Winding Road to the Euro
January 31, 2013
More than eight years after entering the EU, Poland still does not know when it will adopt the single European currency.
Having your own national currency has its good and bad sides. Poland has benefited economically from being outside the eurozone at a time of financial crisis. However, it has lost out politically because the Polish government has no influence on some important decisions made at the European level. Another downside is that there is still no specific timetable for Poland joining the euro club. Optimists say this may be possible as early as 2016, but there is no shortage of views that euro adoption will have to wait until the end of the decade.
The debate on the introduction of the single European currency has been in progress for years. In fact, the government jumped the gun when it comes to joining the euro area. In September 2008, during the Economic Forum in Krynica, Prime Minister Donald Tusk said Poland would aim to introduce the euro as early as 2011. But soon after that the global financial crisis began and plans for eurozone entry were put off.
Those supporting an early Polish eurozone entry argue that the single European currency would ensure lower interest rates, lower costs and benefits for exporters. Euroskeptics, on the other hand, point out that adopting the euro would deprive Poland of its own monetary policy and the floating exchange rate, which saved the Polish economy from succumbing to the crisis.
A desire to adopt the single European currency is not enough. A candidate country must meet the so-called Maastricht criteria, which means they must demonstrate price stability, have a low budget deficit and public debt, a stable currency and low interest rates. Finance Ministry data shows that Poland is still struggling with high inflation and with its public sector finance deficit. Nor does it meet the exchange rate criterion, which requires a two-year presence in the so-called ERM-2 system, where the exchange rate can deviate by no more than 15 percent from the prescribed level.
The debate on euro adoption in Poland was reignited after a statement Tusk made at an EU summit in Brussels in December; he said that the first decisions on Polish entry into the eurozone should be made in 2013. “We have to make a decision on whether we want to be part of the core of Europe—the economic and financial union with the single currency, or remain a peripheral state with its own currency,” Tusk said. He added that there is no need for a referendum on the matter, because voters approved the economic and monetary union during the EU accession referendum.
According to the Finance Ministry, eurozone entry remains an key objective of Poland’s economic policy. But the Polish government put the brakes on its plans to adopt the euro when it was hit by the aftershock of the global economic crisis and of the resulting turmoil in the eurozone. This explains why, according to the official position of the Finance Ministry, the existing strategy for euro adoption has been expanded to include an additional condition: stabilization of the situation in the eurozone, in particular a strengthening of its institutions.
Finance Minister Jacek Rostowski said, “We have a huge job to do to make sure eurozone entry contributes to strengthening and promoting Poland’s development. We need to ensure stable public finances, increase the competitiveness of the economy, carry out further reforms on the labor market and in the tax system.”
Central bank chief Marek Belka has voiced a similar view. “The crisis has shown that we should be much better prepared to join the euro area than we previously thought,” he said. “And the eurozone itself also needs to be repaired.”
Belka told Reuters that Poland will consider joining the eurozone only after southern European countries begin to show signs of economic growth.
According to Andrzej Sławiński, director of the Economic Institute of the National Bank of Poland, premature eurozone entry could be risky to the stability of the Polish economy. “The rate at which productivity has grown in the Polish economy was, is and will be—for quite some time—higher than in more affluent countries,” Sławiński said. “Therefore, the natural interest rate level, one that helps maintain an equilibrium in the economy (...), is higher in Poland than in the eurozone. So too quick an entry into the eurozone would permanently stabilize the interest rate at a level lower than that needed for balancing the economy. This could carry the risk of destabilizing the economy. On the other hand, the variable rate has proved to be a very effective way to keep the real, effective exchange rate at a stable level. So this is a good thing for business.”
Before Poland enters the eurozone, its constitution will have to be amended, primarily article 227, which regulates the powers of the National Bank of Poland. At present the NBP has the exclusive right to issue money and formulate and carry out monetary policy. The central bank is also responsible for the value of the Polish currency. After eurozone entry, both these functions will be taken over by the European Central Bank, which is why Polish regulations will have to be changed before Poland adopts the single currency.