Some of the important benefits resulting from Poland joining the eurozone could be achieved by just making a credible declaration of intent to apply for membership.
Since the 2015 parliamentary elections, the ruling camp has been amending the law in a manner that, in sum, can be described as institutionalising economic and political populism. If the opposition does not win the 2023 elections, the Polish model of capitalism, severely weakened by politicisation, statism and monopolisation, will undergo a permanent and probably irreversible transformation, resulting in lower development dynamics and greater vulnerability to crises.
Notably, the decomposition of the existing capitalism model would then proceed under the continued influence of the delayed impact of the pandemic, the war in Ukraine and high inflation. In such circumstances, a renewed, stronger focus on the European integration process would be the best way to mitigate these risks. This is why it is becoming so important to advocate measures aimed at Poland joining the eurozone.
Stronger Ties with the European Union
Regardless of the traditionally cited benefits, four arguments in favour of membership are now playing a key role: 1. reinforced entrenchment of Poland’s systemic transformation legacy and a Polish variant of the EU model of capitalism; 2. reduced risk of polexit and withdrawal of EU institutions and standards from Poland; 3. lower debt servicing costs and reduced likelihood of a financial (currency or banking) crisis; and 4. smaller expenditures required for any specific increase in armament levels. A significant part of these benefits could be achieved by simply making a credible declaration of intent to apply for membership.
The above arguments are even more important in an election year. Forcing the current government to engage in a serious and honest debate on the euro would test the sincerity and credibility of its official intentions to remain in the European Union, as well as to obtain funds under the NRP (Recovery and Resilience Facility). Moreover, it would force the government to fill its hollow platitudes about defending economic and political sovereignty with enough substance to enable a meaningful pre-election discussion on Poland’s strategy in the face of current powerful geopolitical challenges. It would be good to get the ruling coalition to articulate whether there is an alternative to stronger EU ties in this situation, what it is, and, above all, what the cost of such an alternative would be.
Historic Threat to Poland
A good general framework for this type of discussion is still provided by the so-called political globalisation trilemma, included in the well-known concept by Prof. Dani Rodrik of Harvard University. The essence of the trilemma is that at any given time, only two of these three elements – economic globalisation, political democracy and the nation-state – can co-exist. This concept was recently referenced in a book by Klaus Schwab (President of the World Economic Forum) and Thierry Malleret, who assume that it is equally applicable to international economic integration. In their view, ‘Combining economic integration with democracy implies that important decisions have to be made at a supranational level, which somehow weakens the sovereignty of the nation-state’.
In other words, if you are not willing to compromise on the scope of democracy and the prerogatives of the nation-state, you must limit economic integration. Rodrik’s trilemma confronts countries with a very difficult choice indeed. It may be noted with some irony that, despite the extreme complexity of the current international situation, the originality of the Polish ruling camp’s contribution to the attempted solution of the trilemma only manifests in its inadequacy and harmfulness. This unique ‘originality’ lies in the fact that the current government is willing to give up not just one goal (integration), but also a second (democracy), contenting itself with, or consciously choosing, only the third goal (the nation-state).
The historic threat to Poland can also be explained by the concept of the ‘narrow corridor’, presented in the well-known book by Prof. Daron Acemoglu and Prof. James A. Robinson. Namely, if the current process of reversing the achievements of the transformation is not interrupted, Poland will be pushed out of the ‘narrow corridor’ of the favourable, very difficult to achieve balance between the ‘power of the state’ and the ‘power of society’ which it managed to reach after 1989. Subsequently, pushed away from the countries of the ‘Shackled Leviathan’, Poland may become a case of the ‘Despotic Leviathan’ or the ‘Absent Leviathan’, but may also find itself among the countries combining the negative elements of both cases. Thrust out of the ‘narrow corridor’, Poland will also not be able to build the characteristics of a ‘resilient society’, as analysed by Prof. Markus Brunnermeier in his book. Moreover, it would be very difficult for it to find a place in the ‘College of Nations’, i.e. among countries respecting democracy, civil rights and free commerce, the creation of which James Rickards proposes in his book Sold Out in opposition to authoritarian countries.
