Jan Cienski in Warsaw -
The promise of rapid entry into the euro has been Poland's shield against the worst buffeting from the global economic crisis, but now the country's chances of joining the common currency by 2012 look increasingly remote.
The initial vow to join was made in a surprise announcement late last summer by Donald Tusk, the prime minister, just weeks before the collapse of Lehman Brothers plunged the world economy into crisis. Since then, the government has continued to pledge that Poland will join later this year the ERM2 exchange rate mechanism a precursor to euro membership, and be on track to adopt the euro in three years time. That assurance helped calm international fears about Poland's riskiness at a time when investors were fleeing emerging markets.
However, as the crisis begins to affect the real economy - seen in rising unemployment, slumping exports, falling corporate profits and a rising budget deficit - Poland's rapid accession looks increasingly problematic. "The first of January 2012 is still realistic, but it may require some delay," says Jacek Rostowski, Poland's finance minister, pointing out that joining ERM2 in the next few months was unlikely because of the variability of Poland's exchange rate, which slumped against the euro and the dollar earlier this year before regaining some strength.
"We announced our decision to join the euro before the crisis struck, and even then we said the 1st of January 2012 was an ambitious but realistic aim," he tells bne. "Well, it's still a realistic aim, but it's become more ambitious. This world economic crisis has come along and it would be naÃ¯ve to pretend that that has no effect at all. We always said it was an aim that was not dogmatic. If we have to move it along by one year, that's not the end of the world."
Gloom and gloomier
Rostowski has been determinedly optimistic as Poland's economic circumstances have worsened. Officially, the government is still predicting that the economy will expand by 1.7% this year, although most ministers would be happy with anything over zero. Most private sector economists in Poland concur that some economic expansion is likely this year, which could make Poland one of the continent's fastest growing economies in 2009. "Most forecasters, and certainly most Polish forecasters but also many international ones, see moderate positive growth for Poland," he says. "But, obviously in a situation of such uncertainty, it's difficult to be sure how things will pan out, especially as there may still be events, positive or negative ones. But we're always in that top group of a few countries on the European continent."
However, international institutions have been growing gloomier. In its recent economic forecast, the European Commission said that the Polish economy was likely to shrink by 1.4% this year. If those estimates are correct, that creates a huge problem because the government's budget numbers are predicated on faster growth. A recession would mean that the deficit would rise sharply, putting the euro even further out of reach.
PM Tusk said that the government will revamp the budget in July, and Rostowski says that the deficit will come in at no more than 4.6% of gross domestic product this year. However, the Commission forecasts 6.6% this year followed by 7.3% in 2010. The criteria for joining the euro specify that the deficit cannot be more than 3% of GDP. "I don't there is any chance of Poland being in ERM2 this year," says Witold Orlowski, an economist with PricewaterhouseCoopers in Warsaw, adding that the 2012 deadline for joining the euro is also looking like a long shot.
However, being outside the euro may not be all that bad an idea for the next few years. The zloty's devaluation is giving a fillip to Polish exporters, and as long as the currency does not undergo an uncontrolled collapse, which could endanger the banking system, a weaker currency may help Poland emerge more quickly from the economic slump. In order to join by 2012, the government would have to increase taxes, clamp down on spending and strengthen the zloty, "Which would be politically and economically fatal," says Adam Jasser, programme director at Demos Europa, a Warsaw public policy think-tank.
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