Should Poland join the Eurozone?

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.

Unsuitable economic conditions

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.

Undesirable political conditions

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.