Avoiding Isolation
The need to accentuate these important new benefits of eurozone membership would perhaps not be so pressing were it not for the current government’s deliberate course towards isolation and autarkic authoritarianism. This prospect, in turn, would be at least a tad less dangerous if it could be assumed that, at the very least, macroeconomic policy is being conducted in a competent manner and not subordinated to the electoral cycle. The reality is, however, that President Adam Glapiński has unfortunately crossed the ‘Rubicon of politicisation’ of the National Bank of Poland (NBP). Importantly, the erosion of central bank independence did not occur as a result of pressure exerted on the president by the ruling camp, as was the case in Turkey, for example. Instead, it is a case of him voluntarily meeting the expectations of political power. It could be said that the incompetent monetary policy and, as a result, its low effectiveness in the fight against inflation, as well as the manner in which the central bank is managed – not according to standards – necessitate perceiving the President of the NBP as an additional strong argument in favour of joining the eurozone. In this context, a situation should be mentioned that is rather uncomfortable for the NBP: in the Year of Copernicus, which is just starting, the inferior zloty is driving the better euro and dollars out of circulation; they are being accumulated, even if they are losing some of their purchasing power as well. This seems to be an unfortunate modern confirmation of the Gresham-Copernicus law.
Interestingly, there are also signs which may indicate that, despite the extreme anti-EU rhetoric of the NBP President, he does not attach all that much importance to pursuing an autonomous monetary policy to protect national interests. The announcements released after the meetings of the Monetary Policy Council on 7 December 2022 and 4 January 2023 imply quite clearly that monetary policy is being effectively left in the hands of major foreign central banks. This is because the MPC assumes that interest rate increases implemented abroad will be the main mechanism through which the disinflation process in Poland is going to be affected. If the Polish central bank is prioritising such, so to speak, free-riding, it acknowledges at the same time that national business cycles in the EU are synchronised, thus fulfilling an important criterion of the optimum currency areas theory. If so, then the MPC is advocating abandoning autonomous monetary policy and handing it over to the ECB to manage. If not, then much more focus should have been given to this issue. It should also be added that, given the current high inflation, the – already highly questionable – argument about the pro-inflationary effects of adopting the single currency has lost considerable weight.
Besides the politicisation of the central bank and the unreliable policy of the NBP, another factor that poses a great risk to the medium-term prospects of the Polish economy is a lack of transparency in public finances. It is unlikely that the current government will seek to restore such transparency. The Supreme Audit Office is weakened and can hardly be expected to act with sufficient effectiveness. The European Union, in turn, has loosened its requirements concerning the state of public finances in connection with the pandemic. This unfortunately results in more and more funds being expended outside the budget and in a discretionary manner, subordinated to political criteria. This will become an increasing problem mainly for two reasons. First, the forthcoming elections will push the authorities even more strongly towards a budgetary policy serving to benefit their electorate.
If, on top of that, there was to be an attempt to implement Jarosław Kaczyński’s idea of a quantum leap in the share of defence spending (up to 5 percent of GDP), it would have to be accomplished at the cost of massive cuts in other public expenditures or at the cost of significantly prolonging the disinflation process. The public finance situation would be even more ambiguous had the current ruling coalition not backtracked in time from the introduction of very ill-prepared radical changes to the tax system (the so-called ‘Polish Deal’). Thus, as in the case of monetary policy, the manner in which fiscal policy is conducted also clearly makes an argument for efforts to join the eurozone. Another separate problem is the lack of coordination between monetary, fiscal and macro-prudential policies, which is to be addressed by the Financial Stability Committee (FSC) set up after the global crisis of 2007-2009.
Prevalence of Not-So-Current Views?
The Polish debate on joining the eurozone is still stuck on the same arguments that became prevalent in reaction to the Greek or, more broadly, to the eurozone crisis at the beginning of the last decade. Subsequent attempts to revive public discourse did not have much effect, largely because the main political groupings ceased to take an interest in the issue. The legal barrier of having to amend the relevant constitutional provision played a significant role in this since – given the existing balance of political power – it seemed impossible to achieve. As a result, inertia ensured that the belief that there is an unequivocal preponderance of arguments against joining the eurozone became firmly entrenched in public discourse.
The reasons behind the perpetuation of this ‘conventional wisdom’ have not yet been convincingly explained by political science, sociology or social psychology. Unfortunately, economists have also made an unhelpful contribution here because, despite the significant changes taking place in the global and European environment, they were not keen to undertake in-depth research into the new cost-benefit balance of EU and eurozone membership. Thus, the views of opponents of Poland’s accession to the euro area have not been subjected to sufficient criticism on theoretical and empirical grounds.
