CRACOW UNIVERSITY OF ECONOMICS FACULTY OF ECONOMICS AND INTERNATIONAL RELATIONS · 2014-04-15 · this topic, present my research methodology and main sources used for data collection

Benefit and Cost of Euro Implementation in Poland Page 1

CRACOW UNIVERSITY OF ECONOMICS FACULTY OF ECONOMICS AND INTERNATIONAL RELATIONS

Major: International Economic Relations

Specialization: Studies in Trans-Atlantic International Relations

Maggie Badgley

BENEFITS AND COSTS OF EURO IMPLEMENTATION IN POLAND

A thesis submitted in partial fulfilment requirements for the degree of Bachelor

Academic Advisor: Dr hab. Krzysztof Wach

Kraków 2013


Imię i nazwisko studenta: Maggie Badgley Nr albumu: 179635 Uniwersytet Ekonomiczny w Krakowie Wydział Ekonomii i Stosunków Międzynarodowych Kierunek: międzynarodowe stosunki gospodarcze (w j. ang.) Specjalność: Studies in Trans-Atlantic International Relations

OŚWIADCZENIE STUDENTA

Niniejszym oświadczam, że pracę licencjacką na temat:

“Benefits and Costs of Euro Implementation in Poland”

napisałam samodzielnie. Oświadczam, że praca nie zawiera żadnych informacji, które zostały pozyskane

w sposób niezgodny z prawem oraz oświadczam, iż praca nie narusza praw autorskich w rozumieniu

ustawy z dnia 4 lutego 1994 r. o prawie autorskim i prawach pokrewnych (Dz. U. z 2006 r. nr 90, poz. 631

z późniejszymi zmianami), oraz nie narusza dóbr osobistych zgodnie z prawem cywilnym. Oświadczam

również, że przedstawiona praca nie była wcześniej przedmiotem procedur związanych z uzyskaniem

tytułu zawodowego w wyższej uczelni.

Kraków, dnia 13 czerwca 2013 ............................................

/podpis studenta/


Table of Contents

1: Introduction .............................................................................................................................................. 6

1.1 Research Topic, Objectives and Hypothesis ....................................................................................... 6

1.2 Background of the Topic ..................................................................................................................... 7

1.3 Research Methodology and Thesis Outline ........................................................................................ 8

2. History of Eurozone and Convergence Criteria ..................................................................................... 10

2.1 The Euro History ................................................................................................................................ 10

2.2 Convergence Criteria......................................................................................................................... 12

2.3 Preceded Benefits and Disadvantages .............................................................................................. 14

2.3.1 Benefits ...................................................................................................................................... 14

2.3.2 Disadvantages ............................................................................................................................ 15

3. Euro Adoption and Its Results. Case Studies of Slovenia, Slovakia and Estonia .................................. 17

3.1 The importance of selected countries for comparative analysis ...................................................... 17

3.2 Slovenia ............................................................................................................................................. 19

3.2.1 Price Stability.............................................................................................................................. 19

3.2.2 Public Finances ........................................................................................................................... 20

3.2.3 Exchange Rate Stability .............................................................................................................. 21

3.2.4 Long Term Interest Rates ........................................................................................................... 22

3.3 Slovakia ............................................................................................................................................. 23

3.3.1 Price Stability.............................................................................................................................. 23

3.3.2 Public Finances ........................................................................................................................... 24


3.3.4 Long Term Interest Rates ........................................................................................................... 26

3.4 Estonia ............................................................................................................................................... 27

3.4.1 Price stability .............................................................................................................................. 28

3.4.2 Public Finances ........................................................................................................................... 29


3.4.4 Long Term Interest Rate ............................................................................................................ 30

3.5 Results After The Change .................................................................................................................. 31

3.5.1 Slovenia ...................................................................................................................................... 32

3.5.2 Slovakia ...................................................................................................................................... 34


3.5.3 Estonia ........................................................................................................................................ 35

4. Prospects of Euro Implementation in Poland. Empirical Analysis ....................................................... 38

4.1 Meeting the Convergence Criteria in Poland .................................................................................... 38

4.1.1 Price Stability.............................................................................................................................. 38

4.1.2 Public Finances ........................................................................................................................... 41


4.1.4 Long term Interest Rates............................................................................................................ 44

4.2 Polish Society Attitude towards Euro Implementation: Own Survey ............................................... 44

4.3.1 Survey Questions ....................................................................................................................... 46

4.3.2 Sample Size and Distribution ..................................................................................................... 46

4.4.1 The Results of the Survey ........................................................................................................... 47

5. Conclusion: Should Poland Make the Switch? ...................................................................................... 51



1: Introduction

In this introduction I will first define my thesis, followed by a brief overview as to why I chose

this topic, present my research methodology and main sources used for data collection.

1.1 Research Topic, Objectives and Hypothesis

The Euro banknotes and coins have been in circulation since January of 2002. It was,

and is, a process that aims to unify Europe by removing certain barriers to trade and merging the

monetary and fiscal policies of all who participate. This is achieved though a set of strict

requirements laid out in the Maastricht treaty referred to as the convergence criteria.

The main objective of the thesis is to verify that it would benefit Poland’s economy in the

long run with euro implementation using numerical data and survey. Within such the main

purpose, the following operating objectives were established:

O1: Presentation and discussion of euro history and convergence criteria.

O2: Analysis of the benefits and costs of euro implementation in three selected countries

(Slovenia, Slovakia, Estonia) enabling to draw some lessons for Poland.

O3: Analysis of the state of the convergence criteria meeting in Poland.

O4: Diagnosis and analysis of the attitude towards euro in Poland by using a

questionnaire survey.

The focus of this paper will be that joining the eurozone would be economically

beneficial for Poland, which is the research hypothesis to be proved. They have been in the

European Union (EU) since May of 2004, and are in turn required to make the appropriate steps

to gain acceptance in the EMU. “The government aims at achieving this goal as soon as possible,

however taking into account the necessary conditions of a secure euro area membership.”1 In

1 Bureau of Government Plenipotentiary for Euro Adoption in Poland. "Euro in Poland: Documents." Ministry of

Finance-Republic of Poland. N.p., 18 Sept. 2012. Web. 2 June 2013. <www.mf.gov.pl/en/ministry-of-finance/poland-in-eu/euro-in-poland/documents>.


order to achieve this they have worked towards meeting the convergence criteria by adjusting

monetary and fiscal policies using recommendations given to them from EU institutions. This

process has helped sync the policies of Poland to current eurozone members but has not yet been

fully realized.

One of the more unique things about Poland is the heavy reliance they still have on

internal market demand and supply, being one of the more closed economies in Europe. The

work it has accomplished in terms of convergence criteria has allowed for increases in trade but

not to the level of other member states (MS) prior to adoption. From this you can see that one of

the main benefits Poland could achieve from eurozone entry is a more open and flexible

economy with increased trade opportunities and access to larger markets.

