20 years of the eurozone. Findings for Poland

31.12.2018 14:23|Marcin Lipka

"Two decades have passed since the single currency was adopted. At the beginning, it clearly helped the countries that introduced it, but after 10 years it became a systemic threat to them. Interestingly, Poland, while remaining in the eurozone's hallway, is in a convenient position," writes Marcin Lipka, Conotoxia Senior Analyst.

If we only look at the exchange rate, we can say that not much has happened in the eurozone since the beginning of 1999. Both now, and 20 years ago, one euro cost around 1.14 USD. In fact, the past two decades have been a period of incredible tensions in the countries that share the common currency and have highlighted its serious weaknesses.

From prosperity to depression

Until 2008, the situation in the euro area was very stable. Inflation was low, and countries that previously suffered from high debt financing costs were finally relieved. Investors assessed the risk of bankruptcy of Italy, Greece and Spain to be at a similar level to that of Germany or the Netherlands.

Therefore, it allowed the Southern countries to significantly increase investment and consumption levels. Unfortunately, the investments did not translate into an increase in productivity, but only generated a series of additional costs (e.g. dozens of airports and thousands of kilometres of unnecessary expressways in Spain). On the other hand, consumption did not boost the activity of domestic enterprises, and rapidly rising labour costs with limited productivity discouraged foreign capital from investing in the countries of the South.

All these drawbacks were masked by the inadequate funding costs in relation to the risks piling up for these economies. If the euro had not been introduced, high current account deficits or emerging banking problems in Italy or Spain would quickly translate into weaker currencies and higher yields of government bonds. The relative impoverishment of society would quickly motivate the authorities to implement appropriate reforms.

In 2011-2015, when it turned out that there were many skeletons in the closets (banking sector in Spain, Ireland, Greece, Italy or Portugal, lack of economic growth prospects in the southern countries, unwillingness to reform and weakening of institutions and the law in the weakest countries) it quickly became clear that the euro, instead of being a cure for most EU troubles, only concealed the contagious epidemic.

Painful lesson and difficult recovery

The mistake of a too rapid and widespread introduction of the euro, combined with the bending of the basic rules of fiscal discipline and the 'overshooting' of the growth by the countries of the south, began to take revenge on the threat of the eurozone collapsing a few years ago, high unemployment and a reduction in global prestige for the whole of the European Union.

Although some countries have learned their lessons (e.g. Portugal has reformed the education system), events from Italy or France in recent months have shown that short-term political benefits outweigh common sense and the need for broad structural reforms (both strictly economic and social).

However, the reforms carried out by the European Commission and the ECB can be assessed positively. Although there is still no common deposit guarantee system, a large part of the Banking Union (joint supervision or bank failure mechanism) is ready. The capital markets union is also close to being introduced, which will reduce the burden of financing the development of the private sector from banks to the capital market (equities, bonds), as is the case, for example, in the USA.

At the same time, a serious and unresolved issue remains the common fiscal policy and joint responsibility for debts. Countries with responsible budgetary policies (Germany, the Netherlands) are very far from guaranteeing the creditworthiness of countries where the primary objective of public finances is to maintain government power rather than long-term and stable economic growth. Besides, without appropriate changes in the countries of the south (education, pensions, investments, labour market) this would be completely unreasonable.

In turn, countries with high debt do not want to be kept on a leash by Brussels, and even less so by Berlin, which is wrongly accused by many political forces in Europe of using the common currency and the economic weakness of southern countries to gain a competitive advantage both within the Union itself and globally.

What does it mean for Poland?

The main flaw of the single currency involves the fact that it was introduced too quickly and extended to unprepared countries. This is why the eurozone is unstable, and the implementation of key reforms (fiscal policy, deposit guarantee, unified unemployment benefits system) is difficult due to the increase in post-crisis regrets. Is it really worth joining the eurozone?

The answer from an economic point of view is simple. There is no reason to join a euro area that is not completely reformed. Above all, Germany, which represents the interests of surplus countries and France, which is the lawyer for the south, should agree on the division of responsibilities and the principles governing the future eurozone. This will require painful reforms, for which Italy, for example, still seems completely unprepared.

The failure in these negotiations will only increase tensions in countries with the common currency. Also, the ECB's monetary policy (including negative interest rates) does not seem to be good for Poland at the moment and could unnecessarily stimulate credit activity and create imbalances in the economy. It is also very important to remember another major issue. Leaving the eurozone is practically impossible, hence the decision to enter should not be rushed and ought to be analysed with exceptional care.

Safe hall

Supporters of Poland's entry into the eurozone often point out that it is not worth staying outside the negotiating table at which the shape of the single currency is decided. According to the adopted treaty, Poland has committed itself to adopting it, and at this stage, Poland does not have any influence on its shape.

This seems to be a mistaken assumption. Above all, Poland's position would be limited anyway, given that it is mainly France and Germany that determine the order of the eurozone. Secondly, we are introducing some reforms. The Capital Union has been designed with all the Member States of the Community in mind, and countries outside the eurozone will also be able to join the Banking Union. Sweden and Denmark, among others, are already considering this.

Currently, Poland pursues its monetary policy (e.g. an appropriate level of interest rates), while at the same time the zloty gives rather fast signals as to whether our economic policy is heading in the right or the wrong direction. This motivates us to reform, hard work and greater responsibility for our own decisions. Sweden, for example, has probably managed to get out of the problems of the 1990s much better by remaining in a symbolic hallway than if it had decided to join the eurozone, as Finland did.

Poland now has at least a decade to observe the development of the situation in the euro area and to prepare for euro adoption in the best possible way. The more this country invests in stable development and the more it integrates with the leaders of the region (Germany, the Czech Republic) the safer and more beneficial the hypothetical participation in the euro area will be not only for Poland but for the entire single currency area.


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