One point worth emphasising here is the role that the works and media statements of two well-known financial sector economists, Stefan Kawalec and Ernest Pytlarczyk, have played and continue to play in the dissemination of such views. The issue here is not to what extent the views formulated in their 2017 book ‘The Euro Paradox’ were consistent with the economic knowledge of the time. Much more relevant and disconcerting is the fact that, despite the profound changes that have taken place in Poland and abroad, as well as the resulting changes in risks, in a recently published extensive interview (Horizons DGP, 16-18 December 2022), these authors claim that the views expressed in their book are still fully valid. Moreover, the more complicated the reality proves to be, the more they double down on emphasising the role of the floating exchange rate in explaining economic processes in Poland. Not only do they see it as practically the only reason for the favourable economic situation after the 2007-2009 crisis, but they even tout it as ‘central to the Polish economic model’. If one were to look for the main feature or central element of the Polish model, it would not be the floating rate, but rather a vibrant private enterprise sector, highly adaptive and focused on maintaining competitiveness. These qualities also invalidate the argument that eurozone accession should wait until Poland’s GDP per capita is close to that of the most developed EU countries.
Notably, Kawalec and Pytlarczyk have not dispelled the fundamental doubts that arise after reading their book. Above all, their view that competitiveness can be permanently influenced by depreciation and that exchange rate changes are an automatic shock absorber for cyclical fluctuations remains unconvincing in light of recent research. It also seems logically inconsistent to assume that a floating exchange rate acts as a warning system in the economy, while at the same time treating it as an instrument of economic policy. In this context, it is useful to cite the recent opinion of Mario I. Blejer, former Governor of the Central Bank of Argentina (‘Project Syndicate’, 30 December 2022). His statement is an attempt to explain why the country has been experiencing recurrent macroeconomic crises for such a long time. Blejer believes the best explanation is ‘Argentina’s inability to build and sustain competitiveness without periodically implementing large nominal exchange rate devaluations’.
It is a pity that, in the aforementioned interview, Kawalec and Pytlarczyk omitted the important, albeit inconvenient for their line of reasoning, results of the 2020 study by Milan Škrbić and Davor Kunovac of the Croatian National Bank. Indeed, this is one of the few studies that attempts to directly address the question of why the four EU countries under obligation to join the eurozone (Sweden, the Czech Republic, Hungary and Poland) are still delaying this decision. The study focuses on the cost of membership in terms of the loss of the autonomous monetary policy. The analysis shows that between these countries and the eurozone, there is a high correlation between interest rates as well as synchronicity of business cycles. Importantly, these cycles are predominantly influenced by the same common shocks. From this, the authors conclude that in the four countries studied, a common monetary policy would be an adequate substitute for national policies, so a wait-and-see policy cannot, in their view, be justified on purely economic grounds.
Kawalec and Pytlarczyk should also address the EU’s already advanced search for new institutional arrangements that would strengthen the fiscal ‘leg’ of the monetary union. In recent months, proposals prepared jointly by the governments of the Netherlands and Spain, as well as Germany, have been discussed and agreement has been reached on four objectives of the reform. Additional proposals have also been prepared by the IMF and the European Fiscal Board, and a proposal from the European Commission is expected soon.
The most important thing, however, is that by significantly narrowing the perspective and overexposing their favoured arguments, Kawalec and Pytlarczyk almost completely omit the much more fundamental benefits for the Polish economy, which, in the new geopolitical situation, could arise from directing the country’s development strategy towards future membership in the eurozone. By failing to address these benefits, the authors contribute to the further reinforcement of certain myths and half-truths that will sustain and strengthen the negative narrative about the eurozone.
On Certain Political Conditions
It could be optimistically assumed that, in view of the war in Ukraine, after the experience with the pandemic and high inflation, striving for closer cooperation with the EU and announcing the intention to join the eurozone would be one of the few goals shared by the current government and the opposition. This would also be supported by the 8 percentage point increase in support for Poland’s membership of the eurozone (from 48 percent to 56 percent) that occurred between 2021 and 2022, which also signalled crossing the psychological threshold of 50 percent.