1.2 Background of the Topic

I chose my topic for this thesis well over a year ago, while still living in the United

States. My original interest was sparked in an international economics class. Because of this

class, along with my amazing professor, I chose to switch from my former accounting major, to

my current studies in international economics. It was the first time I examined the Euro

currency, along with the Maastricht treaty, convergence criteria and the Bretton woods

institutions.

This class was a year and a half prior than my first semester in the STAIR program. I

used the knowledge from it and other related courses when trying to choose a topic for my thesis.

I had recently taken an interest in the developmental side of economics, and tried to find a topic

that was relevant to Poland, a European study abroad, and my degree. I thought this choice gave

a way to use my time in both countries for the research process.

In order to help facilitate a faster and more concentrated approach to taking on a topic I

had very little knowledge of beforehand, I focused my class schedule on ones that covered EU

central material. While in Hungary I took several classes relating in some way to my topic. They

include EU studies, history of European economics, and measuring economic performance. In

Poland I have (or am currently) taking regional and local development, International settlements,


diplomacy, and international civil, international trade and commercial law that have also helped

along the way.

I not only utilized the classroom over the course of this year, a lot of my ideas and new

areas of focus came from talking to people. This study aboard provided me with the opportunity

to have contact with students from all over Europe. In them I found different thoughts, in terms

of the Euro, than I could have guessed. Although some of them were extreme one way or the

other, it encouraged me to pursue different angles. I felt that most of the research I was doing

was not voicing the whole picture of the Euro currency and the real public opinion on it. This

brought me to the idea of conducting my own survey which will be presented within the paper.

1.3 Research Methodology and Thesis Outline

The majority of this paper will be presented in a quantitative format for the purpose of

removing any of my personal biases while conducting research. The main focus in each chapter

is on the raw data and what conclusions can be drawn from them. These will be presented in

charts and tables that are dispersed throughout the paper.

The exception to this is found in chapter 2, where I discuss the history of the Euro

currency and all of the convergence criteria. This gives a base for the rest of the material that

will be presented and hopefully a deeper understanding as to the process countries go though to

gain acceptance into such an elite group. I also talk about why these particular reference figures

are used and what they help to show about a country. All of the information for this chapter

comes from publications and/or treaties relating to the EU.

Chapter 3 is a series of three case studies on countries that were in a similar state of

development at the time they joined the eurozone. These countries are Slovenia, Slovakia and

Estonia who adopted the currency in 2007, 2009 and 2011. For each country I used datasets

available on the Eurostats website. With this I created all the tables and charts found within the

paper unless otherwise cited. I also used publications put out by the European Commission (EC)


and European Central Bank (ECB) every two years called convergence reports.2 This

information was gathered and combined to look at not only where a country was economically at

the time of EMU entrance, but looks back at the changes made to achieve acceptance.

The next chapter (chapter 4) is presented in two parts; the first is a statistical case study

of Poland and the second deals with a survey I created and conducted on my own for the purpose

of this paper. The case study is presented in the same format as my three reference countries and

looks at how Poland is doing towards meeting convergence criteria. As stated above I came up

with the idea of a survey from talking to Polish citizens as well as many other Europeans. It

seemed to me that while governments are excited and positive regarding the Euro currency,

individuals were portraying a much bleaker picture of what joining the EMU does to/for a

country. This survey did not receive enough respondents to be used for a complete

generalization, but can help to see how average Polish citizens, specifically students, view the

idea of Euro adoption in their country.

The final chapter (chapter 5) of this paper is that of a conclusion. I use this section to

state that I found my hypothesis to be true and present an argument for this. It also gives some

recommendations to improve public opinion and knowledge of the Euro currency benefits for

Poland and the EU


2. History of Eurozone and Convergence Criteria

The focus of this chapter will be on the history of the Euro currency form plans to

realization, requirements to take on the currency, perceived benefits as well as disadvantages

and the future of the Euro.

2.1 The Euro History

The idea for a common currency in Europe dates back long before and actual plan was

drawn up and implemented. Gustav Stresemann, whom was a German politician, posed this

question to the league of nation only six weeks before black Friday; “Where are the European

currency and the European stamp that we need?”3 This statement was made 70 years before the

realization of the Euro, and shows that although the currency has only been in circulation for ten

years, the need for one was long before understood.

The first step made towards a common currency came from the Hague conference in 1969.

This group, consisting of the original MS, constructed an outline for the Economic and Monetary

Union (EMU). “The ultimate goal was to achieve full liberalisation of capital movements, the

total convertibility of Member States’ currencies and the irrevocable fixing of exchange rates.”4

This initial goal was more about integration of the countries than a common currency.

The 70’s brought unstable times and a collapse of the Bretton Woods system, mainly driven

by US switching from the gold standard to a floating currency and the 73’ oil crisis. These

occurrences brought on a new round of protectionist policies and delayed the process. It is not

3 "Towards a single currency: a brief history of EMU." Europa. EUR-Lex, PreLex and Europe Direct., 19 July 2011.

Web. 25 Mar. 2013. <http://europa.eu/legislation_summaries/economic_and_monetary_affairs/introducing_euro_practical_aspects/l25007_en.htm>. 4 "Towards a single currency: a brief history of EMU." Europa. EUR-Lex, PreLex and Europe Direct., 19 July 2011. Web. 25

Mar. 2013.

<http://europa.eu/legislation_summaries/economic_and_monetary_affairs/introducing_euro_practical_aspects/l25007_en.htm>.


until March 1979 that the idea was once again brought to life. Here came the creation of the

European Currency Unit (ECU) which was a real step towards the single currency.

The ECU, while not a physical currency, was able to function as one and gave the first

criteria used in helping European countries converge. It can be thought of as a weighted basket

of currencies whose exchange rates were fixed. The ultimate goal was for each MS to get their

currency within +/-2.25% of the ECU. This was a way to not only stabilize each country’s

currency but also their monetary policy. Although the structure was not flawless, and had to be

modified over time, it was a very important stride in creating the monetary union they have

today. Table 2 below shows which MS were participating in this process, the weight for each

country and simplifies the calculations used.

Table 1: 1997 ECU Weights and Exchange Rates

@ The dollar exchange rate for the GBP and IEP is the number of dollars per currency unit rather than the number of currency units per dollar.

Note: From "Joint communiqué on conversion rates." Banco de Portugal . N.p., 5 Feb. 1998.

