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Why Poland Is Falling Out of Love With the Euro

Tuesday, 27 Sep 2011 | 2:51 AM ET

Next year is a big one for Poland, as it will host the European football championship together with neighboring Ukraine.

Mascots wearing the two countries' colors roam the streets of the capital and the infrastructure being built for the event – roads and rail tracks – can be seen from the plane as it descends towards Warsaw's Chopin airport.

A tramway pass in the center of Warsaw on June 8, 2011. Poland and Ukraine will co-host the 2012 European Football Championship.
Franck Fife | AFP | Getty Images
A tramway pass in the center of Warsaw on June 8, 2011. Poland and Ukraine will co-host the 2012 European Football Championship.

2012 was also supposed to have been the year in which Poland joined the euro zone, but that target was dropped as the single currency has been mired in turmoil.

Other dates have been mentioned, such as 2014 or 2015. But analysts are skeptical the euro is such a good idea, even if ordinary Poles are still optimistic.

"I think the effects [of joining the euro] would be positive," Adam Krawkova, a 42 year-old stonecutter taking a stroll with his wife in central Warsaw, told CNBC.com "If we had the euro in Poland, our work would be easier."

Krawkova is self-employed and says that for people running a business in Poland, life is hard because of high bureaucracy and big taxes.

Many Poles believe that joining the euro would bring better political leadership and more competence when it comes to economic policies – despite the protracted crisis in Greece.

"I trust the competence of European economists, they are not as political as the ones here in Poland," Beata, a journalist taking a stroll on Warsaw's coquettish boulevard Krakowskie Przedmiescie with her mother Zdzislawa, a retired teacher, said.

"The European society is more responsible, in Poland people expect politicians to help them. Europeans are more self-reliant, the market is freer [in the euro zone]," she added.

Being pro-European is important, and adopting the euro would be a way for Poland to prove it is, Zdzislawa said, adding that troubled Greece should be helped because of the principle of solidarity: "I would hope if Poland had problems that other countries would help."

Euro Party Is Over

But analysts say that joining the single currency before the country is ready would do Poland more harm than good.

"It's not about being pro-European or euro-skeptic, it's about thinking about the economic conditions," Jan Filip Stanilko, an expert in political economy at the Sobieski Institute, told CNBC.com.

The country's economy must be absolutely in step with the stronger members of the euro zone, plus there is the problem that the euro zone itself doesn't know what it will look like in the future, other analysts said.

"This is like going to a party. Going to a party too early is bad; going too late is also bad," Marian Moszoro, professor of finance at IESE Business School in Barcelona and former deputy minister of finance in Poland between 2005 and 2006, told CNBC.com. "Do you want to join the club when you have to pay a very high entrance fee?"

The Central European country of 38 million is certainly not ready to join the single currency, as it does not yet meet the criteria set out in the Maastricht treaty which founded the euro. Polish inflation is still too high and its currency, the zloty, is not as stable as is required.

The zloty's volatility may actually increase as investors from abroad in search of high yields at relatively low risk set their sights on Central and Eastern Europe again. Last Friday, the Polish central bank intervened in the market for the first time in more than a year, buying zloty to stop the currency from weakening.

If Poland joined the euro, it would not have the problem of a volatile exchange rate but at the same time it would not be able to use the exchange rate to boost its exports, Stanilko said.

"We would follow in the footsteps of Spain, we'd lose competitiveness on production," he said. "We'd have a bubble in real estate."

Eastern Europe - A CNBC Special Report
Eastern Europe - A CNBC Special Report

Poland relies on exports for about 40 percent of its gross domestic product, according to World Bank data. Its economy was boosted during the crisis by the so-called 'cash-for-clunkers' programs to replace old cars with new, implemented in Western countries like France and Germany in 2009 to stimulate their economies, as Fiat and Volkswagen have factories in Poland.

The country would lose that advantage if it joins the euro. Plus, there is growing concern that the single currency, mostly a political ambition, is not such a good economic plan.

'Markets Being Greedy'

Poland's Finance Minister has warned of the danger of war if the euro area breaks down, with some in Central and Eastern Europe fearing that without the target to aspire to, reforms will stall and protectionism will rear its head.

But "money is not about aspiration," said Stanilko. "If you base a monetary union on aspirations and being pro-European, you may have problems in 10 years. And there are problems now."

One argument for joining the euro zone was that of obtaining cheaper financing as a country's credibility would increase and its borrowing costs would fall, Moszoro said. But with the crisis bringing yields in of troubled euro countries like Greece and Ireland or even Spain and Italy higher than those of some Central and Eastern European countries' debt, that argument doesn't hold water anymore, he added.

"Now what we see is that major economies like Spain or Italy… these countries are downgraded, not upgraded. So the cost of financing is going up," Moszoro said.

There may be another reason for the sharp rise in yields for periphery euro zone countries in the past year: mispricing of euro zone debt since the currency was launched, Stanilko said.

Zloty Boost Punishes Speculators: Economist
Mateusz Szczurek, CEE chief economist at ING, told CNBC that the Polish central bank had justified its decision to prop-up the zloty on the grounds that it needed to "punish speculators".

While politicians created the monetary union on the assumption that each country is responsible for managing its own debt, markets believed – wrongly as it turned out – that Germany, the richest and most disciplined member, will be responsible for everyone's debt, he explained.

"It's not a story about bad governments and good markets; it's a story about markets being greedy," Stanilko added.

Another reason often quoted by the euro enthusiasts was that the single currency would make capital allocation more efficient, as underpriced sectors would become visible more easily.

But "looking back you see that the sector that was heavily invested was real estate, which created a bubble," Moszoro said. "Ireland, Spain and Greece are a clear example that the cheap financing that came into the country was allocated to real estate."

When will Poland join the euro? There is no easy answer to this question. Analysts and politicians say it will depend on how the country's economy will fare and what the euro zone will look like in the future.

The later the better, some in Poland say, worried that their country will have to bail out richer states, a situation which is bothering smaller neighbor Slovakia, which joined the euro in 2009 and has recently slammed plans to create a rescue fund to bail out Greece.

Tomek, a 24 year-old student who also works in the insurance industry in Warsaw, said he would not agree to his country bailing out Greece if it were in the euro zone.

"I read this story about Greece, how they have something like 40,000 swimming pools there, I can't remember the number exactly, and there is a tax for each swimming pool but only a few people actually pay it," Tomek told CNBC.com in Warsaw's Castle Square. "If they don't pay taxes, it [the crisis] is caused by them."

- Robert Pelka in Warsaw contributed to this story