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

Maastricht inflation criterion – mixed performance

Long term interest rates - below the Maastricht level since 2005

Fiscal deficits - the persistent problem & excessive deficit procedure

Public debt - rising, but under control

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

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

The politics of euro adoption prior to 2008 Before 2007 – not a priority, no formal steps Two left wing-governments ( ) and two right wing governments ( ) 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

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.

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 Nominating the plenipotentiary for the euro - Convergence programmes

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

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

|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 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 EC sees public debt rise to 51.7% and 57.0% (2009&2010) and 61.3% in 2011 (autumn forecast)

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 !