The Delores report, which was accepted by the European council in 1989, brought about the

next step in the process. This report put in place a three stage process for implementing the

EMU and also created a European central Bank (ECB).

stage No 1: (from 1 July 1990 to 31 December 1993): the free movement of capital

between Member States;


stage No 2: (from 1 January 1994 to 31 December 1998): convergence of Member

States’ economic policies and strengthening of cooperation between Member States’

national central banks. The coordination of monetary policies was institutionalised

by the establishment of the European Monetary Institute (EMI), whose task was to

strengthen cooperation between the national central banks and to carry out the

necessary preparations for the introduction of the single currency. The national

central banks were to become independent during this stage;

stage No 3: (underway since 1 January 1999): the gradual introduction of the euro

as the single currency of the Member States and the implementation of a common

monetary policy under the aegis of the ECB. Transition to the third stage was subject

to the achievement of a high degree of durable convergence measured against a

number of criteria laid down by the Treaties. The budgetary rules were to become

binding and a Member State not complying with them was likely to face penalties. A

single monetary policy was introduced and entrusted to the European System of

Central Banks (ESCB), made up of the national central banks and the ECB

Source: Towards a single currency: a brief history of EMU. 2011, July 195

2.2 Convergence Criteria

The Euro currency went into circulation on January 1, 2002 in 12 countries (Austria,

Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal,

Spain and Greece) and has since been adopted by 12 more. It is not enough to just be a

European country, in order to take on the Euro as your currency the Maastricht treaty

guidelines must be complete. Each countries progress can be found every two years in the

convergence reports. Their application is accepted upon a joint decision with the EC, ECB,

and Council on European Union (CEU). The criteria is used in order to try and minimize

any negative side effects to accessing country, but also to the eurozone as a whole.

5 "Towards a single currency: a brief history of EMU." Europa. EUR-Lex, PreLex and Europe Direct., 19 July 2011.

Web. 25 Mar. 2013. <http://europa.eu/legislation_summaries/economic_and_monetary_affairs/introducing_euro_practical_aspects/l25007_en.htm>.


These goals are essential to meet due to the loss of monetary policy an individual country

has when converting to a common currency. It is said that with this you also lose some

sovereignty as a nation, since you no longer have control of you own interest rates and

money supply. Monetary policy is one of the two ways a country can control inflation rates

and economic stability within its borders, showing how important it is to be on similar

business cycles and trends as the countries already participating.

The actual criteria can be put into five categories: Price stability, public finances,

exchange rate stability, long-term interest rates and Central Bank independance.

1. Price Stability: Member state must have an inflation rate of no more than 1and ½

p.p. above the average of the three best performing countries in the European

Union, observable for at least one year.

2. Public Finances: Member state must have a deficit less than 3% of GDP and debt

less than 60% of GDP

3. Exchange Rate Stability: Member state must have participated in and exchange

rate mechanism II (ERM II) and stayed within the normal range (+/-15%) for at

least two years. Also there can have been no devaluation of MS currency on its

own initiative for the same observed period

4. Long-Term Interest Rates: Member state must have an average nominal long-

term interest rate that does not exceed 2% above the average of the three best

performing countries in the union, observable for at least one year.

5. Central Bank Independence: This part of the law deals with specific laws,

regulations and processes a country must have already have in place before

approval. The laws deal with things such as Central bank independence, EBC

superiority and how Euro currency will be circulated. My paper will spend little

time focusing on this portion due to it having little influence on overall economic

activity.

Just know what the policies are, does not mean there is a full understanding as to why

they are necessary. Here I will try and explain the underlying reason for these particular factors

and why meeting the criteria is essential before taking on the Euro currency.


Above there is mention to the loss of sovereignty when moving to a common currency.

This is due to the government only having two main mediums from which they can maintain a

stable economy, Monetary and Fiscal policy. Fiscal policy consists of taxing and spending,

while Monetary is control of the money supply and interest rates. With the loss of control over

the money supply a country is more vulnerable to defaulting on public debt. They no longer

have the option to print money to pay bills. There is also no control over interest rates which can

work to stimulate economic activity in times of a downturn or recession.

Knowing this, one can see that if you are to move such controls over to a central

government, that is also controlling them for several other countries already involved, it is

important have policies already in place and stable that closely match that of other MS. The

closer each countries policy and in turn economies, the easier it will be for a 3rd

party to make

decisions that work well for everyone. The reason these four criteria are the most important to

sync is because all of them relate in some way to the Monetary policy.

2.3 Preceded Benefits and Disadvantages

The initial need for a European currency and the reason countries are still joining today,

have changed in some ways. The original 12 MS to start using the Euro were mostly developed

countries of Western Europe. The remaining countries, that are still working towards or have

recently switched, are in Central and Eastern Europe at a lower level of development. This

creates new challenges due to a lack of homogeneity vis-à-vis the original 12 countries. With the

ECB controlling monetary policy for all Euro countries it is vital that their economies are also

following the same trends and cycles.

2.3.1 Benefits

There are many perceived benefits for all countries in Europe to eventually join the

EMU. It works in a positive way to remove certain barriers to trade such as exchange rate risk,


the cost of international settlements, increased stability “…and credibility of the government's

macroeconomic policy.”6 These can be thought of as the measurable benefits, but some of the

most important aspects for MS to join are immeasurable and affect the political realm.

The other incentives a country has for euro adoption deal more with being included in the

decision making process of the ECB and euro group. It allows you a seat at the table where

representatives can voice what is most important for their country. “These benefits, accumulated

over time, will stimulate trade between Poland and the rest of the world, increase investments,

substantially reduce debt servicing costs, thus generating public finance savings, and strengthen

Poland's competitive position.”7 It is believed euro adoption can be thought of as a path to

sustainable development.

2.3.2 Disadvantages

Some of the negatives entwined in the Euro currency were brought to light during the

Great Recession. This worldwide crisis revealed how susceptible the eurozone countries are to

contagion, due to the interconnectedness of their current economies. There were even talks that

countries were trying to exit the EMU when the recession was in full swing.

No countries really did exit, but all of the talk created more uncertainty within the market

and may have extended this crisis. This leads me to my next disadvantage which is the

uncertainty that comes with joining such a new and somewhat untested institution. Although the

world has continued to support this currency since its creation, it has not been tested over the

years like so many of the most influential currencies around the world. The crisis in 2008-2009

was the first large incident, and even though they are still struggling, the Euro currency is still in

circulation. While it may have been a hard road the results could be god for eurozone members,

6 Bureau of Government Plenipotentiary for Euro Adoption in Poland. "Euro in Poland: Documents." Ministry of

Finance-Republic of Poland. N.p., 18 Sept. 2012. Web. 2 June 2013. <www.mf.gov.pl/en/ministry-of-finance/poland-in-eu/euro-in-poland/documents>. 7 Bureau of Government Plenipotentiary for Euro Adoption in Poland. "Euro in Poland: Documents." Ministry of

Finance-Republic of Poland. N.p., 18 Sept. 2012. Web. 2 June 2013. <www.mf.gov.pl/en/ministry-of-finance/poland-in-eu/euro-in-poland/documents>.


showing they are willing to remain economically open through a crisis and whether the storm

together. This could help to increase the level of trust outsiders have in regards to the Euro.

On a more micro level, one disadvantage that I have heard people state over and over is

the large price increases a country experiences on the initial changeover. I know from my survey

that the number one concern for people here in Poland is this idea that there will be extreme price

hikes. I try to cover that very topic later in the paper through analyzing my three case study

countries after they made the switch. What I found was that there is a price increase, but it is not

nearly as large as the average citizen thinks.


