Interview with Marek Belka, Polish professor of Economics, a former Prime Minister and Finance Minister of Poland, former Director of the International Monetary Fund’s (IMF) European Department and former Head of Narodowy Bank Polski ( National Bank of Poland).
Why did you change your mind about the Eurozone?
John Maynard Keynes once said: ‘When my information changes, I alter my conclusions. What do you do, sir?’ Well, the facts have changed.
You claim we should intensify our efforts to enter the Eurozone.
Saying so would be a euphemism. Not only have we done nothing to this end for the past couple of years, but we have also actively undermined the institutional basis of our efforts within the Ministry of Finance and the National Bank of Poland. But here’s what I think: Poland should declare its intention of joining the eurozone as soon as possible. I realise it’s a process and it takes time, but committing ourselves to it would radically change our position within the EU.
Do we need the euro for political or economic reasons?
Let me start with the political argument, which in my view is usually a secondary consideration in such debates. Yet in this case, I would call it a crucial factor. While the Eurozone is still characterised by unresolved problems, the mood within it has definitely shifted. What is now clear is a shared intention of deepening the integration process in the context of the euro. The consequences of many reforms linked to this objective may prove detrimental to our economy unless we have the chance to shape the process from within. The most important dialogue and tensions in this regard are now playing out between Germany and France. What we need to keep in mind is that our interests align with the German vision for the Eurozone rather than the French one. It’s important that we take measures to ensure that any future changes within the eurozone reduce the risk of there being a multi-speed Europe. In other words, we should take measures to protect ourselves against political marginalisation. We’re right to have ambition and we’re right to want to find ourselves in the decision-making core of the EU. We also have the potential to achieve this goal unless we sulk and throw tantrums.
It would also completely alter the political balance of power within our region.
Our Eurozone declaration would probably cause a stir in the Czech Republic, which would have to follow suit. It would also be a blow to Viktor Orban, who currently has the upper hand in Polish-Hungarian relations. If we join the Eurozone, it will be up to us to promote Hungary’s interests in the EU, not the other way round. And if we do nothing, we may soon discover that we’re the only regional player still using their own currency. We can’t afford to adopt the same stance as the British who were able to negotiate an opt-out clause and keep the pound thanks to their position within the EU. Our position is different, and so we have to adopt the euro. The British think of themselves as part of the USA. There’s no comparable alternative to our identity: we’re either part of the EU or part of the Commonwealth of Independent States.
Sweden seems to be in a similar position to us, and yet no one there is considering giving up their currency.
Sweden will enter the Eurozone the moment the union stabilizes and gathers pace. And besides, why should we copy Sweden? Poland is far more important for the EU because of its role as the centre of the CEE region. Even when it’s doing everything to disprove it.
But wouldn’t adopting the euro mean abandoning the Three Seas concept?
You mean the Three Seas illusion. And the paradox is that a eurozone declaration of the kind I have described would actually have an invigorating effect on the Visegrad group, giving it a sense of purpose other than its current focus on immigration and refugees.
And yet what’s more important that these political calculations are the economic arguments.
First of all, let’s not delude ourselves by thinking that joining the eurozone would drastically improve our trade relations with the Member States using the common currency. The eurozone crisis was a case in point. Would will happen if we adopt the euro? It certainly depends on the exchange rate at the time. The current rate would be most beneficial for us. An academic economist would argue that these factors don’t matter in the long term, but I tend to agree with Grzegorz Kołodka who claims otherwise. Polish enterprises must have enough time to adjust. The first thing that would happen after Poland joined the eurozone would be a reduction in the cost of capital. The current interest rate is at 4%, and it would probably fall to about 2%. Would this matter for our investment services? It probably would in the short term, but I think that what matters more is the psychological anchor that the Eurozone would provide. The private sector is currently on the defensive in terms of investment levels, and that’s largely due to the prevailing mood of legal and political instability. Entering the Eurozone would also help to radically reduce the tax burden. While I commend the Minister of Finance’s efforts to collect taxes, the tax burden is also a factor that discourages companies from investing. There’s no sense that the regulations in this regard are changing, and so small businesses are redirecting their investments, for instance by purchasing apartments with cash. What kind of a practice is this? Secondly, luxury car sellers and their businesses are currently thriving, and we can expect more investments as a member of the eurozone. Another economic argument is the prospect of a higher income. Wages won’t rise unless our employers are pressured to raise them and our economy modernises to become more innovative. Joining the Eurozone or even declaring our intention of joining it would provide such a pressure point, which would, in turn, lead to currency appreciation. We would finally have the chance to strengthen our currency, which hasn’t been possible for a long time.
Wouldn’t this be bad news for exporters?
Why? A weak złoty lures them into the trap of low costs, low wages, and average quality. If we want to break this vicious cycle, the only way out is through a strengthened złoty. The only solution is real currency appreciation and a resulting rise in prices as well as wages. In my opinion, this is the main reason why we should close our eyes and leap into the euro pool. The second economic argument stems from the risk of overestimating the benefits of a weak currency. Some think that a weak złoty can shield our economy in the event of another major crisis. It cannot.
But this is precisely what has already happened. A rapid weakening of złoty turned out to be a shield for our economy.
