One of the reasons that Poland's economy has managed to survive successive waves of the global economic crisis is that it has a shock absorber in the form of its own currency − which is why support for joining the common currency has waned in recent years both in public opinion and among government leaders.
But the argument that being outside the euro has helped the economy is a lot less clear cut than would first appear − just look to the example of Slovakia.
Slovakia joined the euro in 2009 (probably a date that Poland could have also met if it had decided to make a concerted push for accession in 2005 or 2006) amid fears that the populist government of prime minister Robert Fico had set the final exchange rate of the koruna to the euro at too high a rate − 30.126 to the euro compared to 40.05 in 2004, when Slovakia joined the EU.
In the run-up to accession, Slovakia saw a steep fall in exports and industrial production, and the worry was that joining would make the Slovak economy uncompetitive and potentially drive away investors.
“An increase in costs after the introduction of the euro was seen as the most significant negative point, and more than a half of large enterprises as well as SMEs shared this opinion,” noted a study by the National Bank of Slovakia.
While OECD data do show that Slovakia’s average wages jumped sharply, in euro terms, in 2009 and the country lost ground in terms of unit labour costs, it is debatable that Slovakia was hit harder by the crisis than other small and open economies like the neighbouring Czech Republic.
In 2009, Slovakia’s economy contracted by 4.7 per cent, while the Czechs, who kept their koruna, saw a very similar recession of 4.1 per cent.
However, Slovak purchasing power remained unaffected by the crisis, unlike what happened in Poland. Fico even called the euro Slovakia’s “shield” against the crisis, and the impact of the crisis proved to be short lived.
When looking at manufacturing production for Slovakia, the Czech Republic and Hungary, Slovakia tracked the other countries fairly closely during the 2009 downturn, but then actually did better in the 2010 recovery.
As the first wave of the crisis receded, the advantages of being in the euro have grown for Slovakia, primarily because foreign investors now face no currency risk when putting their money into the country. Other CEE countries have seen their currencies sag against the euro, but swings in the forint, zloty and koruna have been quite wild, adding an element of uncertainty to investment decisions.
Andreas Tostmann, until this year the head of Volkswagen’s operations in Slovakia, said that the country’s status as a eurozone member was one of the key factors in deciding to increase investment in the company’s factory on the outskirts of Bratislava.
Slovakia has seen a very sharp increase in foreign direct investment − which rose from €123m in 2010 to €518m last year.
In recent months the country’s three big car factories − owned by Volkswagen, Kia and PSA Peugeot Citroen − have seen about €1bn in investments in expanded production, with the result that the production of transport vehicles is growing at a 42 per cent annual rate − helping Slovakia note a 2.7 per cent annual rate of growth in the second quarter.
In all, industrial production is rising at a 10 per cent annual rate − thanks to the strength of the car and electronics sectors.
While wages did jump on euro entry, wage inflation since then has been subdued, running at about 3 per cent a year, and Slovakia’s average salaries, at about €760 a month, are still slightly cheaper than those of the Czech Republic, Poland and about the same as in Hungary. Slovak labour productivity has also overtaken the other CEE countries.
Another benefit has been price stability. Slovakia has noted lower inflation rates than its neighbours − although the Czech Republic comes close.
Vladimir Vano, an economist with Slovakia’s Volksbank, notes: “Slovaks have not seen a deterioration in their buying power. The adoption of the euro has brought us undeniable benefits. We have had no currency weakening, low inflation and lower transaction costs.”
Slovakia has also been outperforming its neighbours during the second wave of the crisis. While the Czech Republic is in its third quarter of recession, Slovakia’s economy is continuing to grow − with the finance ministry predicting a 2.1 per cent expansion in 2013.
Instead of paying an economic price for the euro, as many had feared before 2009, Slovakia has instead paid a political price. The unpopularity of measures designed to rescue the Greek economy and then set up a permanent European Stability Mechanism helped overturn the centre-right government last year, returning Fico to power.
While Poland’s exports were undoubtedly helped by the swift depreciation of the zloty in 2009, the effect is now more ambiguous. Many Polish companies now source a lot of their raw materials in the eurozone, and the zloty’s wild fluctuations in value are a growing problem for local businesses.
Polish companies like Delphia, the yacht maker, and furniture maker Nowy Styl, say that they would prefer to be in the eurozone to avoid currency risk.
That view of the euro is not shared be the general public, where support for the common currency has steadily fallen in recent years. The government is also cautious about joining − wanting to ensure that reforms aimed at saving and stabilising the euro are first in place.
But when Poland makes the eventual decision to accede, it should take a close look at the experience of its southern neighbour to see that there is actually a positive argument that could be made for the benefits of joining the euro.
By Jan Cienski, Financial Times