Determinants of euro adoption in Poland

The Economic and Monetary Union (EMU), being one of the elements of cooperation within the European Union (EU), was established by the Treaty of Maastricht in December 1991. Its primary task is to create a common Europe-an currency, the euro, Europe-and move monetary policy into the Community sphere.

The EMU includes all EU Member States, however, the third stage – meaning de facto joining of the eurozone, involved 18 of them. The Treaty on European Union was signed in Maastricht in 1992. It provided for the introduction of the Union in three stages. The first stage consisted in establishing the single internal market, intensifying cooperation between central banks and reinforcing coordi-nation of economic policies from 1 July 1990. The second stage commenced on 1 January 1994 and involved creating basic institutions and organisational struc-tures, establishing the European Monetary Institute, meeting convergence crite-ria, the irrevocable fixing of the exchange rates of national currencies to the euro and carrying out preparatory work for the third stage. With effect from 1 January

Furthermore, a new exchange rate mechanism (ERM II) was developed, to protect and stabilise non-euro European currencies [Ministry of Foreign Affairs 2011].

Poland joined the EMU in January 2004, but a derogation applies to Poland which is to be abrogated upon the fulfilment of the convergence criteria. Moreo-ver, as a new Member State, Poland has committed itself to join the ERM II;

however, it has failed to do so in fear of limiting its freedom of determining ex-penditures in the Budget Act, as a result of fixing the national currency against the euro. Table 1 presents the current state of meeting the convergence criteria by Poland. In June 2014, Poland did not meet three of them: fiscal, exchange rate and legal criteria.

In general, the adequacy and relevance of meeting the convergence crite-ria, as well as the effects of Poland’s access to and participation in the ERM II remain under discussion. The main issues raised in this discussion are the costs and benefits of euro adoption in Poland. This subject is mainly dealt with at the macroeconomic level, which is understandable, since this is the only level of aggregation on which the economic rationality of such a step and its importance for the Polish economy as a whole can be assessed.

Euro adoption is expected to bring the following benefits: lower transac-tion costs associated with the single currency, no exchange rate risk, lower interest rates, lower risk of a financial crisis, greater transparency and compara-bility of prices, and greater macroeconomic stacompara-bility. However, its costs are as follows: no autonomy in monetary policy, inflation risk, credit boom risk, and asymmetric distribution of effects of replacing the national currency.

Nevertheless, the general feeling is that the overall balance of costs and benefits of joining the eurozone will be very positive for the Polish economy. Simula-tions carried out by the National Bank of Poland indicate that the Polish exports should grow at least in the first few years after euro adoption, which is supposed to contribute significantly to economic growth.

This expected positive impact on trade is largely confirmed by the results of numerous studies, mainly based on gravity models of international trade, which also indicate the positive impact of the single currency or monetary un-ions on international trade [e.g. Rose 2000, Frankel and Rose 2002, Glick and Rose 2002]. On the other hand, the literature lacks in-depth analyses indicating the diversity of effects of euro adoption on the economies of different countries and their sectors.

Table 1. Assessment of compliance with the convergence criteria by Poland in April 2014

Criterion Description Criterion compliance

Price stability (inflation)

The average inflation rate in the country concerned must not be higher than the average annual inflation rates of the three lowest-inflation Member States by more than 1.5 percentage points.

YES

Poland’s average annual HICP inflation rate was 0.6%, which is below the reference value of 1.7%

Fiscal No Member State may be subject to the excessive deficit procedure, which is ap-plied when the general government deficit of the country concerned in relation to GDP exceeds 3% or government debt exceeds 60%.

NO

Poland is subject to Council Deci-sion on excessive deficit. In 2013, its general government deficit amounted to 4.3% of GDP, while its public debt-to-GDP ratio was 57%.

Exchange rate

The country concerned must participate in the ERM II for at least two years, during which the exchange rate of the national currency must be kept within a fluctuation margin of +/-15% around a fixed central parity and must not be subject to strong tensions, in particular, must not be deval-ued against the euro.

NO

Poland’s exchange rate regime is floating and Poland does not par-ticipate in the ERM II, in which arbitrary currency devaluation against the euro is prohibited.

Interest rates During the year preceding the assessment of compliance with the criterion, the aver-age long-term interest rate must not be higher than the average of the correspond-ing rates of the three lowest-inflation Member States by more than 2 percentage points.

YES

From May 2013 to April 2014, Poland’s average long-term inter-est rate was 4.2%, which is lower than the reference rate of 6.2%.

Legal con-vergence

The compatibility of national legislation with Articles 130 and 131 of the Treaty on European Union and the Statute of the European System of Central Banks and the Statute of the European Central Bank.

NO

The Polish law fails to meet all the requirements for central bank independence, confidentiality, the monetary financing prohibition and legal integration into the euro-zone.

Source: Own elaboration based on [Ministry of Foreign Affairs 2011, European Central Bank 2014].

Theoretically, different sectors may benefit differently from euro adoption

competition. This issue has also been addressed in some other papers [e.g. de Nadris and Vocarelli 2003, Baldwin et al. 2005, de Nardis et al. 2008].

4.3. Zloty exchange rate volatility in relation to the results of the Polish