Poor's Stukenbrock said that meeting the inflation target set in the Maastrict Treaty was still possible. "Inflation is the trickiest target to meet. But they do have some time because if they want to make it to the euro zone by 2011, inflation needs to be met by April 2010," he said.
Finance Minister Jacek Rostowski has said his ministry would soon start work on a schedule and strategy for euro adoption. However, Stukenbrock questioned the central bank and finance ministry's enthusiasm for the project.
"The finance minister is cautious and should wait until the time is right. Maybe the PM can sway him. The central bank is not yet fully on board on the issue. There are still a lot of loose ends," he said.
Meeting Maastricht
Poland already meets most of the EU's Maastricht criteria, but it still has a ways to go. It has a budget deficit of less than three percent of GDP, its public debt is less than 60 percent of GDP and inflation is expected to be fall below the 1.5-percentage-point ceiling.
But some analysts say the fiscal and inflation goals may be hard to meet and maintain due to the economic slowdown, a concern also shared by EU officials. "The timetable is very tight, if possible at all," one EU diplomat involved in monetary issues told Reuters.
Finally, there's the issue of currency stability. Poland needs to spend two years in the ERM 2 mechanism, where its currency will be put under the exchange rate test. "The ECB and the EU will have a skeptical view if [the currency] is depreciating, but if it appreciates, that is much more tolerated," said Stukenbrock.
This is the government's firmest statement yet on when the largest economy of the EU's 2004 accession class could adopt the euro. However, PM Tusk's plan still faces a number of obstacles.
As per its accession agreement, Poland is obliged to join the euro zone at some point. Economists are skeptical that 2011 is realistic, though.
"If the Constitution needs to be changed, then 2011 is not realistic," said Kai Stukenbrock, director at Standard & Poor's. "Parliament needs to change the Constitution and a two-thirds majority is needed," he told WBJ.
In order to adopt the euro, the Polish Constitution needs to be amended to give the European Central Bank the right to print and distribute money. The ruling centre-right government would need the support of the conservative opposition in order to change the constitution and President Lech Kaczyński, co-founder of the opposition Law and Justice party, has expressed skepticism about quick adoption.
Hurdles ahead
There are other challenges in addition to constitutional amendment. According to Stukenbrock, there's still the issue of inflation, having the central bank on board and being a member of ERM 2 system, which Poland would need to enter before the end of the year in order to meet the 2011 goal.
Piotr Kalisz, senior economist at Citi agreed. "Poland should have entered ERM 2 in the first half of 2008. We are now in the second half of 2008 and we cannot turn back time," he told WBJ.
One of the reasons President Kaczyński has been hawkish on euro adoption is fear of rapid inflation. Currently, inflation is at 4.8 percent and the Monetary Policy Council has raised rates eight times since April 2007. Another hike is expected in October.
"I thought two more hikes may be needed. But now, after the prime minister's declaration [on euro adoption], more may be," Dariusz Filar told TVN CNBC in an interview.
Standard & Poor's Stukenbrock said that meeting the inflation target set in the Maastrict Treaty was still possible. "Inflation is the trickiest target to meet. But they do have some time because if they want to make it to the euro zone by 2011, inflation needs to be met by April 2010," he said.
Finance Minister Jacek Rostowski has said his ministry would soon start work on a schedule and strategy for euro adoption. However, Stukenbrock questioned the central bank and finance ministry's enthusiasm for the project.
"The finance minister is cautious and should wait until the time is right. Maybe the PM can sway him. The central bank is not yet fully on board on the issue. There are still a lot of loose ends," he said.
Meeting Maastricht
Poland already meets most of the EU's Maastricht criteria, but it still has a ways to go. It has a budget deficit of less than three percent of GDP, its public debt is less than 60 percent of GDP and inflation is expected to be fall below the 1.5-percentage-point ceiling.
But some analysts say the fiscal and inflation goals may be hard to meet and maintain due to the economic slowdown, a concern also shared by EU officials. "The timetable is very tight, if possible at all," one EU diplomat involved in monetary issues told Reuters.
Finally, there's the issue of currency stability. Poland needs to spend two years in the ERM 2 mechanism, where its currency will be put under the exchange rate test. "The ECB and the EU will have a skeptical view if [the currency] is depreciating, but if it appreciates, that is much more tolerated," said Stukenbrock.
