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The Warsaw Voice » Business » March 4, 2009
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Euro Entry: Remedy for Crisis?
March 4, 2009 By Andrzej Ratajczyk   
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Rapid entry into the eurozone is the best way of protecting Poland from the financial crisis, the government says.

The sudden weakening of the Polish zloty since the beginning of the year has resurrected discussions on the introduction of the single European currency into Poland.

Zbigniew Chlebowski, chief of the ruling Civic Platform's (PO) parliamentary group, said that eurozone entry would protect Poland from many of its current problems. "If we were in the eurozone we would not have the billions of losses we have from foreign-currency options, Chlebowski said. "Moreover, people in Poland would not have problems repaying their foreign-currency loans and the Polish stock market would find itself in a decidedly better situation."

Meanwhile, Finance Minister Jacek Rostowski says the best way to fight the financial crisis is for Poland to join the eurozone rapidly and make sure that its public finances are secure. "The latest depreciation of the zloty, which has significantly increased our debt service costs, has highlighted the advantages of eurozone entry," Rostowski said.

The government wants Poland to join the eurozone in 2012, but many economists say that in reality this could be no earlier than 2013. However, for this to happen it is essential to make changes to the constitution, which is impossible without agreement from the opposition.

This explains why Prime Minister Donald Tusk has appealed for a speedy agreement on Poland's bid to join the eurozone. "If we are to work jointly with the whole region to fight the crisis, I need to ask for an agreement as quickly as possible on a realistic date for Poland to join the eurozone," Tusk said during a recent parliamentary debate on the government's proposals to protect the economy and citizens from the fallout of the crisis.

A united political effort in Poland to support eurozone entry is especially important in the context of the eurozone countries' plan to introduce Eurobonds, according to the prime minister.

"If we choose to turn our backs on the eurozone, then in two months' time, of our own volition, we will have problems financing our deficit," said Tusk.

Ludwik Kotecki, deputy finance minister and the government's commissioner for eurozone entry, has said that the government is sticking to its timetable for eurozone entry, but to keep to it Poland must enter the ERM2 exchange rate mechanism by the beginning of June this year at the latest.

At the end of October last year, the government approved a "road map" whereby it wants Poland to meet nominal convergence criteria in 2011. This would allow Poland to adopt the single European currency on Jan. 1, 2012, once the European Commission has agreed to admit Poland into the eurozone.

However, not everyone in Poland is optimistic. According to the chief of the National Bank of Poland (NBP), Sławomir Skrzypek, the Polish economy is not ready to adopt the euro. Skrzypek says the biggest difficulty is meeting Maastricht exchange-rate criteria.

"We are not ready to adopt the euro," Skrzypek said in an interview for the daily newspaper Rzeczpospolita. "The zloty's exchange rate is not stable enough, and therefore we cannot introduce it into the pre-euro ERM2 currency grid. There are no economic arguments for entering the mechanism this year, and the latter is a prerequisite for common currency adoption in 2012, the date set by the government. I do not understand the presumption that entry into the system would help stabilize the zloty. In the current situation we have to deal with a crisis on the financial markets, huge losses by investment funds, and a withdrawal of funds from this region of Europe. Speculative risk in such conditions is very high, and the market is very shallow. This means that there is a high possibility that the zloty will fluctuate to such a degree that we would not meet the criteria for a stable exchange rate."

In February the NBP published a report on the subject of Poland's full participation in the third stage of the EU's economic and monetary union (EMU). According to the central bank's analysts, research has shown that it is difficult to find economic arguments in favor of entry to this mechanism "under the current uncertain global situation"-though on the whole euro adoption would be "significantly more advantageous than disadvantageous."

Polish President Lech Kaczyński is also skeptical about the plan to speedily adopt the euro and says that there is no economic justification for Poland's entry into the ERM2 mechanism just now. According to Kaczyński, such a move could deepen the crisis and add to Poland's economic woes. The top priority now is to fight the crisis, Kaczyński said, while entry into the pre-euro ERM2 mechanism would force the government above all to defend the Polish currency and tap into the country's currency reserves, which could in time run out.

The president noted, however, that Poland could enter the eurozone in the long term-though before eurozone entry is possible certain conditions must be met such as greater flexibility in the labor market. In view of this, the key challenge at the moment is to preserve jobs and limit the rise of unemployment, Kaczyński said.

In mid-February, the Polish currency hit an all-time low, trading at nearly 4.95 zlotys to the euro. It stopped short of sliding below the zl.5 mark after the government-amid reassuring statements from finance ministry officials-decided to sell an estimated 1-2 billion euros directly on the market for the first time since December 2006.

The zloty was also helped by a declaration from the central bank chief, who said that Poland's macroeconomic performance does not justify such a scale of zloty depreciation and should there be such a need, the NBP would take steps to avoid negative consequences of exchange-rate fluctuations for the economy.

The heads of the Czech and Hungarian central banks made similar declarations about their national currencies at the same time. The Polish zloty, Czech koruna and Hungarian forint immediately strengthened.
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