The state of votes
Joining the Euro: not before we know what we sign up for
Eurozone – unquestioned opportunity or the Great Unknown
Marcin Dembowski Rafał Kowalczyk
Marcin Surowiec | 2018. January 26. 00:00
The benefits of joining the Euro Area are hypothetical and hazy at best. The dangers are real and well-explored. We would be wise not to board a train until we are not only certain that it heads in the right direction, but also has enough fuel to actually reach it.
As of now, Poland has the best of two worlds: it is part of the Single market, benefitting from the great European economy, while at the same time not risking being dragged to the bottom in the event the Euro Area succumbs to another economic turmoil. Being part of the Euro Area is an investment – we would sacrifice some of our economic power for the hazy promise of more political power. It would be a risky bargain by itself, even if the groundwork under the Eurozone was completely sound. Unfortunately we have no reason to believe it to be so.
Robert Alexander Mundell, known to some as “father of the Euro”, pioneered the theory of optimum currency area (OCA), which lays at the basis of the idea for establishing the Eurozone. The theory stipulates that if a given region has certain characteristics, then having a single currency would maximize its economic efficiency. There are four main criteria for a successful currency union: (1) labor mobility across the region; (2) capital mobility and price and wage flexibility across the region; (3) a risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics; (4) participant countries have similar business cycles.
One doesn’t need a PhD in the economics to see that the Eurozone isn’t exactly a very good example of an OCA. The capital mobility is rather good but labor mobility – mostly because of cultural and linguistic differences – not so much. There is obviously no fiscal transfer system and, given German skepticism for such ideas, there won’t be any in foreseeable future. And, last but not least, business cycles of Eurozone countries are uncoordinated. That means when one economy (for instance – Germany) is battling inflation, another (for instance – France) could be struggling with stagnant growth. Not only both have different problems and need different solutions, but solutions implemented by one of them will be detrimental for the other, exacerbating its problems.
Of course not everyone agrees with the implications of the OCA theory. Some still argue, that problems of certain nations are only a by-product of their own ineptitude, wastefulness or even laziness. Those would argue that as long as we retain strict budgetary discipline and curb the inflation, then everything will be just fine and we won’t have anything to worry about. Let’s suppose that is in fact true and Germans owe their growing power in the EU only to the virtues of national character, and if we only emulate them we would have nothing to worry about after joining the Euro Area. That still means that, come another financial crisis, we would have to chip in, along with the rest of the thrifty Northern nations, to pay the debts of the careless Southerners. The only problem is that the other Northern nations tend to own banks that the South is indebted to, so they basically pay themselves. And therefore have little incentive to change this pathological situation.
Politicians of the Euro Area states are not oblivious to those pitfalls. More and more of them voice their concern that austerity policies, forced on countries like Greece, do more harm than good and in fact exacerbate the economic imbalances between the North and South. They argue that fiscal transfers between states of the Euro Area with strong economies and those facing serious problems would help stabilize the situation. Will they? We may have to wait quite a while to find out. Germany has the most say in the matter of reforming the Eurozone, and is notably skeptical about fiscal transfers. German politicians would be hard-pressed to explain this new direction to their voters, who are still firmly convinced they should not subsidize the “less industrious and frugal” Southerners. And if the last Bundestag election is any indicator, the Euroscepticism isn’t going to lose it sway over the Rhine anytime soon.
Marcin Dembowski Rafał Kowalczyk | 2018. January 26. 00:00
Integration itself is not a bad thing. The European Union, considering all the factors, is one of the strongest organizations in the world from an economic point of view. It is worth to be in the group of these countries, integrated both economically and financially.
In recent years, out of the disproportionate development of the EU countries and, their structural and institutional dissolution, emerged the idea of a two speed Europe. What we can observe right now is a serious economic imbalance and political clinch in Europe. Is there something we can do to break the deadlock? Does joining the Eurozone still make sense for Poland?
In our opinion further integration itself is not a bad thing. The EU, considering all factors, is still one of the strongest organizations in the world, from an economic point of view. It is also worth to be part of the Eurozone because in this way we can avoid many market turbulences related to currency crises.
The apathy in which the EU community is currently stuck in can be the start of a serious crisis, leading to the dissolution of the community and the comeback of national currencies. The countries of central Europe are repeatedly in conflict with European institutions, defending their vital interests. It can, at some point, blow up the EU, and as a consequence, the Eurozone.
Polish economy came out unharmed from the 2008 financial crisis. At first glance we might think that joining a single currency has significant advantages and is in the interest of all, since it minimizes currency exchange risks and improves the image and credibility of a country. But fulfilling the criteria to achieve this and to be able to implement the Euro works only in theory. In practice, governments have their own priorities; they have to fulfil the expectations of the voters, which do not always coincide with long lasting and stable development. The government of Law and Justice currently increases social spending, which increases consumption. But this on the other hand is effecting government debt and propels public deficit. The pressure of compelling the criteria of accession can be demotivating for different governments. It can be impossible, in the current economic environment, to fulfil the legislative and economic criteria.
The strategic vision, the vision of where we want to be in a couple of years, is very important. We must have a precise long-term development policy. A strong Poland, being a regional leader in innovation, developing services along with the industry, can be a worthy partner for the EU. Poland has a chance to become an engine of development and a guarantor of stabilization in the Eurozone without which there will be no common currency area.
We are aware that Poland is not a lone island in the globalized world, therefore we implement good solutions creating room for investment. We need to focus as well on creating a social-economic identity based on cooperation between state, business and research facilities. Which on the other hand protects our own vision of development model in the EU. A wider integration, which in the end will lead to integration with a common currency, cannot result in losing national sovereignty. Loss of sovereignty would be a major breach of international law and would also be contrary to the ideas on which the EU was founded.
In conclusion, it would be best to join the Eurozone. Potential benefits outweigh the costs. For the growing Polish economy, the risk of exchange rate fluctuations will disappear. It will enable Polish companies to develop faster and the economy will be more stable. In addition, we will become a member of an elite club of nations, integrated both financially and economically.
Marcin Dembowski Rafał Kowalczyk
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