3. Euro Adoption and Its Results. Case Studies of Slovenia, Slovakia and

Estonia

This chapter will focus on the case study of three other EU countries that have switched

to the Euro currency while still in an underdeveloped state. The states I will be analyzing

include Slovakia, Slovenia and Estonia; all of which took on the Euro Currency between 2007

and 2011.

3.1 The importance of selected countries for comparative analysis

With there being 17 countries on the Euro currency today one might be a question of why

I chose these 3 countries to look at, and what relevance they have to Poland. One of the most

important factors for choosing them came from looking at statistics of GDP. In Figure 1 below

you will see a chart for GDP reported in current market prices, showing the purchasing power

per inhabitant reported in USD.

Figure 1: Purchasing Power in USD

Source: Chart of my creation using Eurostat data

0

5000

10000

15000

20000

25000

2003 2004 2005 2006

Estonia

Poland

Slovenia

Slovakia


Looking at this one can see that the purchasing power in three of the four countries is

very similar leading up to them taking on the Euro. Slovenia is the exception, but this could be

explained by increased trade in the lead up to the switch. Slovenia was the first to take on the

currency on January 1, 2007.

The next set of figures I looked at were those relating to the unit cost of labor leading up

to the switch. In Figure 2 below the year 2005 is set as the base and the growth rates are

displayed for each country through 2009.

Figure 2: Labor Cost per Unit of GDP


Estonia can be seen as the exception here, with labor rates between the years 2005 and 2009

growing an average of 13% faster than the next fastest country, Slovenia. This phenomena has

been studied by Sandrine Levasseu in a paper published by the Eastern Journal of European

Studies. He concluded that:

“ To a certain extent, the year 2004 was a turning point in Estonia: the domestically-based growth

model was endorsed, fuelled by credit to households and financed by foreign debt. It was accompanied

by a boom in real estate and construction sector. Last, labour shortages or fear of them – due to the

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2005 2006 2007 2008 2009

Estonia

Poland

Slovenia

Slovakia


possibility for Estonian workers to work in other EU countries – exerted strong pressures on wages

growth.”8

With this we can continue with the understanding that although wages grew faster in Estonia all

three countries were still facing similar economic standings at the time they switched to the Euro.

3.2 Slovenia

The decision to allow Slovenia into the EMU came from a progress report made on their

progress towards achieving the convergence criteria, per Slovenia’s request, in May 2006. As

reported above there are four main areas that the European Central Bank looks at when making

this determination; price stability, public finances, exchange rate stability and long term interest

rate.

3.2.1 Price Stability

Slovenia needed improvement in this area, with an inflation rate of 8.99 in the year 2000.

Policy changes were required in order to achieve the convergence criteria. Through a series of

changes within the framework of their monetary and exchange rate policies, they managed to

meet their convergence goal by the time the May 2006 report was published. “Over the

reference period of April 2005 to March 2006, the average rate of HICP inflation in Slovenia

was 2.3%, i.e. below the reference value of 2.6% for the criterion on price stability.”10

There did

seem to be some concern for the fact that this level had not been sustained for a significant

period of time, but the ECB expressed a feeling that this rate would remain stable in the long run.

8 Levasseur, Sandrine. "Labour market adjustments in Estonia during the 2008/2011 crisis ." Eastern Journal of

European Studies 3.1 (2012): 123-142. Eastern Journal of European Studies. Web. 29 Apr. 2013. 9 "Convergence Report May 2006." European Central Bank. N.p., n.d. Web. 29 Apr. 2013.

<www.ecb.int/pub/pdf/conrep/cr2006en.pdf>. 10

"Convergence Report May 2006." European Central Bank. N.p., n.d. Web. 29 Apr. 2013. <www.ecb.int/pub/pdf/conrep/cr2006en.pdf>.


Figure 3: Slovenia’s Inflation Rate and Criterion

Figure 4: Slovenia’s Inflation Rate 2006-2012

As shown in Figure 4 above the policies allowing inflation to remain low was not as

sustainable as they thought in 2006, with the peak coming in 2011 around 4%. Although this

increase leading up to, and following, the currency change could in some part be explained by

their access to new markets and general excitement surrounding a new country using the Euro.

Another striking conclusion that can be seen in Figure 4 is how strong of and effect the great

recession had on Slovenia, showing a drop in Inflation by 4.4% between 2008 and 2009

3.2.2 Public Finances

When it comes to public finances for Slovenia in terms of joining the eurozone, they used

an observance year of 2005. Over this period their debt to GDP ratio was at 29.1% which is well

below the reference amount of 60%. The second figure to be noted here is the deficit to GDP

was observed over the same year which was estimated at 1.8%. This figure also significantly

below the reference value of 3% used to determine eligibility.

Both of the figures serve to show that Slovenia was in good standing, in terms of public

finances, at the time of joining the eurozone. What is more, looking back over the years leading

up to this switch, it seems that excessive debt and fiscal stability has not been a problem for

them. In Figure 5 below you can see that until this most current recession, Slovenia has managed

to keep deficits low, and was even realizing surpluses in the early 1990’s.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2006 2007 2008 2009 2010 2011 2012



Figure 5: Slovenia Deficit to GDP (1992-2011)


3.2.3 Exchange Rate Stability

Slovenia joined the ERM II in May 2004 and was effective in its use starting in June of

the same year. The reference period used to determine readiness for the switch was measured

until May 2006. While the first two months in the system were met with some intervention and

devaluation by the central bank, but they did realize 22 months of success within the ERM II.

The major policies followed were “guided by uncovered interest rate parity

considerations and aimed at fostering the nominal convergence process.”11

This process

included a gradual decline of the exchange rate vis-à-vis the Euro as well as the nominal

effectiveness. With the nominal decline came more closely aligned inflation rates which had

relatively been a problem in the past. The author does note here that during this time Slovenia

was in a transition period of becoming a market economy and this has been known to complicate

the assessment of real exchange rate developments. In Figure 6 below you can see these

developments presented as a percent using daily values.

11


-8.000

-6.000

-4.000

-2.000

0.000

2.000

4.000

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11


Figure 6: Slovenian Tolars (SIT) vs. Euro

3.2.4 Long Term Interest Rates

The reference period for this figure was between April 2005 and May 2006. The findings

state that the long-term interest rate was at 3.8%, which was significantly below the mark of

5.9%. The European central bank noted that this is due to an overall trend in declining inflation

rates in relation to the euro area, as well as fiscal and monetary policies that created more

certainty in their market. It is believed to show “market confidence in general economic and

fiscal developments in Slovenia and a credible monetary and exchange rate policy.”12

12



Figure 7: Slovenia Long-Term Interest Rates

Source: Chart of my own creation using Eurostat data

3.3 Slovakia

The decision to allow Slovakia into the eurozone was made with the help of information

presented in the June 2008 convergence repots published by EC and ECB. They had tried before

but were denied due incompatible laws concerning their central bank, volatile inflation rates and

excessive debt. By the time the 2008 report was published they had managed to implement new

laws or change existing ones in order to fully comply with the EC treaty and all other laws

concerning institutions. Slovakia also managed to meet or exceed each of the other four

reference values, granting them accession into the eurozone.


