wtorek, 20 stycznia 2009

time to forget about the euro in 2012

The Polish government's plan to enter the euro in 2012 is looking increasingly less credible. So it should came up quickly with an exit strategy that would both save its face among the market players and prepare the economy to sail smoothly into the monetary union when the things calm down.

First off, let me explain why I believe the plan is flawed and should be abandoned before it's too late. As the first step towards adopting the single currency the government has promised to lock the zloty in a pre-euro ERM-2 currency system by the mid-2009. This was suppose to help shield the zloty from the market turbulence and risk aversion that hammered the currencies of the other ex-communist EU members. The plan seemed to have worked and the zloty was intially spared the drabbing that hurt Hungarian forint or the currencies of the Baltic states.

It quickly became apparent, though, that the plan is full of pitfalls. The government needs to convince the euro-sceptic oppposition to back changes in the constitution before it could swap zlotys for euros. Tough sell, to say the least. They could obviously move ahead with the ERM-2 entry and bet that in the next general election in 2011 they would secure the parliamentary majority large enough to push through the changes and breeze through to the euro. That in fact appears to be the thinking at the moment. But it contradicts the government's intially ascertions that by locking in the zloty in the ERM-2 Poland would be avoid the capital flight from emerging markets. Such move will actually heighten the uncretainty and spur the speculative attacks on the zloty if the opinion polls start to show the popular support for the government is waning.

And that's no longer quite inconcivable. However inept the conservative opposition appears to be they might become dangerous when they will eventually get their act together. The economic situation is deteriorating faster than anyone would have thought only a few months ago. The latest industrial output figures for December showed production down 4.4 percent from a year earlier and that's even despite more working days and much worse than anyone had expected. The possibility that the economy will not grow at all this year or even shrink cannot be ruled out any more. Zloty's astonishing slide that has taken the currency to some 4-year lows is adding to woes of many middle-class Poles that took out mortgage in swiss francs, often buying their homes at the top of the housing boom. For some of them the pain barrier has been breached already and they may soon be asked to post additional collateral after falling into negative equity.

The government appears to be blissfully unaware of the storm that's brewing on the horizon, which is particularly evident in its stubborn refusal to cut its rosy 3.7% growth forecast written in the budget. This creates a chance for the opposition that happened to be running the country when the growth was at a decade's high, stock market was going through the roof and the zloty was at an all-time high. How they play is anyone's guess but the government should be ready for an assault as the things are bound to get worth as the months go by. In this context it's becoming increasingly clear that the budget doesn't add up and its revision is all but invitable.

Now, here comes the crux. If the government wants to stick to the euro timetable it would probably have to cut spending in order to keep the deficit on target. This would be harmful for the economy and politically unreasonable. With governements everywhere moving to pump-prime their economies how would the ruling liberals explain such austerity measures to its electorate? Such moves would send their popularity sinking just as they need to actually increase their majority in the parliament and change the constitution in order to adopt the euro.

It all just doesn't square and judging by the zloty's steep decline the market appear to be thinking the same. Which only makes it more comfortable for the government to officially ditch the plan and at the same roll out decisive measures to prop up the economy by financing road building and other infrastructure projects. At the same time the government could also lead the way with some meaningful reforms it had promised to increase employment or raise the retirement age. It's no time to be meek and the government could yet show a real leadership in the crisis with or without the euro in 2012.

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