Poland must seize a window of opportunity to take its next step towards joining the euro or risk finding the task too tough in future years, the deputy president of the central bank told Emerging Markets.
Poland’s government has refused to set a date for adopting the currency now used by 12 European nations. As the move slips further and further into the distance Poland, the second biggest European Union member still using its own coinage, is missing out, according to central bank deputy president Jerzy Pruski.
“The macro economic situation of Poland is very good, it is an excellent moment to become a member of ERM 2 and later to participate in the euro,” he said in an interview. “My personal worry is we could miss this excellent macro economic opportunity,” he warned.
New EU countries, don’t have the euro opt-out clauses used by the UK and Denmark, but are free to set their own timetable for joining the eurozone. Before adoption of the common currency they must maintain the value of their local currencies within a fixed band around the euro for at least two years, a requirement known as ERM2 (Exchange Rate Mechanism).
Of the ten nations which joined the European Union in 2004 the smaller countries have found it easier to muster the political will and fulfil the economic criteria for euro adoption. Slovenia is set to become the first of the group to assimilate its economy into the eurozone under the supervision of the European Central Bank.
Poland’s central bank, known as the NBP, has established the country “can expect significantly higher GDP growth after becoming a member of the eurozone,” according to Pruski. All that is holding the country back is its government.
Poland meets all of the economic criteria for membership of the euro club except for conditions relating to government borrowing. Prime minister Kazimierz Marcinkiewicz’s ruling Law and Stability party probably will achieve a pledge to reduce the level of debt to GDP towards the 3% reference value but too slowly, Pruski says.
“We’re still worried whether fiscal policy is too expansionary,” he said.
The government must tackle its spending to enable it to lower taxes and provide a much needed boost to employment prospects, according to the NBP.
Pruski says the task is achievable, especially with Poland in the early stages of an economic recovery. The economy will grow near potential at above 4% in 2006 and 2007, the central bank estimates. Pruski sees the domestic side of the economy, and particularly investment taking over from exports as the engine of growth.
Despite the incipient economic recovery, inflation remains tame, with Poland comfortably meeting the requirements demanded by the EU. Some of this is down to temporary factors such as depressed food prices because of a ban on exports to Russia and fears of bird flu. Another short-term drag has been dropping fuel prices as energy suppliers took a temporary hit on margins. Pruski expects these factors to disappear in the coming months, and inflation to pick up as the output gap closes in the coming quarters. There is even an upside danger to the central bank’s forecast of inflation rising close to its 2.5% target by next year or the beginning of 2008.
“An increase in wages could create additional risk for our inflation forecasts,” he said.
The euro decision is about much more than just economics. The populist government is seeking to exert its independence and prove that it’s willing to put Polish interests ahead of the EU agenda. There’s no sign it will heed the central bank’s advice on joining the common currency now any more than it has in the past with a strengthening economy providing ammunition for eurosceptics who say Poland can manage fine with the zloty. The euro issue will probably continue to oppose the government against the central bank in a relationship which has deteriorated into unprecedented depths with the backlash from the Unicredito fiasco.