wiiw Opinion Corner: Is there an economic rationale for Poland – and other EU-CEE countries – to join the euro area?

20 February 2017

A critical commentary by wiiw Economist Leon Podkaminer


Professor Grzegorz W. Kołodko, twice Poland’s Deputy Prime Minister and Finance Minister (1994 1997 and 2002–2003), has recently published a pamphlet appealing for Poland’s speedy adoption of the euro. The pamphlet titled ‘Will Poland Save Europe?’ appeared in the influential Polish daily Rzeczpospolita on 3 January 2017. It rightly stressed the importance – for Poland – of stopping the creeping disintegration of the European Union and expressed the opinion that Poland’s accession to the euro area would somehow reinvigorate the forces keeping the euro area (and thus Europe) united. Apart from serving Poland’s vital long-term geopolitical interest (preservation of a strong, cohesive EU), the switchover would – so Kołodko – bring the country numerous economic benefits, both in the short- and long-term perspectives.

On 5 January 2017, Rzeczpospolita published a polemic with Kołodko’s theses, authored by Leon Podkaminer (wiiw).

The polemic, titled ‘Who Will Save Europe?’, first disputes the economic advantages Poland was supposed to enjoy on adopting the euro, as claimed by Kołodko. The most essential of these advantages would follow the elimination of transaction costs necessitated by the exchanges of euros into Polish zlotys (and vice versa) on foreign trade transactions. Kołodko believes these costs total ‘dozen or so billion zlotys’ (equivalent to some EUR 4–5 billion) per year. In my opinion this estimate is grossly exaggerated. The whole Polish banking sector makes profits totalling about a dozen or so billion zlotys.

The elimination of the exchange rate risk was to bring another benefit: faster growth of capital formation which – according to Kołodko – has been depressed on account of uncertain profitability of production dependent on foreign trade. However, facts do not seem to support that argumentation. Investment dynamics (and levels) do not have any obvious links to the possession (or not) of an own currency. Gross fixed capital formation accounts for over 25% of GDP in Romania and the Czech Republic – two countries that have retained their own currencies. For Lithuania and Slovenia (both euro area members) the shares of investment in GDP are relatively low, about 20% (as in Poland). Moreover, the GDP investment shares in countries that have switched to the euro have fallen perceptibly: in Slovenia from over 28% in 2005 to 20% in 2015; in Slovakia from 29.7% to 23.2% respectively; in Lithuania from 23.4% to 19.3%; in Latvia from 31.3% to 22.6%; and in Estonia from 32.9% to 23.7%. In Poland, investments were seen to both rise at double-digit rates (as in 2014) or decline (as in 2013) – with unchanged national currency. Similarly, investment volatility is observed in the euro area. For instance, in Slovenia investment fell 13% in 2010. According to provisional estimates, in 2016 investment fell by 10% also in Latvia.

The supposition that euro adoption would accelerate Poland’s GDP growth by ‘approximately 0.5% yearly’ is wishful thinking not supported by any solid calculation. (Ironically, in the Czech Republic one hears the opinion that euro adoption is likely to slow down growth by 0.5%.)

The last more important argument for an adoption of the euro would consist of lowered (‘by about 2% of GDP’) burden of servicing Poland’s foreign (public) debt. However, right now the servicing of Poland’s whole (domestic plus foreign) public debt costs the country 1.7% of GDP. This is much less than is the case for Slovenia (2.8%), not to mention Portugal (4.3%). Moreover, one has to bear in mind that the countries overburdened by the costs of servicing their public debts (Slovenia, Portugal, Greece etc.) have found themselves in their pitiable situation just because of their accession to the euro area. In 2000 the Slovenian public debt stood at 26% of GDP, Portugal’s at 50% and Greece’s at 105%. By 2016 these ratios had risen to over 80%, 130% and 180% respectively.

That much on the benefits which Poland and other countries of the EU-CEE region could gain: Romania, Hungary and the Czech Republic could gain from giving up their own currencies. (Interestingly, the Czech National Bank and Finance Ministry have recently found it fit to issue a joint statement on not setting a target date for initiating euro accession negotiations.)

Two other questions remain: on the costs of countries’ giving up their own money, and on whether their giving up their own money would ‘strengthen Europe’.

In my opinion the switchover to the euro carries a risk – bordering on certainty – of secular (or even irreversible) stagnation which is right now experienced by the South European euro area member states (as well as Slovenia). It is hard to imagine that the euro area would strengthen economically (and also politically) by having been joined by another lame national economy – another Portugal (or, in a perspective, another Greece).

There is one point on which I fully agree with Professor Kołodko: In economic terms the European Union drifts towards disintegration. For Poland the EU’s disintegration would have fatal economic and political consequences. But right now Poland has no real bearing on what is happening to the EU. Poland could have influenced – rather marginally – the events during Donald Tusk’s premiership, especially during Poland’s EU Presidency (Poland’s international standing was quite high then, unlike at present). But the possibility of influencing the course of economic policy in the EU remained unutilised. Poland has not saved Europe – and is not going to save it in the future, either.

Europe can be saved only and exclusively via a radical change of Germany’s economic policy. German economic policy is a direct cause of the fatal tendencies observed in the euro area – and thus in the EU at large. First, the Maastricht Treaty ordering the fiscal and monetary policies in the euro area countries is an embodiment of German economic phobias and superstitions. Second, Germany’s internal policy boils down to running aggressive mercantilism. Germany runs gigantic trade surpluses which directly or indirectly destabilise the economies of its West European partners. Moreover, these surpluses drive Germany’s partners into rising debts vs. German banks. The policy has to be called aggressive because the trade surpluses are achieved at a cost of repressed German domestic wages, consumption and investment. Success on the ‘export front’ is the prevailing objective of that policy.