I made a speech about “Poland and euro” at the seminar today. Conclusions are below:
“According to official government and NBP forecasts Poland will fulfill all eurozone entry criteria this year (fiscal deficit, public debt, inflation, long-term interest rates). The only criterion not met will be two-year ERM2 membership without significant currency depreciation. If Poland had joined the ERM2 in the first half of 2005, as I formally proposed in January 2005, we would have been able to join the eurozone in January 2008. This opportunity has been lost, and now meeting the Maastricht criteria will become more challenging. If agflation is with us to stay, and central banks decide to keep CPI close to the target, high sacrifise ratio implied by flat Phillips curve may require significant growth slowdown. In such case meeting fiscal criteria will be challenging amid slowing tax revenues. If, on the contrary, central banks treat agflation as a typical negative supply shock, then meeting inflation criterion will be challenging. Finally, if strong exchange rate appreciation continues, we may just make it will both fiscal and inflation criteria, but we will enter eurozone with heavily overvalued exchange rate, which may harm growth for many years if not decades.
This is a real “Gordian knot” to be solved by CEE central banks, financial market regulators and governments. The “Alexandrian solution” would be massive acceleration of productivity enhancing reforms, especially in the area of knowledge economy, where the CEE countries are badly lagging behind other regions. If we don’t accelerate reforms we may still be lucky, there could be few years in a row with good global crops, or someone will finally produce cheap hydrogen-powered car to replace gasoline, resulting in a collapse of oil prices. But I would not bet the country future on the assumption of being lucky.”