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Glapiński: The zloty is the driving force behind Poland’s economic success

Poland has achieved huge economic success in the last two decades. Suffice to mention that Poland’s real GDP more than doubled during this time (i.e. in the years 2001–2021), which was a significantly faster pace of growth than in the wealthy countries of Western Europe (e.g. in Germany real GDP rose during this time by only 23 per cent). Importantly, this dynamic development translates into a dramatic improvement in the living standards of Poles. At the beginning of this century, high unemployment was still one of the main social problems in Poland, reaching as high as 20 per cent. Today this problem has practically ceased to exist, and Poland enjoys one of the lowest unemployment rates among the economies of the European Union (according to Eurostat data, in 2021 it stood at 3.4 per cent compared to an average of 7 per cent in EU countries).

Of course, the success of the Polish economy has many sources. Above all, it is the resourcefulness and industriousness of Poles that has contributed to this, supported by appropriate economic policy. But our own currency is a very important ingredient of this success, without which we certainly would not have achieved such progress.

The zloty supports Poland’s economic development in several ways. Most of all, it plays the role of a stabiliser of the economic situation in a time of global turmoil. Although economic success is often equated with a strong exchange rate, the reality is more complex. It should be remembered that exchange rate fluctuations have various repercussions for different types of economic entities. A strong exchange rate is favourable for companies importing goods or semi-finished goods from abroad. But in the case of exporters, it is the weakening of the exchange rate that has a positive effect on the profitability of their operations. In turn, the greater the profitability and export volume, the higher the GDP and activity in the whole economy. In other words, the depreciation of the zloty – which often occurs when the global economic conditions deteriorate – supports activity in the export sector. The adjustment of the exchange rate is therefore a kind of safety cushion, which increases the resilience of the Polish economy to external negative shocks.

An excellent example of how this mechanism works was the events during the global financial crisis over a decade ago. The collapse of the American bank Lehman Brothers in September 2008, along with the panic in the global financial markets and recession in the major economies, led to an outflow of capital from many emerging economies, which translated into a significant depreciation of their currencies, including the zloty. In turn, this protected us from a collapse in exports and allowed Poland to be the only country in the EU to maintain positive GDP growth in 2009. Let us recall that Polish GDP grew by 2.8% in 2009, while economic activity declined by an average of 4.4 per cent in the euro area, including by 5.7 per cent in Germany.

The maintenance of our own currency allows Poland to conduct an autonomous monetary policy. A given currency area, by definition, must be subject to a uniform monetary policy. Meanwhile, individual economies often require various measures on the part of the central bank due to the differences in the structure of the economies, the level of their debt, different cyclical positions, or generally the diversified mechanism of impact of the given macroeconomic shock on individual economies. It is also important that the monetary policy measures are implemented efficiently and without undue delay – precisely when the available information indicates the need for a response from the central bank. A sovereign central bank is therefore an advantage, because it can adjust precisely it’s measures to the needs of one specific economy and is able to do it faster than the central bank of a currency area, where the interests and needs of different countries clash.

It was especially following the outbreak of the COVID-19 pandemic that we saw the importance of a rapid and adequate response of monetary policy to shocks. At that time, in response to a dramatic deterioration in the economic activity outlook, both globally and in Poland – which was accompanied by a fall in commodity prices and a lowering of inflation forecasts – Narodowy Bank Polski was one of the first central banks in Europe to start easing its monetary policy. Let us remember that in 2020 NBP lowered interest rates three times, including the reference rate from 1.5 per cent to 0.1 per cent, and also began purchases of Treasury bonds and debt securities guaranteed by the State Treasury on the secondary market. The easing of monetary policy contributed to a decline in financing costs in the Polish economy, including a decline in the interest rates on household and corporate loans. At the same time, NBP’s measures created the space for the necessary shielding measures for the real sector of the economy implemented by fiscal policy. This was conducive to limiting the negative effects of the pandemic for the Polish economy and led to a rapid return to the growth path. Thanks to this, in 2020 the scale of the fall in real GDP in Poland (-2.2 per cent) was almost three times less than the average in the euro area (-6.3 per cent). Moreover, thanks to the dynamic rebound of activity in the first quarter of 2022, Poland’s GDP was already 8 per cent higher than immediately before the outbreak of the pandemic, while some of the European economies, including Germany, had still not made up for the pandemic losses.

