Economy / Europe / Fiscal policy

The Eurozone’s Post-Crisis Challenge

The future of the Eurozone appears to hinge on Southern Europe at the moment. But eight states, almost all of them in Eastern Europe, may also play a role in the future of the currency bloc in the coming years. Under the terms of their entry to the EU, these states have agreed to adopt the Euro once they meet basic economic and fiscal benchmarks. And many have viewed the recent crisis in the Eurozone with a suspicious eye. Furthermore, the precedent set by the UK and Denmark, which have maintained their own currencies, may make it easier for these states to obtain an opt-out from their Euro adoption obligations.

That these states may seek an opt-out is not beyond the realm of possibility. Some of these states have experienced a degree of insulation from the European crisis, which some economists argue is on account of their floating currencies. Greece’s recent woes appear to be tied to its adoption of the Euro: namely, its inability to implement currency controls to manage its deficit spending. Indeed, regret over adopting the Euro has been growing in Greece.

Poland is the largest of the states waiting to adopt the Euro, both in terms of population and GDP. Its relative insulation from the recession has been remarkable. In fact, there never really was a recession in Poland–only a slowdown in growth, and it appears to have been rebounding even from that. Its economy grew by 4.4 percent last year and is projected to have the highest growth rate in the EU this year. Confidence has been so high that Poland’s central bank actually raised rates earlier this year. It was the only one in the EU to do so.

Was the złoty responsible for this success? The answer may be more complex than that. Poland has made extraordinary strides in the two decades since it eschewed communism to embrace a more Western economic system. This about-face has been so thorough that the central square of a district of Krakow built by Stalin after the Second World War to be a socialist model city for the country has been renamed…after Ronald Reagan. The country has also experienced a great deal of infrastructure development from EU development funds, and its burgeoning middle class has been eager to spend its new-found wealth. At the same time, relatively cheap labor compared to Western Europe has encouraged foreign investment.

Nevertheless, the events unfolding in Greece have had a profound impact on public opinion. Over half of Poles supported adopting the Euro in 2008. That same year, Prime Minister Donald Tusk claimed that his government planned to adopt the Euro by 2012. Since then, support for the Euro has dropped to 12 percent and a third want Poland to keep the złoty in perpetuity. 58 percent, however, appear willing support at least postponing adoption past 2016, or the earliest possible entry date. A different poll from January 2012 shows only 32 percent are in favor of adopting the Euro while 60 percent oppose. This shift in opinion has provoked Tusk’s pro-integration Civic Platform, the current majority party, to tone down its pro-EU rhetoric. Its current policy is to continue preparing for entry and to join the bloc once it has become more stable.

In the meantime, the Euro promises to impact future elections as the pro-EU Civic Platform and the “euroskeptic” Law and Justice party, which opposes the Euro, continue to spar over the country’s monetary policy. Law and Justice will not allow memories of the current crisis to fade as it campaigns in elections approaching Civic Platform’s target date for Eurozone entry. As a result, the EU may uncover a new roadblock obstructing its goal of establishing a monetary union across its 27 member states, even if it manages to prevent a Greek exit.

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