Yes, but let’s not forget that the depreciation of our currency took place at the end of a speculative bubble from 2006 until 2008. In the end, the bubble broke. It would be worth looking into the specificity of the process that accompanied the strengthening of the złoty, the effects of which are still echoing across our economy in the form of franc loans. I think it would be naive to count on the złoty’s weakness shielding us again. We were lucky the first time.
Are there other economic arguments?
There are a number of myths that should be dispelled, for instance, the one about the detrimental rounding of prices, which has happened in several countries.
And yet the cappuccino effect was real enough. It led to the rounding of coffee prices in Italy and proved harmful to customers.
Italians tend to complain a lot and I wouldn’t pay too much attention. Avoiding this problem was possible in countries such as Latvia or Estonia, which proved that it’s possible to join the eurozone and protect customers at the same time. There’s also the so-called ‘taxi driver’s argument’ about Poles earning four times less in euro than their German counterparts. I think that the main effect of our country joining the eurozone would be a rapid increase in wages and prices, and it’s something we haven’t been able to bring about in a long time. Without it, we’re doomed to remain, as vice-Minister Morawiecki calls it, ‘colonised’ by foreign capital. Though I really liked Adam Noga’s recent statement that he prefers colonisation to oligarchisation. The latter is much worse because it brings nothing to the economy. The so-called ‘colonisation’, on the other hand, has brought us more interconnectivity with the world: new technology, management techniques, and access to positive value chains we are now benefiting from.
Let’s return to the euro. Aren’t you afraid of a rapid inflow of capital that could create more bubbles, for instance in real estate?
We’ve developed new ways of using macroeconomic supervision to protect our economy from potential imbalances. You often hear the argument that in contrast with the Eurozone, our economy is inherently more stable. This may be true in the short term, but in the long term, our prospects for GDP growth without the euro worsen. Our demographic situation is terrible, and low investment levels are hampering our growth even further. To top it all off, there’s the detrimental instability caused by the constant swinging of the political pendulum, which seems to be leading to a form of economic state control. In contrast, the Eurozone seems to be heading in a good direction. A fuller banking union is being born, and decisions about how bank failure is going to be managed at the EU level are being made. This issue may yet prove to be crucial for us. If we achieve a banking union, perhaps Germany can also be swayed to accept a fiscal union.
The lack of a common fiscal policy is currently the EU’s main weakness.
True, but Germany fears a situation where they might have to pay for grasshoppers supported by German ants.
Yanis Varoufakis, Greece’s former Minister of Finance, wouldn’t agree to have the Greeks labeled as grasshoppers.
Varoufakis is a very intelligent man who defended his country. Greece has been sacrificed on the altar of the currency union, so to speak. Let’s ask us what will happen if the Eurozone collapses. Will we be inside or outside of it if it happens? A collapse of the Eurozone would in all likelihood necessitate some form of ‘Eurozone Plus’, which we might have to enter in the end. This process might be more difficult and laborious if don’t have a shared currency, to begin with. This is why I don’t really fear the unlikely scenario of Eurozone collapse. It wouldn’t really matter if we’re a part of it or not. What I fear more is the end of the common market.
A eurozone collapse would be a blow to the German economy, which means a blow to our economy. Germany benefits greatly from a weak common currency.
It’s a serious argument, one often used by Donald Trump who has taken to criticising the undervalued German currency. But it’s not Germany that wants a weak euro. In fact, the country is currently putting pressure on the European Central Bank to end its weak monetary policy. Germany has experienced a couple of decades of post-war currency appreciation, which has prompted innovation and modernization. A strong currency necessitates competitiveness; a weak one reduces it. The weakness of the złoty is lulling us into a false sense of security. I think we tend to overestimate the benefits of being outside the Eurozone.
And yet the Czech Republic is currently experiencing problems due to the strengthening of its currency and it’s not a process it can stop.
It may be harmful to their economy in the short term, but not in the long term. And it doesn’t change my view that we overestimate the benefits of a weak złoty. We haven’t drawn the right lessons from what happened in Poland between 2006 and 2009. We have been using the events following the 2008 financial crisis to showcase a weak złoty’s ability to protect our exporters. It’s true, but there were many other factors at play. We had a small and well-capitalised banking sector, our economy wasn’t very dependent on credit rating, and it was a unique period for our tax policy. We’d experienced a dramatic reduction in pension contributions and personal income tax, which cost us around 2.4% of our GDP. It was a mistake. How can you lower taxes at a time when the economy is growing beyond its potential output? There was nothing Jacek Rostowski, Poland’s Minister of Finance at the time could have done. He allowed for a deficit increase and protected us from the recession. The weakening of the złoty also mattered, but mostly because of its unprecedented strengthening prior to the crisis. I wonder why the central bank and the Monetary Policy Council allowed the situation to exacerbate to such an extent. Make no mistake, my Eurozone rant doesn’t mean I’ve forgotten about the imperfections of the currency union. But the Eurozone has survived the last crisis, and perhaps the worst is now behind us. With the euro up our sleeve, we can join the decision-making core of the EU alongside France and Germany. That’s where we belong.
The interview was first published at Dziennik.pl on November 7th, 2017.
Transalted by Alexandra Trzeciak