Inflation was one of the most significant reasons Slovakia’s EMU application was denied

prior to 2008, with a value in 2004 over 8%. Their inflation rate did not drop below the

reference value until August 2007, showing that at the time of this report they had not met the

one year criteria. Although the projected inflation rate remains below the reference value until

the time of entrance and was used to allow acceptance.

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In Figure 8 below you can see a downward trend that started in 2004, but they were

unable to maintain it in 2006. For their year of reference Slovakia managed to have an average

inflation rate of 2.2% which was 1% lower than their target value.

Figure 8 below shows the real and projected vales, revealing a shrinking margin and in

Figure 9 you can see the actual values through 2012.

Figure 8: Slovakia’s Inflation Rate and Criterion

Source: EC Convergence Report (2008)

Figure 9: Slovakia’s Inflation Rate 2006-2012



A decision was made in July 2004 that Slovakia’s expected deficit of 3.6% of GDP in

2003 was too excessive for the convergence criteria. With this the “Council endorsed the

following intermediate targets for the general government deficit: 4.0% of GDP in 2004, 3.9% in

2005, 3.9% in 2006 and 3.0% in 2007.”13

Figure 10 below provides the real deficit level from

2003 to 2008 displaying that they exceeded the targets give by the EC. In the 2008 it was

reported that Slovakia was able to meet the 3% reference mark, and the commission therefore

rescinded its denial based on excessive deficit.

"Publications Office." European Commission. N.p., n.d. Web. 14 May 2013. <http://ec.europa.eu/economy_finance/publications/publication12574_en.pdf>.

13

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Figure 10: Slovakia Deficit to GDP (2003-2008)


In real terms of debt to GDP ratios in 2008, Slovakia had exceeded the reference value of

60% with gross debt at 27.4%. A problem was found with the projected figures and strain age-

related costs would have on their coming budgets. They were projected to reach the 60% debt to

GDP ratio by the late 2020’s and continue at exponential rates. The commission seemed to

express concerns regarding this and gave several recommendations as to how to improve future

standing.


Slovakia entered the ERM II on November 28 2005 at a fixed exchange rate of 38.455

SKK/EUR and a standard fluctuation band of +/-15%. Within the first year the National bank of

Slovakia (NBS) had to perform “three significant interventions…on the foreign exchange

market, a policy rate hike and the confirmation of euro adoption plans”14

in order to support the

Koruna. By May 2006 the currency started to appreciate and this trend did not stop for the next

year, though the NBS did try to stem the problem with two more interventions on the foreign

exchange market.

14

"Publications Office." European Commission. N.p., n.d. Web. 14 May 2013. <http://ec.europa.eu/economy_finance/publications/publication12574_en.pdf>.

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In March 2007, due to excessive upward pressure on the Koruna, the ECB revaluated it at

35.4424 SSK/EUR. This 18% decrease in exchange vis-à-vis the Euro allowed some strain to be

relieved within the central bank and created possibilities for greater stabilization. The changes

can be viewed in Figure 11, and help to show how necessary the revaluation was in allowing the

Koruna to meet the necessary requirements of Euro adoption. Left unadjusted, fluctuations

would have been +16%, hence outside the +/-15% bandwidth.

Figure 11: Slovakia’s Koruna (SKK) vs. Euro

Source: EC 2008 convergence report

3.3.4 Long Term Interest Rates

Between the years of 2001 and 2005 the long term interest rates in Slovakia followed a

downward trend which stabilized around 3%, close to the Euro area average at the time.

Although 2006 and 2007 brought about some volatility, it was mainly driven by uncertainty in

fiscal policy and eurozone acceptance. The reference period used for the 2008 commission repot

was from April 2007 through May 2008. The final long term interest rate reported was “4.5% on

average and thus well below the 6.5% reference value for the interest rate criterion”15

15

"Convergence Report May 2008." European Central Bank. N.p., n.d. Web. 15 May 2013. <http://www.ecb.europa.eu/pub/pdf/conrep/cr200805en.pdf>.


Figure 12: Slovakia Long-term Interest Rates


3.4 Estonia

In my opinion Estonia is the most interesting of these cases for three reasons; 1) Prior to

the switch their currency was known for having a “longstanding track record of stability”16

and

fully convertible by reserves or gold 2) Their gross debt was so minimal that they had no long

term bonds and they were running budget surpluses until 2008 3) They entered into the eurozone

only two years after the great recession.

Each of these three facts show that Estonia held the strongest economic position, in

regards to the three cases presented, upon eurozone entrance. The reasons for late entry were in

large part due to laws within the central bank. In 2008 they were cited for still having Euro cash

and collection of statistics issues, as well as missing laws regarding ECSB superiority.

16

"Convergence Report March 2006." European Commission. N.p., n.d. Web. 14 May 2013. <http://ec.europa.eu/economy_finance/publications/publication12574_en.pdf>.

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2003 2004 2005 2006 2007 2008


3.4.1 Price stability

One if the statistical area of concerns for Estonia, in regards to their integration, was price

stability. In

Figure 13 you are able to see the volatility in inflation since 2004 when it started its

upward trend.

Figure 13: Estonia’s Inflation Rate and Criterion

Source: EC 2010 Convergence Report

The average inflation in Estonia was 1 to 2% above its reference point until the steep fall

seen in late 2008. With Estonia’s acceptance in into the eurozone taking place in 2010, their

inflation rate of reference was taken from this period of sharp decline. It only dropped below its

target value in December 2009 and was projected to remain below through 2010.

This can be seen as a case of the European Union making an exception for Estonia’s

application approval. The specific law requires that inflation remain below their reference value

for at least one year prior to acceptance. As seen in 12 above, inflation had only fallen below its

reference in December. The reason approval was still granted can be explained by the

projections also shown above. They did not enter the eurozone until January 1, 2011 and their

inflation was projected to remain below the reference value the end of the year.



The public finance requirement was one that Estonia not only accomplished, but is an

area they have excelled in, even before their attempts to join the eurozone. Looking as far back

as 2003 seen in Figure 14 below, Estonia has not only managed to maintain a balanced budget,

but has attained surpluses in seven of the last ten years.

Figure 14: Estonia deficit to GDP (2003-2012)


As one can imagine, with such a balanced budget the gross debt for the country is also

very low. When looking at the figures starting from 2000, you will see that in 2002 debt reached

the high point of 5.7% of GDP. For the next five years gross debt fell due to surpluses achieved

within the budget, reaching a low point of3.7% in 2007. With the recession starting in 2008 and

peaking in 2009, the chart above displays Estonia using Keynesian economics. This includes

spending more through a recession to mitigate its effects. After the peak of 7.2% in 2009, they

have managed to return to a more balanced budget.

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Since the Estonian Kroon (EEK) was reintroduced as their currency in 1992, it has been

operating in a currency board regime pegged to the Dutsche Mark, and then the Euro as of 1999.

They have also guaranteed over the years that all of their currency is fully backed/convertible

using foreign reserves and gold. This strategy worked to create a resilient currency by using the

same policies required by convergence criteria.