Therefore, a country’s own currency and monetary policy act as a kind of shield, which protects the economy against the negative effects of global shocks. However, the euro is certainly not such a shield. Looking at the fundamental weakness of certain euro area states, and even the solvency problems of some of them, the argument that the single currency guarantees stability and economic security is increasingly questionable. At the same time, the single monetary policy seems to generate significant costs, which to a large extent result from significant differences between the individual economies of this currency area and the inadequateness of a single monetary policy for all the countries of the euro area. For example, the unemployment rate in Spain (12.6 per cent in June 2022) is approx. 10 percentage points higher than in Germany (2.8 per cent). There are also significant differences in the scale and costs of debt service of individual countries. For example, the public debt in Italy was 150.8 per cent of GDP in 2021, while in Germany it was 69.3 per cent of GDP, or less than half of what the Italian ratio was. At the same time, the yields on 10-year Treasury bonds in Italy (3.24 per cent on average in July 2022) are systematically significantly higher than in Germany (1.14 per cent). Today, clear differences in the key variable for the central bank, in other words inflation, can also be seen between the euro area economies. Admittedly, the global rise in inflation has affected the majority of the euro area countries; however, the rapidly developing economies of Central and Eastern Europe which adopted the euro are experiencing much higher price growth. For example, in the Baltic states inflation exceeds 20 per cent, including Estonia with 22.7 per cent inflation, while in France (6.8 per cent) and Malta (6.5 per cent) inflation is roughly three times lower. Both the euro area average rate of inflation and the rate in each individual euro area country are currently significantly higher than the ECB target, which is 2 per cent. But concerns about the macroeconomic and fiscal condition of the southern states of Europe limit the possibilities of the single monetary policy to operate. As a result, the ECB responded to the acceleration in price growth later than many other central banks, making its first interest rate hike as late as July this year. It is worth remembering here that after this hike, the ECB’s deposit rate is still only 0 per cent, because earlier, for eight years it was negative. In the same month, NBP increased its interest rates for the tenth time in the current tightening cycle, including the reference rate to 6.5 per cent. Such action – i.e. a gradual, but marked increase in interest rates – is necessary to ensure medium-term price stability in the Polish economy. On the other hand, the ECB policy, which would be unlikely to change after the adoption of the common currency by Poland, would be unsuitable from the point of view of the needs of the Polish economy.

Therefore, membership of the euro area would deprive the Polish economy of two important mechanisms mitigating the increasingly frequent severe external shocks. It would also not automatically ensure – as it is sometimes believed – the stability and improvement of living standards. After all, euro area accession is not a guarantee of economic success and does not automatically ensure rapid GDP growth. This can be seen clearly when we compare the growth rate of real GDP in the last two decades: on average, the economies currently belonging to the euro area have grown during this period almost twice as slow as the whole of the group of OECD countries (22 per cent compared to 41 per cent), overtaking in this respect only Japan (11 per cent growth), which has been struggling with stagnation. Of course, it is not possible to point to one factor which is responsible for the relatively slow pace of development in the euro area. But for some of the economies of the area, one of the dire consequences of the adoption of the common currency was the loss of competitiveness. Suffice to look at Italy and Greece. These countries have still not made up the losses following the deep recession related to the debt crisis a decade ago.

Of course, in this context the blame for the weak economic performance of these countries is often placed on their failure to maintain internal financial discipline. The fact is that this element is a sine qua non condition for effective functioning in the area of the single currency. However, it is not a sufficient condition whose fulfilment guarantees economies a positive balance of benefits and costs of belonging to the euro area. The negative shocks which are hitting the economies do not always have internal sources – they can also come from outside, as we have recently been experiencing severely in the form of shocks related to the pandemic and the Russian military aggression against Ukraine. The adjustment of the economy to such shocks can occur in two ways: by adjusting on the nominal side, i.e. in particular by depreciation of the nominal exchange rate, or by adjusting on the real side, which is manifested by a decline in economic activity. Unfortunately, this second way is not only much more painful socially – if only because it is often associated with an increase in unemployment – but it also generates higher economic costs, which makes the convergence process much slower.

Returning to Italy and Greece – if they owned their own currency and debt in these currencies, a natural market response to the debt crisis would be the depreciation of the exchange rate of these currencies, which would be a positive impulse for competitiveness. This would also contribute to faster price growth, which – with limited risk of persistently elevated inflation amidst weaker economic growth – would limit the real debt burden on these economies. However, due to their membership of the euro area, this mechanism could not operate. As a result, the adjustment occurred in a very painful way: through a fall in GDP and increase in unemployment. In addition, Greece struggled with deflation. In such circumstances, it became impossible to get out of the debt trap, and the economies of Italy and Greece found themselves in long-term stagnation: today the GDP of these countries is not significantly higher than at the beginning of the century.

Therefore, the euro did not ensure the rapid development of these economies, nor an improvement in living standards to their citizens. We, however – having at our disposal our own currency – have successfully achieved these goals. In this context it is worth remembering that Poland’s economic success also strengthens our position on the international arena. The significance and political strength of the state does not rest on participation in one or another body, but above all on its economic strength. Strength that is supported by having one’s own currency.

In short, it would be a huge and costly mistake for Poland to give up its own currency in the current conditions. The interests of the Polish economy would often be different from the needs of the largest European economies and, as a result, the single currency and monetary policy would not meet Poland’s needs. Fiscal integration would also fail to solve this problem. The structural differences dividing economies cannot be immediately eliminated using fiscal measures. Economic convergence requires time and there are no safe shortcuts here. Therefore, it is in the best interest of Poland and Poles to support our economy in catching up with the richer Western countries step by step. In recent years we have overtaken, for example, Portugal, and we are in direct reach of Spain (in terms of GDP per capita according to Eurostat’s purchasing power standard). But closing the gap with the richest EU countries – in particular with Germany – will still require more time and effort. Therefore, at this moment we cannot give up an important asset – our own Polish currency – which supports the Polish economy along this path.

The article by the Governor of the NBP, Professor Adam Glapiński in "DGP Daily" (August 8, 2022): The zloty is the driving force behind Poland’s economic success

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