To euro or not to euro?

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In a move that was not entirely a surprise, the new Finance Minister Paweł Szałamacha has said the government will not be pursuing euro adoption “in the foreseeable future”.

“Law and Justice (PiS, the governing party) advocates holding on to the Polish zloty and the adoption of the euro is not a priority for us,” Szałamacha wrote. One of the architects of the new government’s economic policy, Henryk Kowalczyk, in particular noted differences between the earnings and purchasing power of Poles and citizens in the eurozone. Kowalczyk, who co-wrote PiS’s ‘Funding for Growth’ scheme similar to the one in Hungary, said the PiS parliamentary caucus was “practically unanimous…Under current conditions it would make no sense to introduce the euro…Thanks to the zloty, Poland has the ability to react to various economic events, but in addition there is no threat of [Poland] falling into a debt spiral, as for instance Greece has done.”

Amid the uncertainty over Greece, a possible Brexit and changes in the US’s monetary policy starting this year, retaining the zloty for the time being is probably the safest bet. Marek Belka, governor of the National Bank of Poland, argued as such recently. “The crisis has shown that there exist scenarios in which a currency union, with the implied lack of an own currency and monetary policy, can be very harmful,” he added.

President Duda, also of PiS, has said that if Poland were to ever join the euro there would have to be a referendum first, and insisted that it couldn’t happen until Polish wages are at least equal to German wages. Average wages in Poland are EUR689 per month, compared with EUR2,598 in Germany. So, there is no target date for Polish euro adoption and no fixed date for when the country will join ERM-II, a precursor to full euro adoption and the fifth euro convergence criterion.

It was not always thus, however

When the single currency was created by the Maastricht Treaty in 1992 all members of the EU were committed to signing up one day, with the exceptions of Britain and Denmark, which negotiated opt-outs. On joining the EU in 2004 the countries of Eastern Europe all expressed ambitions to join the single currency as well. A few of the smaller ones have already done so: Slovakia, Slovenia, Latvia and Lithuania , between them a combined population of 12 million. With a combined population of 60 million people, Poland, Hungary and the Czech Republic are of a similar size to Britain or France.

In autumn 2012 the Monetary Policy Council of the Polish National Bank published its official monetary guidelines for 2013, confirming earlier political statements that Poland should only join the ERM-II once the existing eurozone countries have overcome the current sovereign-debt crisis. In April 2013 Belka said Poland should demand to be permitted to adopt the euro without first joining the ERM-II. This was due to concerns over currency speculation.

After the 2014 Russian military intervention in Ukraine, Belka said that Poland needed to re-evaluate its reluctance to join the eurozone. In June 2014, a joint statement by the finance minister, central bank chief and president of Poland stated that Poland should begin a debate shortly after the 2015 parliamentary elections about when to adopt the euro, leading to a roadmap decision that might even include identification of a target date.

In hard economic terms, by April 2014, Poland had met three out of the five adoption criteria. But now, under PiS, it seems that eurozone entry will lie dormant. The new government’s monetary policy will indeed likely be to seek to create a more dovish Monetary Policy Committee (RPP), appointing nine out of its 10 members in 2016. With a majority in both houses of parliament, PiS will choose six new members of the central bank’s rate-setting panel when the terms of existing panelists end by February. Another two policy makers on the 10-person panel will be chosen by the president, who will also pick the next National Bank of Poland governor in mid-2016. PiS will also likely favour central bankers more willing to deliver monetary easing.

Szałamacha wants the central bank’s mandate to add economic growth as an objective on equal terms with its goal of price stability. Szydło seeks a more active role from the central bank in fostering growth, for example by providing loans for companies.

On the fiscal policy front one of the first economic decisions of the new government will be to submit an amendment of next year’s budget. The government has said it will be committed to maintaining an overall deficit below 3% of GDP in line with EU guidelines, but to do so PiS wants as of January 2016 to introduce two taxes, one on banks, a tax on assets with a rate of 0.39 percent, and a tax on supermarkets.

One drag on this prospect, however, could be a bill on Swiss franc loan conversion, which has been supported by President Andrzej Duda, who pledged to offer relief to borrowers during his election campaign, Szałamacha has said he’s willing to help write the legislation. A draft presented recently would require banks to absorb 70% of the costs.

Poland has fiscal rules in place to keep a lid on spending, automatically adjusting expenditure if public debt grows and the constitution includes a trigger that sets off austerity measures if debt exceeds 60% of GDP and PiS doesn’t have the parliamentary backing to overturn this should it want to.

According to a standard eurobarometer poll in April 2015, 44% of Polish people were in favour of introducing the euro (a decrease of 1% from 2014) while 53% were opposed.

 

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