Estonia entered into the ERM II in June of 2004 with a fixed exchange rate of 15.646

EEK/EUR and a standard fluctuation band of +/-15%. When the adoption of the Euro currency

took place in 2011 their currency had been in the ERM II for seven years with no problems

reported.

Figure 15: Estonian Kroon (EEK) vs. Euro

Source: EC Convergence report 2010

3.4.4 Long Term Interest Rate

Estonia’s long-term interest rates are a second area that sets them apart from the other

two countries. You can see this in the fact that the government’s indebtedness has remained so

low over the years that the EU was faced with the obstacle of choosing a new variable of interest

under this requirement. The cause being “no appropriate benchmark long-term government


bonds or other comparable securities are available for the assessment.”17

Instead the EU chose to

look at the interest rates of loans to households and non-financial corporations.

Even with low indebtedness and prudent fiscal policies, Estonia was faced with a

downgrade of their credit at the beginning of this recession, partly due to developments within

surrounding countries. This was coupled with a credit default spread (CDS) that peaked in

February of 2009 at over 700 basis points. During 2009 they were able to differentiate

themselves by using their longstanding prudent policies. “CDS spreads narrowed more strongly

than those of Member States with higher credit risk and returned to their mid-2008 levels of

below 100 basis points in March 2010.”18

This sign of strength through the recession, proved to

the EU that Estonia’s interest rate policies were sufficient to meet the convergence criteria.

3.5 Results After The Change

Now that we have looked at the reasons for each countries acceptance into the eurozone,

let us switch to how each has fared since. For this step I have chosen to return to three of the

four figures (exchange rate stability excluded because it no longer applies) used to determine

their convergence status. I feel it is important to maintain focus on these values for two reasons;

1) With a full analysis above the comparisons can be more fully understood. 2) These are the

indicators chosen by the EU as the most important in determining convergence, and so then

stability, within the eurozone.

There is one additional area of interest I choose to examine, which will be of more

importance when looking at public opinion towards the Euro currency. Talking to citizens of

Poland, and also through a survey I have conducted, one of the most commonly stated reasons

for resisting eurozone entrance comes from the idea that prices will steeply increase. I decided

17

"Convergence Report March 2010." European Commission. N.p., n.d. Web. 18 May 2013. <http://ec.europa.eu/economy_finance/publications/european_economy/2010/pdf/ee-2010-3_en.pdf>. 18

"Convergence Report March 2010." European Commission. N.p., n.d. Web. 18 May 2013. <http://ec.europa.eu/economy_finance/publications/european_economy/2010/pdf/ee-2010-3_en.pdf>.


that here was a good place to see if this is just a perception held by EU citizens, or if the concern

is one of legitimacy. For this indictor I have chosen to look at two new statistics, which are the

Harmonised Index of Consumer Prices (HICP) and comparative price levels.

3.5.1 Slovenia

In Table 2 below provides a dataset of all five statistics used to analyze the post-

eurozone status of Slovenia, starting with the year of entry. With just a brief look at these

numbers is can easily be seen that inflation and debt requirements for the convergence criteria

have remained below reference values. When talking about the long term interest rates you

must have the reference value for comparison, which can be found in Figure 16 below.

Table 2: Slovenia After the Switch

Stat/Time 2007 2008 2009 2010 2011 2012

Inflation 1.85 5.25 0.86 2.05 2.04 2.74

Debt 23.1 22 35 38.6 46.9 54.1

Surplus/Deficit 0 -1.9 -6.2 -5.9 -6.4 -4

Interest Rate 4.53 4.61 4.38 3.83 4.97 5.81

HICP (actual) 106.39 112.28 113.25 115.62 118.03 121.35

HICP (change) 3.75 5.54 0.86 2.09 2.08 2.81

Comparative Prices (actual) 78.9 82.8 87.8 86.9 85.8 N/A*

Comparative Prices (change) 2.87 4.94 6.04 -1.03 -1.27 N/A

*N/A represents not available Source: Table of my creation using Eurostat data


Figure 16: Long-Term Interest Rate reference (2006-2012)

Source: EC Convergence report 2012

From this you can see that Slovakia has managed to keep long term interest rates below

this target. That is until 2012 when I came in .1% above the reference value of 5.8%. I feel this

shows that there is still confidence in their economy and proves they are maintaining a health

course.

The next two numbers shown in the table are the HICP and comparative price levels, of

which there are two numbers for each. Both indices are created using the EU-27 in 2005 as a

base (i.e. EU-27 = 100). I used the available data to find the actual and then calculated the

change from year to year. The EU recommends an average yearly increase for a country around

2%. The second figure, on comparative price levels, is calculated and presented in the same

way. This shows how close a country’s prices are to converging with the EU-27’s. I could not

find a specific recommended value of yearly increase from the EU.

Looking at the values for these to figures in Table 2 above, one can see there has been

some volatility in this area since Slovenia joined the eurozone. I feel a more complete way to

look at this is how they compare to the EU-27. In Table 3 below you can see that even though

most years their change has been greater than the EU, they have never been more than +/-2%.

Table 3: Slovenia change in HICP vs. EU-27

GEO/TIME 2006 2007 2008 2009 2010 2011 2012

Slovenia 2.54 3.75 5.54 0.86 2.09 2.08 2.81


EU- 27 2.31 2.37 3.66 0.99 2.08 3.10 2.64

Difference .23 1.38 1.88 (.13) .01 (1.02) .17 Source: Table of my creation using Eurostat data

The comparative price levels tell a different story. The first three years using the Euro

currency brought about a sharp increase in this figure, but the 2009 recession seems diminished

this, even showing negative change in 2010 and 2011.

3.5.2 Slovakia

Slovakia’s entrance into the eurozone coincided with the most devastating year of the

Great Recession. When looking at Table 3 below we can again see the five indicators, and in my

opinion, they make a great case for the stability of the euro currency. The year 2009 was one of

volatility and uncertainty around the globe, but when reviewing the numbers it seems Slovakia

maintained monetary and fiscal stability. Some of the credit for this must be given to the EU in

regards to the convergence criteria and strict policy requirements required to join new and

growing currency.


Table 4: Slovakia After the Switch

Stat/Time 2009 2010 2011 2012

Inflation 0.86 2.05 2.04 2.74

Debt 35.60 41.00 43.30 50.20

Surplus/Deficit -8.00 -7.70 -5.10 -4.30

Interest Rate 4.71 3.87 4.45 4.55

HICP (actual) 111.43 112.21 116.79 121.16

HICP (change) 0.92 0.70 4.08 3.74

Comparative Prices (actual) 73.10 71.20 72.40 N/A

Comparative Prices (change) 4.73 -2.60 1.69 N/A

*N/A represents not available Source: Table of my creation using Eurostat data

Inflation rates are the same as Slovenia’s, with them now using the same currency. The

lowest year being 2009, but since growing at a very health rate of around 2%. The matter of debt

is increasing becoming a problem, coming in a 50.20% in 2012, which only 10% below the

reference value. Although, now that they are in the eurozone these reference numbers are

meaningless, and compared to the EU as a whole this level of indebtedness seems to be

sustainable or at least not unusual.

