Przemysław Woźniak

1. Economic and Political Challenges of Acceding to the Euro area in a post-Lehman Brothers World: The case of Poland Przemysław Woźniak

2. Contents • Brief overview of economic developments • Economic aspects – Maastricht criteria • Political process

3. Strong growth → real convergence

4. Nominal convergence alongside real convergence

5. Maastricht inflation criterion – mixed performance

6. Long term interest rates- below the Maastricht level since 2005

7. Fiscal deficits - the persistent problem& excessive deficit procedure

8. Public debt - rising, but under control

9. The crisis hit Poland hard • Particularly via the exchange rate which lost almost half of its value to the euro between Sep08 and mid Feb09

10. … and the stock exchange • Which tumbled by almost 1/2 (Sep 08 - Feb 09) and by 2/3 since the peak in July 07.

11. The politics of euro adoption prior to 2008 • Before 2007 – not a priority, no formal steps • Two left wing-governments (2001-2005) and two right wing governments (2005-2007) did little to initiate the path to the euro • The left wing coalitions – ideological consent but fear of political risk • The right-wing coalitions (Kaczynski) – ideological objections + political opportunism

12. Unpopularity of the euro • In the Eurobarometer surveys Poles emerge as one of the most euro-sceptic countries Eurobarometer (May2008) • The lowest awareness of no opt-out (15%). • The biggest fear of price rise (83%) and abuses during changeover (84%) • Poles are generally uninterested in the euro and consider it negative for their country • Up to late 2007 politicians decided to give in to or profit from those fears rather than change them.

13. Breakthrough in late 2007 • The change came in late 2007 with the new centrist liberal government of Donald Tusk • Rostowski, the advocate of unilateral euroization prior to 2004, became the finance minister • The euro adoption emerges as a fully-fledged political plan: - Roadmap to the euro (Oct 08) – ERM2 in 2009H1 and EMU entry in 2012 - Nominating the plenipotentiary for the euro - Convergence programmes

14. Euro-accession debate in late 2008 and early 2009 • Macroeconomic criteria do not considered a problem (except exchange rate stability) • The biggest challenge – constitution amendments to allow transferring powers to the ECB • Two-thirds majority required – that the coalition does not have (referendum). • Monetary Policy Council – entering ERM2 before the constitutional change unwise • The gridlock puts the roadmap under pressure

15. The debate shifts back to economics • As the year 2009 progressed, economic situation deteriorates • Euro more popular – according to the polls • Fiscal deficit in 2008 revised downwards (to -3.6%) → EDP • Unprecedented fluctuations in the forex market make it less realistic to enter ERM2 by mid-2009 as planned • Rostowski changes the tone – calls the euro adoption a pragmatic goal, not a dogma

16. |The deficit becomes the biggest problem • The ultimate blow came with EC Spring forecasts: deficit at 6.6% in 2009 and 7.3% in 2010 • Better GDP performance and outlook likely to produce smaller deficits of below 6% in both years. • Bringing the deficit below 3% not likely before 2012. • Inflation above the reference level since late 2008 (but expected to return below by mid 2010) • Interest rates started to exceed the reference level in October 2009. • EC sees public debt rise to 51.7% and 57.0% (2009&2010) and 61.3% in 2011 (autumn forecast)

17. 2012 invalid but formal steps continued • In late summer the government officially gave up the plan to enter EMU in 2009 and EMU in 2012 • However, administrative processes continue • Early December – the first meeting of the National Coordination Committee, the key body in the euro adoption process • Progress on the National Changeover Plan • The median expectation of the euro-day is 2014 (November Reuters poll)

18. Thank you !