Poland: From Crisis Resilience to Robust Growth
Euro Adoption The global financial crisis has derailed Poland’s progress in meeting nominal convergence criteria central to euro adoption. According to the latest EC assessment, Poland does not meet the criteria on price stability, the government fiscal position, the exchange rate, and the interest rate (EC 2010b). In view of the uncertainty in Poland’s progress in meeting the convergence criteria, the government has not announced a specific target date for the adoption of the euro. Euro adoption will facilitate deeper market integration with countries of the euro zone, but premature euro adoption could derail Poland’s competitiveness. The benefits of euro adoption are substantial, ranging from strong market integration of finance and trade to enhanced competition, reduction in exchange rate and country risks, enhanced macroeconomic stability, and reduction in transaction costs. These benefits will tend to strengthen growth. EU integration has also made euro adoption more attractive. Joining the euro area would further align Poland’s economy to the euro area’s volatility and business cycle. At the same time, euro adoption carries a heavy price: the loss of autonomous monetary policy making and exchange rate flexibility. The experiences of countries like Greece and Portugal point to the potential pitfalls of premature euro adoption. The convergence process to EU income levels implies that Poland’s price level will rise to the higher levels of richer euro area countries. This could happen either through nominal exchange rate appreciation relative to the euro or through domestic inflation outpacing euro area inflation. At the same time, once Poland’s exchange rate is fixed to the euro, the convergence of price levels has to operate through the inflation channel.4 This could also lower real interest rates below levels consistent with keeping output at potential and stabilizing inflation at low levels. Given the scarcity of capital, Poland’s marginal productivity of capital is higher than in the euro area, suggesting that the real interest in Poland should be higher than in the euro area. This exposes Poland’s economy to the risk of overheating, especially if capital inflows translate mostly into higher investments in nontradable sectors, such as construction and real estate, and into a household consumption boom (Eichengreen and Steiner 2008). If wages and prices rise more than increases in productivity and more than those of trading partners, the competitiveness of the economy will be undermined and trade balances will deteriorate. The economies will then be exposed to the risk of
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