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Exchange rate key to Poland's euro adoption


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17th November 2002, Skopje, Macedonia
By Wojciech Moskwa

Finance Minister Grzegorz Kolodko told Reuters on Sunday the timing of Poland's planned switch from zlotys to euros depends not only on budget reforms and growth, but also on the exchange rate.
Kolodko wants to meet the single currency's strict entry terms in 2005, an ambitious target given Poland's wide budget deficit and the high fiscal costs of European Union membership, expected to be won in 2004.
But he made clear that meeting the so-called Maastricht criteria in 2005 did not mean adopting the euro in the shortest possible timeframe -- in 2006 or 2007.
"We have one criterion for euro entry: Will it be beneficial for our economy or not? This also depends on the exchange rate at which we will join the euro," Kolodko told Reuters in an interview on a trip to Macedonia.
Kolodko has repeatedly called for a weaker zloty but the Polish currency remains under upward pressure from pre-accession portfolio capital inflows. Asked about the rate he would like to anchor the zloty to the euro, he said:
"During work in the central bank-finance ministry (euro entry) working group, there are talks about this. But at this phase, they are within the team, not with the media."
The strong zloty has added to woes surrounding Poland's worst slowdown in a decade, which has more than doubled the budget gap and unemployment while undermining the political will to tackle structural reforms.

MAASTRICHT IN 2005
The euro team's only statement to date said the zloty will be pegged to the euro at the average market rate for an unspecified time frame. It also said that Poland would try to fulfill euro entry requirements in 2005.
"It will be extremely difficult...but is this goal realistic? I will be able to answer that question when I know how much of my public finance restructuring package, which I'm working on, is implemented," he said.
"Also, when we have a better feel for the chances of five percent GDP growth in 2005." Kolodko expects GDP to expand 1.4 percent this year and 3.5 percent in 2003, but most analysts are more bearish on growth.
Kolodko said that in December or January he will complete work on fiscal reforms aimed at making the Polish budget, now stuffed with inflation-linked social payouts, more flexible and prepared for EU entry.
"To be in a position to decide when to join the euro, we must first fulfill the entry criteria. Still, this does not mean that once we meet entry terms, we will join the euro zone at the earliest possible moment."
Kolodko said that reducing Poland's budget deficit from 3.9 percent of GDP in 2003 to below the Maastricht ceiling of three percent will be very difficult, but was upbeat about meeting other entry criteria like low inflation.
Public debt, according to EU calculating methods, will reach 44.6 percent of GDP in 2002, below the 60 percent threshold set in the Maastricht treaty, Kolodko said.
"I am completely sure about (meeting) the inflation criteria," he said, forecasting CPI at 1.3 percent in December and dipping below the 2.3 percent annual budget target for next year if no external price shocks emerge.
"We are also ready to meet the requirements of the exchange rate fluctuation band," Kolodko said, referring to the 30 percent trading band in the pre-euro Exchange Rate Mechanism-2 system which euro candidates must stick to for two years.
Kolodko also reiterated that Polish interest rates were too high. "The process of rate reductions, both nominal and in real terms, has begun. I believe there is scope for further easing."