Euro: A strategic choice

©Reuters/François Lenoir

Poland is not yet a member of the euro area, though is watching the euro situation with close interest. 

From Poland’s perspective, there are two major issues: first, the crisis in the euro area, its causes, effects and implications for sustainable growth; and second, the impact of the euro crisis for Poland and for the prospects of euro adoption.

While the global economy shows signs of gradual improvement, the recovery remains fragile and exposed to risks related to the euro crisis. The roots of the euro’s problems are both policy-related and more fundamental, related to the architecture of the monetary union.

An expansionary fiscal policy, mispriced risk, weak prudential policies and frameworks were instrumental in the accumulation of excessive private and public sector debt in several euro area countries before 2008. These economies now exhibit substantial fiscal weakness in the form of large fiscal deficits and/or of debt burdens or both. Fiscal weakness has contributed to the spread of stress across European banking systems due to their high exposure to sovereign default risk. There are also fundamental, structural and institutional weaknesses. A number of countries–mainly the so-called “peripherial” economies–are structurally exposed to external deficits due to persistent deterioration of their relative competitiveness. The feasibility of goods and factor markets remains problematic, and therefore necessary reallocation of resources–with more emphasis on exportoriented industries–is hampered.

Policymakers have already made progress in addressing the crisis, at both national and euro area level. Countries receiving financial assistance are implementing macroeconomic adjustment programmes, in particular fiscal consolidation. The financial capacity of the EFSF (European Financial Stability Facility) has been expanded and the implementation of the ESM (European Stability Mechanism) has been advanced. Generally, the lending capacity of the IMF has been increased. Crucial steps have also been made to improve the EU-wide financial supervision and ensure the capital strength of banks. The bold reaction of the ECB, particularly the LTRO (long-term refinancing operations), including non-standard measures, has been vital for containing the crisis and preventing further contagion.

Timing issue
However, a number of underlying fundamental problems remain to be addressed. The major challenge for the euro area is twofold. First, ensuring the integrity of the euro area is vital. The risk of a catastrophic disintegration of the euro must be taken off the table. Until it is, we cannot expect the private sector to invest and unless the private sector invests growth will not recover. Second, economic growth, which is the only long-term solution to overcome excessive indebtedness, must be restored. Euro adoption is a strategic choice for Poland. However, before we define the timeframe for euro adoption, the situation in the euro area must stabilise. We are well aware that the euro has the potential to bring significant gains in terms of growth, trade, investment and, ultimately, standards of living to Poland. Such gains, however, require both adequate preparation for the changeover and an active use of economic policy to minimise the risk of increased volatility that may result from the loss of an independent monetary policy. The crisis and the new economic governance framework (“six-pack” and “twin-pack”) imply serious shifts in the relative importance of costs and benefits for future euro area entrants.

Due to sound macroeconomic policy, as well as a sound financial sector, Poland has avoided a boom based upon excessive indebtedness. Poland has been the only EU economy to avoid recession during the crisis. Well-tuned fiscal policy responses and early structural adjustment, together with an independent monetary policy and a floating exchange rate regime, have been instrumental in Poland’s weathering the crisis without recession. It is at present one of the first countries in the EU to experience a decline in its debt/GDP ratio, from an already relatively low level. Domestic policy and structural measures have been well assisted by the Flexible Credit Line from the IMF, and keep Poland’s economy resilient to external shocks.

Poland contributes to strengthening of global financial safety nets through a bilateral loan to the IMF and considerable participation in the New Arrangements to Borrow. Domestically, the major challenge for policymakers remains further improvement of public finances, including reduction the general government deficit to below zero in 2016.


©OECD Observer No 290-291, Q1-Q2 2012

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