In November 2008 the Tusk government announced a plan to adopt the euro by 2012, although the prime minister stated that, should adverse circumstances arise, the plan was open to “discussion” and possible delay. This decision was somewhat controversial since it not only required an amendment to Poland’s Constitution but also the unusual cooperation of Poland’s two major political parties-now bitter rivals on the Polish political landscape-and perhaps even a national referendum. Despite an overwhelmingly positive consensus about Poland’s European Union membership today, fundamental policy differences exist between two major parties, PiS and PO, and they were reflected the parliamentary elections in 2005 and 2007.

Poland’s Constitution[1]-Article 227 in particular[2]-provides that the National Bank of Poland shall have the “exclusive right to issue money” and to “implement monetary policy.” At present, Poland is an “honorary” member of the European System of Central Banks. As a result, Poland remains free to set its own monetary policy. However, as a condition of entering the EU, Poland committed itself to satisfying a set of fiscal and microeconomic criteria (the Maastricht Criteria) set by the European Central Bank. These included:

• maintaining an inflation rate of no more than 2.3 percent

• maintaining a budget deficit at or below 3 percent of GDP

• maintaining the level of Polish government debt at no more than 60 percent of GDP

In addition, Poland is required to join the exchange rate mechanism called ERM II[3] for at least two years before formal adoption of the euro, during which time fluctuation in the value of the zloty to the euro may not exceed 5 percent.

Arguments on euro participation

In 2009 critical economic factors impacted Poland’s decision to fully implement its commitment and adopt the euro. In 2008, several weeks after President Kaczynski agreed in principle that Poland would join the Eurozone by 2012, the European Central Bank came to an agreement with Poland. The ECB would give Poland a 10 billion euro credit line, described as a currency swap agreement, to prevent further depreciation of the zloty. By December 2008 the zloty seemed to have stabilized.[4]

Witold Orlowski observed that one of the main drivers of Poland’s successful transition has been its continued ability to attract foreign direct investment, based on the interplay of four solid fundamentals: high labor productivity, moderate labor costs, safety of investments, and good location.[5] According to a report issued by the World Bank, Poland exhibits a “robust financial system, a relatively sound banking system, and an overall external debt which is relatively moderate compared to more vulnerable countries.”[6] Joining the Eurozone would strengthen Poland’s international position.

The Euro Debate: Economic and Monetary Pros and Cons

A variety of opinions have surfaced on the question whether Poland’s economy is actually prepared for adoption of the euro. Professor Janusz Bilski of the University of Lodz has summarized some of the main arguments against the adoption of the euro. These include:

• a worldwide financial crisis and a recession will stop economic growth for the next two to three years, ushering in a period of “soft economic nationalism” at the expense of “mechanisms and regulations of monetary unions”

• it is unrealistic to impose severe restrictions on the Polish economy amid the crisis. The next two-to-three-year period (2009-2011) may be the “worst possible timing for the euro adoption since the moment of creating the euro zone.” Only a monetary policy run by Polish national authorities can effectively protect Poland’s poor and its pensioners against economic recession in an environment in which the unemployment rate could once dramatically rise

• the decision of “fast euro adoption” will add an external burden on economic policy “exactly at a time when it should be as flexible as possible”

• the adoption of the European Central Bank’s interest rate may hurt the Polish economy. In contrast to an emerging trend, “the government’s aim seems to be to keep fiscal policy tight so that the central bank can cut interest rates”[7]

• restrictions adopted by many countries against worker migration and the provision of services by Poles may distort the effect of any adjustment mechanisms adopted by the EU

On the positive side, Professor Bilski noted some potential positive benefits from the adoption of the euro. These include:

• adoption of the euro may provide an impetus to Poland’s attempt to reform its public finance system and in its efforts to tame or control inflation

• the decision to adopt the euro “may be [one] of the country’s most vital decisions in the next decade as it is likely to ensure good conditions for stronger economic growth”

• for the Polish economy-which Professor Bilski terms as a “peripheral economy”-the adoption of the euro will be beneficial if it is a part of a plan to ensure “better implementation of [Poland’s] strategic economic goals”

• According to Thomas Laurson, country manager at the World Bank for Poland and the Baltic States, “Poland is really the only country now in the region that has a firm and, at least as far as possible, a credible plan for adopting the euro.”[8]

Conclusions

Both proponents and opponents of euro adoption agree that the decision to join the Eurozone will have a profound impact on the Polish economy and society. The economy, while generally robust and growing, albeit at reduced growth rates, is still not fully mature. In sum, the arguments boil down to a fundamental disagreement on whether the adoption of the euro will amount to a “risky economic experiment” that will lead Poland into a prolonged recession in which the European Central Bank’s interest rates could hurt the Polish economy. President Kaczyński and his party (PiS) believe that it will. It thus appears that an important interim step will be Poland’s joining the ERM-2, during which it must stabilize the zloty-to-euro exchange rate and create suitable adjustment mechanisms. Rzeczpospolita reports that in preparation for this event, “narrowed margins for currency rate volatility are likely to lay new ground for Polish economy functioning, and it should be carefully monitored how the market reacts to asymmetric shocks as well as what are the cost of their absorption.”[9]

The decision to adopt the euro has been made. Questions remain as to how and when Poland should take this dramatic step. Prime Minister Tusk summed it up: “The main obstacle to the carrying out of the plan [to adopt the euro by 2012] . . . may be the lack of political consensus rather than the condition of Poland’s economy, which is fairly stable.”[10]

This article is based on a paper delivered at the 67th Annual Meeting of the Polish Institute of Arts and Sciences of America, June 2009.

NOTES

1. <www.sejm.gov.pl/prawo/konst/polski/10.htm>.

2. “Centralnym bankiem państwa jest Narodowy Bank Polski. Przysługuje mu włàczne prawo emisji pieniàdza oraz ustalania i realizowania polityki pienięÏnej. Narodowy Bank Polski odpowiada za wartośç polskiego pieniàdza.”

3. Thompson Financial News reported that “Poland must enter the pre-euro exchange rate mechanism ERM-2 at latest in the second quarter of 2009 to be ready in 2011 to adopt the common currency.” Dagmar Leszkowicz, “Update 1- Poland c.banker sees ERM-2 at latest in Q2 2009,” at www.forbes.com, 25 September 2008.

4. Stefan Wagstyl, “Lending fears may freeze the system,”

Financial Times (Poland), 9 December 2008, 6.

5. Witold Orlowski, “Better placed than neighbors,” ibid.

6. World Bank, EU10 Regular Economic Report, reported in Anna Olejarczyk, “Fundamentally sound,” Warsaw Business Journal, 3-9 November 2008, 3.

7. Economist, “The tough go politicking,” 6 December 2008, 68.

8. Anna Olejarczyk, “Fundamentally Sound,” Warsaw Business Journal, 3-9 November 2008, 3.

9. Polish News Bulletin, “Has Poland Chosen Worst Timing Even for Euro Adoption?” 12 December 2008, citing Rzeczpospolita, 11 December 2008, B12.

10. Polish News Bulletin, “PM and Finance Minister on Euro,” 10 December 2008, citing Gazeta Wyborcza, 9 December 2008.