INTERVIEW: Finance minister says Poland won't adopt euro before 2011

By bne IntelliNews December 20, 2007

Jan Cienski in Warsaw -

Poland's finance minister, Jacek Rostowski, isn't starting his new job from an easy position. On the one side he has business, and his own liberal views, pushing him to move as rapidly as possible to get into the euro and to dramatically slash government spending. On the other he has the new government's social promises.

Rostowski, who in the past had been an advocate of rapid adoption of the common currency, even calling for Poland to join the euro unilaterally before becoming a member of the EU, says Poland will adopt the euro no earlier than 2011. The caution from the academic economist who helped guide Poland's rapid 1989 transformation away from socialism to a market economy is born of the political realism that is a hallmark of the new Civic Platform government.

"Euro entry is a major strategic goal," Rostowski told bne. "It is a major way in which we can ensure faster and more stable growth in the Polish economy. However, it is no secret that actually getting into the Eurozone can be a rather fraught process if you are not really properly prepared."

Rostowski's goal over the current four-year term of parliament will be to ensure that Poland is ready and that when the government of the day decides to pull the trigger on joining the euro, the process will be very smooth.

The warning of what can happen if a country and the markets are not fully prepared comes from over Poland's southern border in Slovakia, which hopes to adopt the euro by 2009. It has been beset with currency turmoil while in the European Exchange Rate Mechanism II - the precursor to the euro. There are also doubts that even if Slovakia meets all of the Maastricht criteria for joining the euro, whether the European Commission will consider it has met those benchmarks in a sustainable enough fashion to be accepted into the club.

"For the process of entry to be smooth, we also need conditions in the world economy to be stable. Then, instead of the markets making it hard for us to satisfy the interest rate and exchange rate criteria, they will actually be pushing us into the Eurozone, as they have with all the really successful entries. We are determined to achieve entry and to do it in this in this prudent way," says Rostowski.

Between a rock and a hard place

The caution extends to other areas of his brief. During the campaign before the October 21 elections, members of the liberal Civic Platform party dusted off their idea of scrapping Poland's progressive tax system and introducing a single flat rate, following on the heels of much of the rest of the region. But after winning the election, party leaders have become much more circumspect. In part they have been saddled with promises made by Donald Tusk, the prime minister, to steeply raise civil service wages, and there is also the worry of letting Poland's budget deficit slip out of control. Poland's deficit will be about 2.7% of GDP this year, rising to 3.2% next year and 3.1% the year after, which means Poland will not be released from the EU's excessive deficit procedure, which increases the country's borrowing costs.

While allowing that "our aim is to reach a flat tax by the end of the term," Rostowski would not be specific on either a time frame or a rate for when the flat tax is to be eventually reached. Instead, the new government will push ahead with its predecessor's plans to bring in two tax rates, 32% and 18%, down from today's three rates, which top out at 40%.

"It is a big change to remove the middle rate, to reduce the bottom rate by 1 percentage point, and to reduce the top rate by 8 percentage points. It is not going in one step to a flat tax. However, we shall consistently go further in that direction," he said.

As well as this conflict between business pushing Rostowski to move as rapidly as possible to get into the euro and to dramatically slash government spending, and the new government's social promises, which have already led to threats of labour action from doctors, miners and teacher if they do not get more pay, his job has been made even more difficult by the lacklustre record of the previous government. Led by the Law and Justice party, the previous lost took almost no economic and fiscal reforms while in power, allowing government spending to increase rapidly.

Calling those policies, "really not prudent behaviour," Rostowski added: "I do not think it is good, if you are expecting a very large increase in revenues on the back of rapid growth for 2008, to programme equally large increases in expenditures."

Despite the budgetary difficulties and the turbulent global economy, Rostowski is certain that Poland will continue to grow strongly, pointing out that the billions of euros in foreign investment over the last couple of years will begin to come on stream, giving the economy an extra push.

"There is no question that the Polish economy will continue to catch up with the economies of Western Europe with growth rates that will be significantly above the growth rates in those economies," he said.

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