Their price indices are the most intriguing to me because they show very little change in

the first two years. Of course you must consider the downward pressure from this recession, but

if you compare it to the corresponding changes in the EU-27 (.98, 2.04), their overall prices

actually increased less. With one of the major complaints in the survey being the immediate and

extreme increase in prices, this seems to show that may not be the case. On the other hand in the

following two years they grew around 1% faster, which could be the release of recessionary

pressure, and now are showing a kind of catching-up effect.

3.5.3 Estonia

Estonia has been using the Euro currency for the shortest of these three countries, but can

still provide some interesting insights. Their public finances and long term interest rates were


what made them unique before switching, but even more can be seen by looking at these five

statistics in Table 5 below.

Table 5: Estonia After the Switch

Stat/Time 2011 2012

Inflation 2.04 2.74

Debt 6.10 10.10

Surplus/Deficit 1.20 -0.30

Interest Rate N/A N/A

HICP (actual) 133.40 139.02

HICP (change) 5.08 4.21

Comparative Prices (actual) 77.90 N/A

Comparative Prices (change) 2.10 N/A

*N/A represents not available Source: table of my creation using Eurostat data

Two years into the currency swap and Estonia has managed to keep their debt levels low

and budget balanced. Since they have maintained stability in public finances, there are still no

outstanding long-term bonds. This can show that a countries fiscal policies guide how smooth a

transition can occur. I also think it is reason to consider these fiscal requirements as some of the

most important aspects when considering a new candidate for the eurozone entrance.

The HICP seems to be high for the initial two years, in regards to the recommendation by

the EU of around 2%. Although if you look back at the years leading up to 2011, they are

actually around the same as the previous five year average (4.95)19

. below shows the change

HICP for Estonia staring in 2006, which can be seen to display some volatility. Comparative

prices on the other hand, have remained at the constant upward trend that they have been on

since the beginning of the 2000’s.

19

Created by doing a simple average of the previous five years using data retrieved from Eurostat


Table 6: Estonia change in HICP vs. EU-27

GEO/TIME 2006 2007 2008 2009 2010 2011 2012

Estonia 4.45 6.74 10.60 0.20 2.74 5.08 4.21

EU-27 2.31 2.37 3.66 0.99 2.08 3.10 2.64

Difference: 2.14 4.37 6.94 -0.78 0.66 1.98 1.57

Source: Table of my creation using Eurostat data


4. Prospects of Euro Implementation in Poland. Empirical Analysis

This chapter will cover two topics. First of all, a statistical analysis of Poland in terms of

the convergence criteria. Secondly, I will present a survey that I have created and carried out

specifically for this thesis. The structure for numerical analysis will mimic that of the three case

studies already presented. The purpose of this survey was to try and gleam the general feelings

and ideas Polish citizens have about entering the eurozone.

4.1 Meeting the Convergence Criteria in Poland

Poland’s accession into the European Union took place in the May 2004 enlargement.

This case study will see how they are doing in terms of meeting convergence criteria and relative

to the three countries covered earlier. This is important for many reasons, including identifying

how close they are to meeting said criteria, understanding how they were “…the only EU

country to avoid a recession in 2009…”20

, and finally to make an informed guess as to how

entering the eurozone would affect the overall Polish economy.


There are two ways to look at price stability in Poland since entering the EU; the first

showing them well above their target value since 2008, meaning they do not meet qualifying

criteria, but another way to see it is that during the recession, while MS showed large drops in

inflation, Poland remained relatively stable. Figure 17 shows the relationship between Poland’s

inflations rate and the corresponding reference value. From this you can see that even the

projection for 2012 show them above the reference value for this criterion.

20



Figure 17: Poland’s Inflation Rate and Criterion


While stabilization in general can be thought of as a good/positive indicator, I feel that

inflation rates remaining at this high level (around 4%) through the Great Recession was not the

most constructive path to recovery. In Figure 18 below you can see the weight each input used

to calculate the HICP inflation rate for Poland in 2008.

Figure 18: Poland’s HICP weights of input (2008)

Source: chart of my own creation using EC convergence report 2008

Although these weights are not unusual compared to similar, countries it does allow one

to see how important food and energy prices are in calculating Poland’s inflation, coming in at

27%

13%

10%

21%

29%

Non-Energy IndustrialGoods

Energy

Unprocessed Food

Processed Food

Services


44% of the overall basket. This helps to understand that the external price of these two inputs

has an incredible impact on the rate of inflation. Keeping in this mindset, you can see how a

lower inflation rate through the recessionary years helps maintain or even reduce the cost of

these to essential goods.

The second driving force behind inflation is the supply of money, and most importantly

M2. When a central bank increases the money supply, it is followed by upward pressure on

prices. This is due to the idea that with more money in circulation, each bill you already have

has less inherent value. One could use this knowledge to assume that increases in the M2

supply, or a form of quantitative easing, was perused by the Polish government during the

recession. In Figure 19 below it is quite clear that the peak of M2 supply was seen in 2008, then

moving on a steep decline until the middle of 2010. This helps to show that inflation during the

recession was driven by prices and not money supply.

Figure 19: Poland’s y-o-y Δ (Money Supply vs. Inflation)

Source: Graph of my own creation using Eurostat data

0

2

4

6

8

10

12

14

16

18

2006 2007 2008 2009 2010 2011 2012

M2 Supply

Poland'sInflation


On the other hand “domestic demand which, compared to its regional peers, plays a more

important role in a relatively closed Polish economy”21

, provides them with more resilience to

external shocks. This high internal demand was one of the drivers that allowed them to weather

this recession so well. In summary the elevated inflation rates, compared to other EU states

during the recession, can be thought of in some ways as positive but not completely.


Poland’s record in regards to this requirement has been a mixed bag of narrow

accomplishments and steady increases. When accession took place in 2004, they had a deficit of

3.9 and gross debt of 45.4, both as a percentage of GDP. They did see decreases in each for the

2006 convergence report, coming in at 2.2% and 42.4%, but since that time both figures have

been at a steady incline. In 2008 the Council on the European Union (the Council) created a plan

with specific requirements as to how Poland could reduce their excessive debt over the following

two years.

“In February 2010, the Council concluded that, based on current information and the

recommendation under the European Economic Recovery Plan to provide fiscal stimulus in

2009, it appears that Poland has taken effective action towards correcting the excessive deficit

within the time limit set by the Council.”22 This means that although they could not meet some of

the more specific requirements due to external factors, their efforts were satisfactory in the EU’s

eyes.

