The EU’s new member states from Central and Eastern Europe are required to join the eurozone as part of their accession agreements. However, deciding when to adopt the euro is a matter of heated debate.
At stake is not just an economic calculation, but also a judgement about the outlook of the single currency itself. For many, the benefits of membership have diminished since the 2008 financial crisis and prospective members, such as Poland, can derive maximum advantage from joining only if they are clear about the economic conditions that must first prevail in their own countries.
The formal criteria for entry are contained in the 1992 Maastricht Treaty, which sets targets for government debt, budget deficits, inflation, interest rates and exchange rates. However, merely hitting these targets (or, worse, just approaching them) at any given point in time has proved to be an inadequate foundation for membership. Indeed, the malleability of the Maastricht criteria has caused many of the eurozone’s problems. As long as eurozone debts continue to rise and member economies diverge rather than converge, prospective members should also be stress-tested to see whether they can withstand external shocks and sustain the membership criteria over the long term.
Before Poland decides to share a currency with its main trading partners, it should consider three vital economic conditions: its international competitiveness, the flexibility of its labor market and the health of its public finances.
Poland’s export markets are growing steadily, but this is not because the country trades mainly with other dynamic emerging economies or because there is huge global demand for uniquely Polish products. Rather, Poland simply combines low costs — including wages — and high-quality production. For this reason, Poland is sometimes called the “China of Europe.”
However competitiveness based on cost, rather than on brand value or innovation, makes the Polish economy vulnerable. Poland lacks the deeply rooted competitiveness of, say, Germany, the Netherlands, Austria, Sweden or Switzerland. Polish exports are sold under non-Polish names — Italian for shoes or English for clothing, for example. Its machinery exports are part of larger multinational networks run by German, Dutch or other global companies. And Poland’s cost advantage would disappear if the local currency, the zloty, were to strengthen sharply.
Although Polish companies are working hard to build brands abroad, that process can take decades. In the meantime, the country must be careful about joining the exchange rate mechanism (ERM II) — the narrow band within which applicant currencies must operate for at least two years prior to adopting the euro. Doing so could cause the zloty to strengthen, as it did to the Slovak koruna, and wipe out Poland’s competitive advantage.
Another important aspect of Poland’s competitiveness is its flexible labor market. One in four employees is on a fixed-term contract or self-employed. A quarter of the typical Polish wage comprises variable elements, making it easy to freeze or even lower compensation during tougher economic times. This means that firms can hire workers on short-term contracts when they are unsure of the business outlook; more generally, such flexibility helps the economy withstand external shocks.