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Poland is the six largest economy in the EU and the second largest EU country outside the monetary union EMU. For this reason, the issue of the future Polish joining of the euro is quite a steady topic in the press and economic analysis. However, the question is rather about the “when” than the “if” of joining (which, of course, is in line with the Maastricht Treaty).

What strikes me a lot in this context – I hope my impression is correct – is the picture that the Poles in a significant number of comments consider the joining of the euro predominantly as a political decision – and not primarily as an economic one. Sure, politicians have the final decision on the EMU entry unless a binding referendum is put into place. After the EMU entry, however, financial markets would take over the judgments on the Polish economy which clearly underlines the permanent need of a structurally strong and resilient economy. In other words: the economy matters a lot.

The view of the prominent political role in the membership process seems also being shared by current Prime Minister Donald Tusk who several times in the past months pointed at mostly political impediments for a euro membership. In reality, the formally delaying factor is indeed the need of a constitutional change before introducing the euro – since constitutional changes need a two-thirds majority in the Polish parliament which is not achievable any time soon. In other words, a broadly changing party composition in parliament is not in the cards. Will this locked situation open the way for a referendum at the end of the day?

In my view, the Poles can be happy about their current political and legal obstacles for joining the euro. I have followed and admired the development of Sweden’s neighbor on the other side of the Baltic Sea since 1990 (which includes dozens of trips to Warsaw and some other places). Sometimes the speed of reforms was quite high, sometimes more dampened. But Poland never really left the way of reforms or took steps back on this bumpy road.

This obvious continuity of economic policy must be seen as the key to the stable international confidence in Polish politics and reform activities in the past two decades.

But despite all these achievements: Poland is still a country that needs structural improvements. Currently, Poland does not suffer from major structural macroeconomic imbalances but the country would currently not really meet the convergence criteria as a whole for joining the euro.  In particular, the budget deficit is too high (which partly is reflected in somewhat excessive deficits in the current account). Improvements in other areas are also needed, for example further reforms of the pension system.

Thus: Why on earth should Poland any time soon destroy the tool of an independent monetary policy and the chance of choosing the interest rates it needs for the economy? Why should Poland in the foreseeable future go for a fixed exchange before really having created strong macroeconomic, microeconomic and institutional conditions? Why should the Polish government act against the will of the people which still clearly opposes to a Polish joining of the euro? Why shouldn’t Poland wait and see how the euro area as such will be developing in the forthcoming years?

And an important additional remark:  The flexible zloty served Poland well during the past years of global/European financial instability. Something to keep in mind! On the other hand, it cannot – and maybe it should not – be ruled that Poland can be ready for joining the euro at a later stage.

The big question is when Poland will be there…

Hubert Fromlet
Visiting Professor of International Economics, Linnaeus University
Editorial board

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A couple of weeks ago, Latvia decided to apply for EMU/euro membership from 2014. This is an understandable step – but is it also a wise decision? I do have my doubts.

Sure, Estonia joined the euro in 2011. But all three Baltic States have their own characteristics; my own experience tells me that Estonia still should be regarded as the most flexible Baltic country. Latvia’s return to reasonable GDP growth at currently around 5 percent certainly has to be considered as a remarkable performance after the turmoil of 2008-2010 in a pure macroeconomic perspective (which many foreign analysts – unfortunately – tend to prefer).  We should, however,  not forget that pain was quite strong for major parts of the Latvian population as a result of the internal devaluation in the past years – and that Latvia could not come on the  track of recovery without the support of the EU and the IMF.

My main arguments against Latvia’s joining of the euro already next year look as follows:

1) It is certainly no secret that Latvian public and political opposition to the lats’ euro entry is relatively strong. Such a constellation is no good starting point for a new exchange rate regime.

2) The Latvian economy was confronted with a severe economic crisis only 3-4 years ago. Thus, we do not know very much about the sustainability of the competitive progress that could be achieved by the internal devaluation.

3) A couple of years ago, the current account deficit of Latvia exceeded 20 percent of GDP – a horrible ratio! Currently, the situation looks better. But what will happen to the current account 5 to 10 years from now when the effects of the internal devaluation probably will have been wiped out (more or less)? I doubt whether Latvia in a couple of years will have achieved a structurally healthy current account balance. Of course, I hope this will be the case.

4) One of the main problems to come to a persistently favorable development of the current account is the very difficult process toward a new and modernized structure of Latvian exports with good qualitative and technological competitiveness on tough global markets. The way to such a fundamental change will be very, very bumpy – with a very uncertain outcome.

5) Right now, the Latvian government seems to have a feeling that the safety net for its currency, the huge bank lending in euro, and the banking system ought to regarded as more stable within the Eurozone than outside. Recent experience, however, tells us a different story. Small countries cannot be too small to fail! A little reminder: At present, the small EU/EMU country of Slovenia – having roughly the same population as Latvia – seems to give increasing reasons for concerns.

6) One of the worst disadvantages that could be watched already before the financial bubble burst in 2008, was the absence of an independent monetary policy because of Latvia’s membership in the ERM2 system, the final currency step of EMU preparation before joining the monetary union. If the instrument of an independent monetary policy still had been in place between 2006 and 2008, much misery could have been avoided in the following years (GDP loss more than 20 percent).

In other words: Only very competitive and fundamentally strong economies can afford the loss of national monetary policy decisions as a tool for adjusting or changing wrong developments at home.

Thus, the conclusion should be that Latvia should wait at least another business cycle – which could be 5-8 years – before the idea of joining the euro may be re-considered!

Hubert Fromlet
Professor of International Economics
Editorial board

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