During the March summit of the European Union in Brussels, leaders of member states adopted a compromise solution concerning changes in applying the stability and growth pact. The changes may make Poland's entry to the eurozone easier.

Under the stability and growth pact, eurozone countries and countries seeking to adopt the single currency, including Poland, are required to maintain public debt below 60 percent of gross domestic product and a budget deficit below 3 percent of GDP. The latter condition was especially difficult to accept by EU countries, including the largest members of the eurozone, Germany and France, which for the past three years have been unable to keep their deficits below the required threshold. As a result, EU members were increasingly eager to make changes in the stability and growth pact.

A compromise solution to the problem was found during the recent EU summit, which ended in Brussels March 22. During the summit, the European Council approved a plan for changes to the pact prepared earlier by EU ministers of finance.

The reform of the stability and growth pact does not mean that the two reference values will be abandoned. Budget deficits of eurozone countries are still required, under threat of financial sanctions, to stay below 3 percent of GDP and public debts below 60 percent. However, the ministers agreed that in certain circumstances countries whose budgetary situation has deteriorated could be treated more leniently.

In line with the new principles, the procedure normally applied in the case of excessive deficit will not be initiated against countries whose economies have suffered as a result of recession or a longer period of low growth. Previously, only countries with a 2-percent annual decrease in GDP could count on preferential treatment.

Countries with budget deficits exceeding 3 percent will now have the right to justify their failure to meet the criterion by pointing to their business cycle position, structural reforms, for example a pension system reform and spending on research and development, and so on. Countries which spend a lot on "European solidarity and important goals of European policy, especially Europe's unification" can also count on lenient treatment if this spending has an adverse impact on their growth and fiscal burdens. This concerns chiefly Germany, which wants to deduct from its deficit spending on its unification and part of its contribution to the EU budget, used for assistance to poorer EU members.

If a country crosses the deficit threshold, it will now have two years, instead of one, to correct its fiscal policy. In the case of "unexpected developments" in the economy, this period can be further extended. At the same time, eurozone member and candidate states committed themselves to using the surplus budget revenue generated in times of an economic boom to reduce their budget deficits and public debts.

For Poland, changes to the stability and growth pact mean first and foremost greater chances for adopting the euro by 2009, the deadline set by the government. Before the relaxation of the pact, this seemed quite doubtful because of costs connected with the pension reform, which could prevent Poland from keeping its budget deficit below 3 percent. In line with the new rules, in the 2005-10 period, only part rather than all of the money transferred by the budget to open-end pension funds will augment the deficit. "Poland will be able to enter the eurozone in 2009," said Prime Minister Marek Belka.

The European Commission demanded that Poland should change the method by which it calculates its budget deficit by 2007, involving the addition of pension reform costs. The exclusion of savings on open-end pension funds' accounts from the public finance sector would automatically raise the deficit from the planned 2.2 percent to 3.7-3.8 percent of GDP.

In line with the adopted changes, the pension reform may provide grounds for delaying the initiation of the "excessive deficit procedure" for up to five years, starting with 2004. Poland will be required to add 1.6-1.7 percent of GDP to its deficit, but gradually-20 percent of the total value each year. According to Minister of Finance Mirosław Gronicki, Poland is still able to bring its budget deficit down to the required 3 percent of GDP or even below the reference value in 2007.

However, the adopted changes obviously represent a relaxation of budgetary discipline. The European Central Bank has already expressed its concern and warns that the relaxation of fiscal discipline may adversely affect the single currency. However, the bank cannot be expected to respond rapidly by tightening monetary policy, because inflationary threats in the eurozone are minimal, while potential negative consequences of the changes to the pact will only become evident after some time.

The decision which makes it easier for Poland to meet the Maastricht criteria by excluding pension reform costs from the deficit has been recognized as beneficial for the country. This was reflected, for example, in an upgrade of Poland's long-term debt rating from stable to positive by the Fitch ratings agency. The agency pointed out that the decision by EU ministers increases Poland's chances for the adoption of the euro according to the existing timetable, that is, in 2009 or slightly later, in 2010, which would have a positive impact on the country's rating. "However, the government should have credible plans for reducing the deficit to 3 percent of GDP, something which will pose a challenge," reads a communiqué from Fitch.

President of the National Bank of Poland Leszek Balcerowicz is an advocate of the fast adoption by Poland of the single European currency. "I am convinced that the best strategy for Poland-the most conducive to development-would be to implement quickly the reforms designed to pave the way for the euro," Balcerowicz said in an interview with the Voice. "Consequently, it is necessary to reform the economy rapidly and subsequently join the eurozone. With the single currency, we would be able to increase our exports faster and there would be faster growth, in addition to greater foreign investment."


Calling a Compromise
The EU summit in Brussels was dominated by the dispute concerning liberation of the European market for services. According to the directive on services proposed by Brussels, companies could render certain services anywhere in the EU without having to register their branches in other countries. Contracts would be signed in line with the laws binding in a given company's country of origin (country of origin principle). According to the European Commission, the directive-when adopted-will stimulate the EU's economic growth.

The summit participants were close to rejecting the directive. The main opponent was France, which feared the directive could cause "social dumping" by cheaper workers from the East. Eventually, a few modifications were added to the directive. The country of origin principle was sustained, which is vital to the competitiveness of Polish service exporters. It was agreed at the same time that some categories of services (called public services of general interest) would be excluded from the directive and in the case of others, liberalization would be gradual and take into account justified objections of more affluent countries.