Poland Meets Convergence Criteria: Prospects on Entering Eurozone in 2012
The treaty that Poland signed four years ago to become an EU member required the country to adopt the euro as soon as possible. Until this month, however, Poland had not even set a target date for the change ? a situation that caused
consternation in the EU.
The government adopted a conversion plan on October 16 under which it will begin formal discussions with the EU about the change in 2009 and will make the change in 2012.
In announcing the 2012 target date, Gilowska also said that Poland now meets the four European Union requirements for conversion.
The first requirement deals with government debt ? both debt for the year and cumulative debt. The annual debt requirement is that the ratio of debt to gross domestic product must not exceed 3 percent.
Gilowska said Poland will meet the condition this year and the situation will continue to improve. He estimates that the ratio will drop to 2.8 percent in 2008 and to 2.5 percent in 2010.
Getting a handle on its debt has been a tremendous success for Poland. The ratio of government debt to GDP was a whopping 6 percent when it joined the EU.
The EU’s cumulative debt requirement is that debt may not exceed 60 percent of GDP. It is below 50 percent now ? and is expected to remain there.
The second EU requirement for euro conversion is that Poland
begin talks about what will be the conversion rate between the zloty and euro two years before it adopts the euro.
The government’s plan is to begin the talks with the EU in 2010. That would meet the two-year requirement for discussions before it converts to the euro in 2012.
A third EU requirement for Poland converting to the euro deals with its inflation rate. The requirement is that the rate be no more than 1.5 percentage points higher than the average rate of the three EU members with the lowest inflation.
The fourth EU requirement for Poland converting to the euro has to do with the long-term interest rate that the country’s central bank has set. It must be no more than 2 percentage points higher than the average rate of the three EU members with the lowest rates.
Gilowska said “long-term interest rates in Poland are lower than the average rates of the countries with the lowest rates in the EU.”
Although Poland now meets the requirements for converting its currency to the euro, economists, politicians and the public differ on whether the change will help or hurt the economy.
While some fear that the introduction of the euro will make things more expensive, economists say inflation should not be an issue.
But the man whom Poles just elected their leader, the Civic Platform Party’s Donald Tusk, says that if the euro conversion generates even minor inflation it will hurt Poles.
He notes that Poland differs from countries such as Germany, Italy and Slovenia in that it has a huge group of people with a very low standard of living. For those people, even a minor increase in prices could be disastrous.
Some economists worry that switching to the euro will slow Poland’s excellent rate of economic growth.
“The example of poorer EU member states shows that premature replacement of the national currency with the euro may result in an economic slowdown in the short and medium term,” said Professor Edmund Pietrzak of Gdansk University.
The economy of Portugal, for example, expanded at a much slower pace in the years after the country adopted the euro.
A major advantage of switching to the euro is that it eliminates exchange risk ? fluctuations between the zloty and euro that can cost businesses and individuals money if they move in the wrong direction.
Elimination of exchange risk should both facilitate exports and lead to interest rate cuts, translating to lower costs of money, economists say. In addition, meeting the EU requirements for converting to the euro confirms that Poland’s economic policy is on track, economists add.
Those who maintain that the conversion is a good deal contend that the euro’s ability to facilitate long-term development better than the zloty justifies any short-term economic adjustments Poland will have to make.