You will be familiar with old cliché that you wait ages for a bus and then three come along at once. It appears, the same is true of ministers – up to a point. Last week, in Benin, I had an appointment to meet the Minister of Energy and Mining and was kept waiting for two hours, the minister having been summoned unexpectedly to see the president. Today, in Warsaw, at a BPCC breakfast meeting the expected speaker, the Finance Minister, had to cancel at the last moment as he had been unexpectedly summoned to see the prime minister, and sent not one but three ministers from the finance ministry, including the chief economist. What did we learn?
As you might have expected, the Euro zone (EZ) crisis is having an effect on the Polish economy since no country in the modern economic world exists isolation from those around it (please see The Island). The reasons for the EZ crisis stem from the poor performance of the EZ’s stability and growth pact, weak enforcement of the instruments available under the growth and stability pact and the lack of a crisis resolution mechanism. In the view of the government’s chief economist, Ludwik Kotecki, there has been a weakness in the EU response to EZ crisis to date and there are four important areas which must be addressed: banking union – progress is needed so that the taxpayer does not have to pay for banking failure in the future; fiscal union – to avoid unsustainable deficits; economic union – to improve competitiveness; and political union – to underpin all these measure with democratic legitimacy. As I have written here before (for example, Other People’s Money) it is not possible to have an effective monetary union without fiscal union which is itself not possible without political union and I have pointed to the lack of democratic accountability in the EU and all its works as a fatal weakness. Obviously I am not alone.
On banking union some progress has been made. Poland’s view is that the EZ is not perfect and it supports further discussions but sees the danger of a two tier Europe emerging, something about which Poland, which wishes to be at the core of the EU, is very sensitive. In the medium term Poland should join the EZ but considers that changes are needed to solve the problems of the structural debt. The EZ also needs to solve the problems of the lack of economic growth and competitiveness.
As to the actual adoption of the Euro, the debate began this year (please see The Colour of Money). Poland’s adoption of the common currency should be based on four pillars: nominal criteria – does Poland satisfy them all; structural criteria – Poland has to be well prepared because those countries that were have benefitted from the Euro but those that were not have become a burden on the others; technical preparation – having the correct legal, regulatory and logistical structures in place; and what Poland calls Euro 2.0 – being convinced that the EZ is reformed and stable. This is seen as not something that is a matter of one to five years away but rather 10 years away. Poland must be prepared fiscally, with the structural deficit being not greater than 1 per cent of GBP and Poland’s internal target for national debt being not more than 45 per cent of GDP as oppose to the Maastricht criterion of 60 per cent. There is still much to be done.
On the macro-economic front, Poland has reduced its forecast for growth in GDP in 2013 from 2.2 per cent to 1.5 per cent largely because exports to the EZ are reduced, consumption is lower, a too tight fiscal and monetary stance last year (see below) and simply because Poland is at this particular stage of the business cycle, Poland’s economy having largely converged with the business cycles of other European economies which has, of course, resulted in the EZ’s large impact on the Polish economy. When Poland’s 2013 budget was prepared last August, Poland based its assumptions on EC and IMF predictions for growth in Europe as whole which assumed a rebound in growth from the beginning of 2013. The rebound is now predicted for the second half of 2013 with a gradual improvement in the Polish economy in 2014.
Interestingly, the chief economist thought that the Polish Monetary Policy Council (MPC) – which is wholly independent – could have cut interest rates more aggressively last year, with the rise in rates in May having been wholly unjustified. The market expectation, based on falling inflation (1 per cent when the MPC based its assumption on inflation at 2.5 per cent) is for a slow-down in the economy and a further 0.75 to 1 per cent cut in rates.
So there you have it: both busses and ministers arrive eventually but economic growth is rather more elusive, in Europe at least.