Avoiding the fate of Greece means rejecting the euro
Well into the second year of the European debt crisis, Greece is still struggling with 20 percent unemployment. The rest of the European Union is in recession, and monetary union is looking less attractive than ever before. Poland faces a difficult choice. It can break its legal obligation and keep its currency, the zloty, or adopt the euro and go the way of Greece.
Poland joined the EU in 2004. Under the terms of the Treaty of Accession, the country has to adopt the euro by 2019. Before the currency integration can proceed, four things must happen: The inflation rate must be less than 1 percent; Poland’s annual government deficit as a percent of gross domestic product must be less than 3 percent; it must join the European Exchange Rate Mechanism; and the Polish constitution must be amended.
Early on, Poland was eager to meet the targets by 2012 so it could make the switch. Now that 2012 is here, enthusiasm for integration has waned. In 2002, a bare 1 in 5 Poles opposed the euro. In January of this year, 60 percent of Poles wanted to keep their zlotys.
Monetary integration, particularly without fiscal integration, is always an exercise fraught with risk. The danger increases dramatically when countries thrown together have substantially different income levels, fiscal outlays and output. Poland, like the other Eastern European nations, has a lower income than the west and is more fiscally responsible than the south. Poland’s debt is a mere 60 percent of GDP, compared to Greece’s 160 percent or Italy’s 116 percent.
Like many of the former Eastern bloc countries, Poland liberalized its markets and ranks high in the world in terms of investment attractiveness. It has weathered the debt crisis well, and its economy has grown at 2.5 percent this year while most of the EU has slid into recession. One reason might well be that the zloty has been able to adjust to maintain the competitiveness of Polish exports. Monetary integration, following the adoption of the euro, would take that away.
What Poland exports is different from what Germany exports, which is different from what Greece exports. Locking all these widely differing countries into a single currency inevitably means that at least one nation is going to hurt at some point. In the recent debt crisis, that hurt fell on Greece, which saw its exchange rate appreciate steadily, adding to the already crushing burdens of its debt.
Poles have watched the fall of Greece. They wisely have not spent profligately and do not have either the welfare state or the debt that Greece has. Now, they don’t want the euro. Luckily, Poles still have a few years to find a way out of their dilemma. In the interim, they should ignore all claims that the European crisis is under control because it isn’t just the debt that’s the problem. It’s also the euro currency.