Unfortunately, instead of heeding the positive poll results, the government is stepping up its anti-EU and anti-German rhetoric and the president of the central bank is announcing that until the end of his recently started second term, the euro in Poland should best be forgotten. The position of the ruling camp, although very damaging to Poland’s interests, is at least quite clear: regardless of the long-term costs to the economy and society, all that matters is staying in power. The big enigma, however, is why the opposition has so far largely stayed away from the issue of joining the eurozone. This is puzzling because advocating for the euro seems to be a good investment for political parties. According to Eurobarometer surveys, support for this decision increases noticeably in the three-year period after accession as compared to the three-year period preceding it. Such was the case in all five countries of Central and Eastern Europe that have already joined the eurozone. The opposition’s position is also puzzling because, in addition to the four key arguments that were already pointed out at the beginning of the text, there are many other reasons for including the topic of the euro in the election campaign. Why would the opposition not, for example, be interested in bringing the following issues into the public debate:
a) why was Croatia unafraid to join the eurozone and why are Bulgaria, and subsequently Romania, set to join relatively soon?
b) why didn’t Slovakia, after joining the eurozone (in the midst of the global financial crisis, no less, when it supposedly lost its exchange rate buffer and its interest rate buffer), fare worse economically than, for example, Poland, the Czech Republic or Hungary?
c) why, despite the severe crisis, didn’t Greece seriously consider leaving the eurozone?
d) would the ‘mini-crisis’ and change of government have occurred in the UK in autumn 2022 if it had remained in the EU?
The opposition should also demand an explanation for the following paradox: while the ruling camp is trying to position itself as an advocate of Ukraine’s rapid accession to the EU, it is simultaneously pursuing a policy suggesting that the EU is alien to it. Not only culturally, but also in systemic, military and economic terms; all that in the context of the deglobalisation process, as a result of which regional integration groupings and the benefits of near-shoring and friend-shoring are becoming increasingly important. We ought to be asking why the government preferred to prioritise an anti-German campaign instead of focusing on opportunities to exploit these new trends in the global economy. We should also inquire whether, before launching such a campaign, anyone in the ruling camp tried to calculate the cumulative opportunity costs in the form of reduced future foreign direct investment inflows, an increased risk of exchange rate collapse, or an increase in debt servicing costs resulting from the demand for war reparations from Germany.
Among representatives of the opposition, there are more and more voices calling for a compromise with the Law and Justice Party on the issue of amending the Act on the Supreme Court, which would facilitate unblocking EU funds under the NRP (Recovery and Resilience Facility). In this vein, prominent lawyer and well-known public affairs commentator Prof. Marcin Matczak recently stated that receiving these funds is Poland’s raison d’état and therefore warrants the adoption of certain provisions proposed by the Law and Justice Party. Regardless of the purely legal aspects, this position is not very convincing and even risky because Poland’s raison d’état is to remain in the EU and to rebuild and strengthen its position within it. NRP funds are only a raison d’état insofar as they will serve this overarching objective.
The opposition seems to treat NRP funds as a substitute for the economic benefits of applying for eurozone membership itself – for the purposes of the election campaign, anyway. It would be far better to embrace the notion that participation in this important EU project is the right step towards deepening integration ties but nonetheless subordinated to the more strategic goal of eurozone membership. Treating NRP funds as an autonomous goal is politically risky, as obtaining them significantly increases PiS’s chances of staying in power without guaranteeing a shift in the party’s optics towards a less anti-EU stance. Nor should the opposition frame NRP funds as a remedy for a very broad spectrum of economic problems. The overemphasis on the potential benefit of lower inflation resulting from the strengthening of the zloty exchange rate should be regarded as a serious mistake here. Such an effect can be expected, but its scale is likely to be limited. Emphasising this effect, on the other hand, brings a risk that both the central bank and the government would be even more lax in fulfilling their duty to ensure the macroeconomic stability of the economy.
A qualitatively new combination of unfavourable national and geopolitical conditions in the economic and political environment makes it necessary to reconsider the balance of costs and benefits of Poland joining the Economic and Monetary Union. The prevailing threats under these circumstances, as well as the resulting opportunities, clearly support the announcement of Poland’s intention to seek membership in the eurozone. Such an intention itself can bring tangible economic benefits. The upcoming parliamentary elections provide a very good opportunity to familiarise the widest possible cross-section of the public with arguments based on the latest research during the unfolding discussions. Experts, particularly in the field of social sciences, as well as journalists and other professional groups, are facing an extremely important task. ©℗
