Poles and Czechs: we need to talk about the euro

By bne IntelliNews March 26, 2015

Jan Cienski in Warsaw and Robert Anderson in Prague -


When the EU expanded into Central Europe in 2004, the new member states committed to adopting the euro, though no deadline was imposed. While the smaller economies of the Baltic countries, Slovakia and Slovenia have all adopted the euro in recent years, today, more than 10 years after accession, the three largest economies – Poland, the Czech Republic and Hungary – look no closer to joining than they ever were.

For Hungary, the failure to join the euro is part of the country’s sad relative decline from when it was perceived as one of the pacesetters in economic transformation after the collapse of Communism in 1989. Joining the euro is today not even a live issue: the country does not meet the public debt criterion required for adoption; it has made only feeble steps to converge with the rest of the EU in real terms; and, under the all-powerful Prime Minister Viktor Orban, it shows more interest in looking east than in joining the Eurozone.

But for Poland and the Czech Republic, the lack of any concrete steps to join the euro is more surprising. Now as the Eurozone finally begins its slow recovery from the global financial crisis and its own subsequent sovereign debt crisis, policymakers are starting to consider whether to join in the near future.

Poland’s slow shift in thinking

The closest Poland came to joining was in September 2008, when the then prime minister, Donald Tusk, promised that Poland would be a member by 2012. One of the spurs to action was Slovakia's successful accession in 2009. But Poland had lost too much time. Unlike the Slovaks, who used the post-2004 economic boom to fulfill the criteria, Poland's rightwing Law and Justice party government, in power from 2005-2007, was allergic to giving up the national currency. The collapse of Lehman Brothers just days after Tusk's speech put paid to Polish thoughts of joining.

The steep depreciation of the zloty during the crisis was one of the factors that helped the country narrowly avoid a recession in 2009. The subsequent disarray in the Eurozone made the common currency a taboo subject for most politicians and increasingly unpopular among many Poles.

Despite the recent accession of the Baltic countries and the apparent calming of the Eurozone crisis, the situation in Poland is little changed today. “The evident positive balance of costs and benefits in favour of adopting the common currency in a country like Lithuania, which has had a fixed exchange rate for over a decade, is different for a large country with a bigger internal market like Poland,” Mateusz Szczurek, the finance minister, said in a recent radio interview.

The government and the central bank have devoted almost no effort to selling the idea of the euro in recent years and opinion polls show the results. A poll taken by the CBOS organisation last year showed 68% of Poles are opposed to joining the euro.

As Szczurek mentioned, the business argument for joining is also less clear than for some of the smaller Central European members. Poland's internal market is large – merchandise trade as a percentage of GDP comes to 77%, while in the three Baltic countries and Slovakia it ranges from 101% to 170%, a sign of how much more those economies rely on imports and exports. However, many business leaders are wary of the effects of Poland's fluctuating zloty, which lends uncertainty to business decisions.

There is a slow shift taking place in official thinking, especially in the ranks of the ruling Civic Platform party, in part driven by security worries because of Russia's aggression in Ukraine and in part fuelled by worried that a consolidating Eurozone will leave it permanently on the outside.

In an election year – the presidential election takes place on May 10 and the parliamentary vote this autumn – the centrist Civic Platform is using the euro to differentiate itself from Law and Justice. That party's presidential candidate, Andrzej Duda, has said Poland should not join the euro until “our salaries are on a European level”, something likely to take decades. Bronislaw Komorowski, the incumbent backed by Civic Platform, has said instead: “Our fundamental problem is first to rebuild popular support for Poland's entry into the Eurozone.”

Poland is also edging closer to meeting the criteria for joining. At the moment it meets interest rate and inflation targets, but is under the EU's excessive deficit procedure for running a deficit above 3% of GDP. However, the finance ministry estimates that the deficit this year will be below the EU's 3% limit. Public debt, at about 53% of GDP, is well below the EU's maximum of 60%. That means by next year the decision on whether or not to join becomes more one of politics and less of economics. “Adopting the euro is a political decision,” Marek Belka, the central bank governor, recently said in Brussels. “It will not be taken by economists but by political leaders.”

The problem is that Poland's constitution makes such a decision very difficult. The constitution grants the National Bank of Poland the right to issue currency and set monetary policy, and changing it to give those powers to the European Central Bank requires a two-thirds majority in parliament. Neither the current coalition led by Civic Platform, nor any probable government formed after the elections, will have anything like the votes needed to push through such an amendment. “A specific Polish problem is that our constitution does not allow us to join the eurozone,” said Komorowski.

Political obstacles paramount

For the Czechs, it was even more galling to see their poorer neighbours, the Slovaks, leap over them to join the Eurozone in 2009, but it did not spur them into making more vigorous efforts to adopt the single currency.

The country meets all the Maastricht criteria for joining except for the requirement to be in the ERMII exchange rate mechanism for two years. This means keeping the koruna stable against the euro and not devaluing in the two years prior to entry, a task that is not insuperable in present conditions.

The country is also currently in economic good shape, with growth of 2.6% expected this year; it is competitive in export terms; and it has 80% of the average GDP per capita in the EU, though the convergence has stagnated since the global financial crisis.  Czech business is also much more dependent on the Eurozone than most of the new member states – 30% of exports go to Germany alone.

The obstacles in Prague are mainly political, with arguments based on how the currency should be stronger, or how public debt should be reduced further, or how structural reform is needed, acting merely as economic excuses for political prevarication.

Much of the resistance to the euro can be traced back to Eurosceptic former premier and president Vaclav Klaus, whose thinking lives on in the rightwing Civic Democrats that ruled from 2007-13 and the current central bank board that Klaus appointed.

Milos Zeman, the current president, and the ruling Social Democrats (CSSD) favour the euro, but the coalition has agreed not to join in this parliamentary term, instead talking in terms of 2020. “We must overcome the legacy of Mr Klaus,” Jan Mladek, the Social Democrat economy minister, told bne IntelliNews at the end of last year.

Pavel Telicka, foreign affairs spokesman of their junior coalition partner ANO – which is currently leading opinion polls – also supports entering the ERMII in the next parliamentary term, but warns: “It is not just fulfilling the criteria and then entering the Eurozone; it’s about being sustainable and that is a more difficult issue.”

Though the CSSD-ANO coalition looks likely to win re-election in 2017, it is still far from certain that it will be able to take the country in. Adopting the euro does not require a change to the constitution (which needs a three-fifths majority in both houses) or a referendum, but a nervous government might feel the need for this kind of political backing, which would be very hard to win.

Three-quarters of Czechs currently remain opposed to the euro, according to recent opinion polls. They fear that they will have to pay for Eurozone casualties such as Greece, or that prices will rise, or they desire a stronger exchange rate for the koruna before they agree to give it up. The Civic Democrats are likely to fan these fears as a way to regain popularity after the ignominious collapse of their last government in scandal.

It will take a strong, courageous government to overcome this political resistance to adopting the euro, and the Czechs have lacked such a government for 20 years.


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