The New York Times

December 25, 2004

Once Again Part of Europe, Poland Ponders the Euro


International Herald Tribune

WARSAW - Selling books outside the Warsaw Academy of Fine Arts, Tomas Piekatkiewicz takes in mostly zlotys each day.

But with his smattering of books in French, German and Italian, Mr. Piekatkiewicz, 46, must also juggle a small stash of euros to accommodate the tourists who shop in Warsaw's lovingly restored downtown. He is already looking forward to the day when Poles use those same coins and bills, which he regards as a business-friendly, thoroughly European mark of stability.

"It will make selling easier," Mr. Piekatkiewicz said one evening while packing his books in Chiquita banana boxes. "And the euro will be stronger than the zloty."

Not yet a year in the European Union, Poland is gearing up for the next huge task: swapping the zloty for the euro. And though the path to the new currency is fraught with political peril, influential Polish officials say that embracing the euro will offer the country a historic opportunity to knock economic policies into shape while further embedding it in European structures.

"The next goal - adopting the euro - could play a valuable role if used wisely," Leszek Balcerowicz, the governor of Poland's central bank, said in an interview. "It's a win-win strategy if we do it right."

This goal grabs few headlines, eclipsed by Poland's entry into the European Union, on May 1, in the country's symbolic re-entry into Europe after a half-century of war and occupation. But behind the scenes, the wheels are in motion, and the question is when, not if, Poland will join the 12 nations that use the euro.

In late January, officials from Poland's central bank and the ministries involved will meet to plot strategy on the euro.

"We will decide the future then," said Poland's finance minister, Miroslaw Gronicki, who describes 2009 as the earliest possible date for embracing the euro. That target falls on some skeptical ears among Polish economists, who see 2010 or 2011 as more realistic.

Imposing change on a bloated disability system - a requirement for fiscal consolidation - will require a deft hand in a country that has dealt with wrenching change for more than a decade. And past currency shifts have left behind a public skeptical of governments that toy with the zloty. But the political will to embrace the euro, a logical extension of European Union membership, seems strong across a broad range of parties and institutions.

"The politicians seem committed," said Janusz Jankowiak, chief economist of BRE Bank in Warsaw, "even if the euro is not an issue that is close to ordinary people."

A look at the 10 new European Union members finds a heterogeneous lot when it comes to the euro. In October, the European Central Bank emphasized that the Maastricht Treaty criteria for euro membership, which include a consistently low inflation rate, sound fiscal policies and manageable long-term interest rates, would be strictly enforced.

Five months before the warning, Estonia, Lithuania and Slovenia had already stormed to the front of the pack by fulfilling the three criteria. In June, they took the final step toward euro-zone membership, agreeing to maintain their currencies in stable trading ranges vis-à-vis the euro for at least two years.

In other countries, progress is less certain. Hungary is mired in a wrangle over the central bank's independence. Budget deficits are high there and in the Czech Republic. By contrast, Slovakia passed tough budgetary changes this month intended to usher in the euro by 2009.

Poland, economists agree, will test exactly how ambitious euro-zone expansion can be. With 38.6 million people, its population exceeds all other new entrants combined. The Polish economy oozes diversity: farmers who barely subsist on small plots, workers in heavy industries along the Baltic Sea and a layer of educated professionals, mostly in Warsaw.

And the continuing transition away from central planning produces constant surprises.

"Poland still has a very unpredictable economy," said Rafal Antczak, an economist with the Center for Social and Economic Research in Warsaw.

Inflation, the bête noire of central bankers, spiked this year to about 4 percent from 2 percent in Poland because of erratic food prices but will recede in the next few years, economists said. But getting a sustainable, long-term grip on government finances remains the overriding task, and it will demand first some statistical fudging at the European Union level, then some painful change.

In 1999, Poland revamped its pensions by steering a substantial portion of Poles' paycheck deductions into private investment plans. The state collects the money but it is invested privately, so Poland wants Eurostat, the European Union's statistics agency, to exclude it from budget deficit calculations, something Eurostat has so far refused to do.

Thus, Poland is demanding that this change be incorporated into the Stability and Growth Pact, the framework for fiscal discipline in the euro zone that will be revised early next year. The modification would, at a stroke, permanently reduce the Polish budget deficit by 1.5 percent of gross domestic product. It now hovers at more than 5 percent.

Beyond this change lies the politically explosive issue of overhauling disability payments, which cost the state 3.7 percent of G.D.P. In the late 1980's and early 1990's, the government shoveled thousands of workers into the system, often simply to avoid the political consequences of their unemployment. Now, Poland is saddled with a costly system that, absent radical surgery, will fuel budget deficits indefinitely.

"This is our challenge for the future," said Mr. Gronicki, the finance minister. "If we stop our efforts at this point, it will be hard to reach the Maastricht criteria."

Yet Poland is also entering a bumpy political phase. The center-left government of Prime Minister Marek Belka that took office this year is likely to lose to rightist opposition in elections next October. With one eye on the polls, the government abandoned a modest attempt this year to begin changing the disability system, a plan that would have started to take stock of exactly who deserves disability payments.

Even if the government can put the fundamental building blocks in place for the euro's introduction, it will also have to tackle the public relations aspect of abandoning the zloty, Polish officials and economists said.

Many Poles, including Mr. Piekatkiewicz, the bookseller, recall with considerable angst the change of 1995, when the government imposed a simple mathematical change to the currency. With years of hyperinflation behind it, Poland lopped four zeros off the currency, turning 10,000 zlotys into one and adjusting prices accordingly.

"People thought the government was going to cheat them," Mr. Gronicki said. "The euro will create the same problem."

Trying to tackle the problem head on, the finance ministry is already considering a campaign to promote the euro, and Mr. Gronicki said he expected the central bank to follow suit next year.

Next October's elections will give some hint about how quickly the zloty will give way to the euro, said Ryszard Petru, an economist with BPH Bank in Warsaw. The central bank is regarded as a strong supporter of euro-zone membership, but action by the politicians will be decisive.

"If the central bank and the finance ministry share the same views after the election," Mr. Petru said, "the deal is done."

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