There Is No Point in Replacing the Polish Zloty with the Euro

Every year, the holiday season results in increased interest in the subject of Poland’s accession to the euro area. This is reflected in the media during the holiday period, with authors pointing out the benefits that would arise from abandoning the national currency and the sovereign central bank.

Personally, I do not share such opinions, which I have expressed on several occasions. At present, the opinions of economists on the possible adoption of the euro also vary widely, and the public is hardly enthusiastic about abandoning the zloty.

I expressed negative opinions about the euro even before it formally appeared. Here are some facts in favour of keeping our own currency.

It is unlikely that adopting the euro will boost economic growth

The replacement of the national currency by the euro does not at all guarantee a faster ‘catch-up’ with highly developed countries. Poland operating with its own currency is growing faster than, for example, Slovakia and Slovenia, which adopted the euro relatively early after joining the EU. Moreover, Poland is also strongly improving its position vis-à-vis many of the weaker countries of the original euro area. This can be seen, for example, in comparison with Europe’s strongest economy, Germany. Countries in the south of the continent, such as Portugal, Italy, Greece, and Spain, fare poorly in this comparison. Spain’s radical decline is noteworthy, as is the erratic and low rate of progress in both Slovakia and Slovenia. It is worth noting that despite starting much lower, Poland has risen to surpass Slovakia, as reported by Eurostat.

Presence in the euro area does not provide fiscal discipline

Contrary to widespread complaints about fiscal policy (and hopes that it will be ‘disciplined’ following the adoption of the euro), public debt in Poland remains manageable, despite active state social policy. Meanwhile, in spite of various formal restrictions, debt is exploding in the euro area. This also applies to countries which joined the euro area without a public debt problem. The debt emerged over time after they joined.

The euro and common monetary policy do not guarantee low inflation

Let us take a look at the already historic inflation rate in 2022, in the context of the data showing that the price growth rate fell to 8.2 per cent in September. Could its high level of 14.4 per cent support the thesis that it would be lower if we were ‘within’ the euro?

The fact that the average inflation rate for the zone was 8.3 per cent last year says little about the situation in individual euroland countries. In Estonia it was 19.3 per cent, in Lithuania 19.7 per cent, in Latvia 17.2 per cent and in Slovakia 12.8 per cent. A high rate was also recorded in 2022 in some of the ‘old’ EU countries: Belgium and the Netherlands (9.5 and 10 per cent respectively). Where is the certainty that inflation in Poland would not be even higher under the euro?

Advocates of adopting the single currency as soon as possible are also among the strong critics of the overly lenient (in their view) policy of NBP, especially in the context of the central bank’s recent rate cuts by the Monetary Policy Council. They were opposed to them, and had previously outdone themselves in demanding rapid and radical interest rate increases. However, if Poland were to adopt the euro, they would have to accept much lower official (for a long time even negative) interest rates dictated by the European Central Bank!

The flawed architecture of the euro area: one size fits all?

Why do the euro area countries have such an extraordinary tendency to accumulate public debt, and this despite all treaties and pacts designed, after all, to ‘discipline’ their national finances? And why is their economic growth anaemic and erratic? This even applies to Germany, which generally is growing faster than the countries of southern Europe, but still quite slowly, much slower than, for example, the USA, and has recently entered a recession phase. Detailed answers to these questions can be found in specialist literature, which is available but rather poorly known in Poland. The short answer is that the common monetary policy – and the common currency to be precise – is to blame.

The ‘fathers’ of the euro recklessly believed in the doctrine of ‘one size fits all’. But one and the same monetary policy, one and the same ECB interest rate applied to a vast area made up of countries with very different macroeconomic and structural characteristics cannot be effective. The ECB’s interest rate of just above 2 per cent in 2022 was far too low for Lithuania, where inflation was approaching 20 per cent, but slightly too high for France, where the rate hovered around just 5 per cent. The ECB’s one-size-fits-all policy leads to destabilising and costly imbalances in individual member states, which consequently spill over into the euro area as a whole. They have resulted not only in anaemic and unstable economic growth for the euro area as a whole, but also in forced public finance deficits. The fact that the euro area has in the long term turned out to be a zone of secular economic stagnation, furthermore shaken by periodic crises and recessions, is therefore no coincidence. By remaining outside the euro area, Poland is growing economically much faster and much more ‘healthily’ than countries that have long since abandoned their own currencies. A ‘sovereign’ currency, even if its exchange rate against the euro is at times subject to significant volatility, is proving to be an important factor for growth and stability.

Doubtful geopolitical benefits

The short-lived panic that occurred in the currency market following the Russian invasion of Ukraine has evidently also infected many economic commentators, journalists, and politicians. There have been calls for immediate action to be taken to replace the Polish zloty with a common European currency immediately. The conviction that Poland with its own currency is more vulnerable to Russian aggression than Poland without its own currency is naive. Are the Baltic States less vulnerable to aggression than Poland by virtue of having the euro? I don’t think so.

The author is Advisor to the Governor of Narodowy Bank Polski.
The text expresses the opinions of the author.