21

"Convergence Report March 2012." European Commission. N.p., n.d. Web. 31 May 2013. <ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-3_en.pdfhttp://>. 22



Figure 20: Poland Deficit to GDP

Source: Chart of my own creation using Eurostat data

Figure 20 above shows the actual deficit levels for Poland from 2003- 2012, but there is a

second part to Public finances. Gross debt in also a factor in the convergence criteria and it

states that a country should be below 60% of GDP. With the deficits shown above, it can be

assumed that over time their gross debt has also been at a steady incline, reporting at 56.3% in

2011. Although they have not surpassed the maximum level of debt, Poland is inching closer

which does not bode well for eurozone entrance. In 2012 they managed to reduce debt by .7%

coming in at 55.6%23

, but more fiscal restraints will need to be put in place for any substantial

reduction to take place.


The Polish Zloty (PLN) does not, and has never, participated in the ERM II. “Since April

2000, Poland operates a floating exchange rate regime, with the NBP preserving the right to

intervene in the foreign exchange market, if it deems this necessary, in order to achieve the

23

http://www.tradingeconomics.com/poland/government-debt-to-gdp

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inflation target.”24

Figure 21 below shows the exchange rate since the year 2000 for the Polish

Zloty in reference to the Euro currency.

Figure 21: Polish Złoty (PLN) vs. Euro


From this graph you can see that the exchange rates over the last several years in Poland

have been somewhat volatile. The NBP had to make verbal and actual interventions to stabilize

depreciation in 2009. The actual intervention came from EU funds given to them, denominated

in Euro’s. They were also “granted access to an IMF Flexible Credit Line facility of $20.5 bn,

which it treated as precautionary.”25

These actions combined halted the strong depreciation and

helped realize some stabilization.

One might wonder why Poland has not allowed the Zloty to participate in the ERM II, it

was, and still is, something of a mystery for me. The most recent development for this came

from a debate held in Warsaw recently on the topic of when Poland should adopt the Euro. Here

the president of the NBP was quoted saying: “We’re not entering ERM II. If you want us in,

invite us without that requirement.”26

The only reason I could find for this reluctance was that it

allowed for speculation in the currency market which they did not want to allow. With this

statement coming from the most influential individual associated with monetary policy in

Poland, it seems an agreement must be struck.

24

"Convergence Report March 2012." European Commission. N.p., n.d. Web. 31 May 2013. <ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-3_en.pdfhttp://>. 25

"Convergence Report March 2010." European Commission. N.p., n.d. Web. 18 May 2013. <http://ec.europa.eu/economy_finance/publications/european_economy/2010/pdf/ee-2010-3_en.pdf>. 26


4.1.4 Long term Interest Rates

Long term interest rates in Poland, while remaining around 2% above the EU-27 average,

has shown stability over the years, which is displayed in Figure 22 below. If their reference value

was added into this graph, you would see that they have remained at or below it since the middle

of 2005. Both of these indicate that long term interest rates in Poland could improve but are

stable enough to gain access into the eurozone.

Figure 22: Poland Long-Term Interest Rates

Source: Graph of my own creation using Eurostat data

4.2 Polish Society Attitude towards Euro Implementation: Own Survey

A full copy of the survey and exact questions in Polish can be found in the appendix.

Here I would like to give more detail as to why these questions were asked and the insight I

hoped to gain. I have a limited knowledge of the polish language but felt it was important to

distribute this survey in respondent’s native tongue, so it was not limited to citizens whom are

proficient in English.

The first six questions are in a multiple choice format, with one and two being general

demographic questions related to age and sex. I felt that these two questions could help to see

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Poland

European Union(27 countries)


patterns within the final data. Initially I had thought that the results would show older citizens

with more reluctance towards making this switch because of a stronger connection they felt

towards the Polish Złoty.

Question three asks if the individual is in support of overall European integration and

four tries to gain insight as to how attached citizens are to the current currency. Both of these are

important in determining if it is the Euro currency that respondents disagree with, or other

underlying factors. I gave room at the end for participants to state any other reasons/ideas for

their positive or negative feelings.

The last two multiple choice style questions ask specifically if respondent believes that

eventually Poland should join the eurozone and when. This is the most important section of the

survey, and allows one to see specifically where the population stands in regards to the Euro.

My overall aim here was to see not only if they agree with making the switch, but under what

circumstances they think the economy would be ready. The when question had four choices; a)

as soon as possible b) within five years c) as soon as eurozone stabilizes d) never. You can see

from the choices it is more than just about the time, with answer C as an option, it can show if

participant feels the reason to delay switching comes from instability within the eurozone.

There are three remaining questions. Of these, all are presented in an essay format and I

ask respondent to answer either question seven or eight. The option here is if you answered yes

Poland should take on the Euro or no, either way they are asked to provide the main reason for

this conclusion in the context of Poland’s economy. The final question is simply an area for any

additional comments. I did not want the subjects to feel as though they could be misrepresented

in some way, and allowed for a section that is completely intended to say anything they felt

could clarify previous answers.


4.3.1 Survey Questions

Biases can be found in every survey, no matter how hard the conductor tries to remove

them. Several biases can be found within the survey I have conducted, although most are in

terms of the sample size and distribution.

When looking over the questions presented in the survey, it is hopefully visible that an

attempt was made to remove all personal bias in terms of a positive or negative feeling towards

joining the eurozone. One of the areas I feel the survey is lacking the most is in the area of

demographics. If a couple additional questions were asked about where respondents live, work

and income levels, a more in depth picture could have been presented. The reason I decided to

exclude these additions can be answered in two parts; 1) I felt the longer the survey, the less

people would be willing to complete it 2) I did not want people to think it was too personal and

feel uneasy about sharing personal information.

4.3.2 Sample Size and Distribution

This section is where almost all of the biases can be found in the survey with the most

significant being actual sample size. Poland has a population of over 38 million people; this

would require a very large sample size of which I was not successful in obtaining. For the

survey I have 45 responses, with 80% of the respondents are between the ages of 18-24. This is

due mainly to how I was able to obtain participants, because of my status as a foreign student

with little Polish language skills. While it means I cannot use my survey as a representation of

Poland as a whole, I do think that the results can provide some insight into the thinking of an

average university student.

There is a nonresponse bias imbedded within the results as well. I feel this, at least in

part, comes from Polish people unwilling to disclose their true feelings about such an important

topic to a person whom is not even a citizen. My reason for thinking this involves the many

professors and older citizens I asked to partake in the survey, but either declined or sated they


would but never followed through. Younger people seemed more willing to answer with their

true feelings, shown in the essay responses. It is possible that the unresponsive participants felt I

was an outsider and had no right intruding into the economical/political realm found in Poland

today.

4.4.1 The Results of the Survey

The results will be presented in two sections; 1) the statistics for the first six multiple

choice questions 2) a compilation of types of answers given for essay questions. I uses each part

to look at different results and decipher what they could mean for Poland in general.

Table 7: Survey Questions 1-6

Questions %

Gender

a) Male 46.67

b) Female 53.33

To which age group do you belong

a) 18-24 80.00

b) 25-39 17.78

c) 40-64 2.22

d) 65 and older 0.00

Are you in support of European Integration

a) Definitely yes 40.00

b) I think so 37.78

c) I don’t think so 13.33

d) Strongly disagree 8.89


How important is the Ploish Zloty (PLN) as a currency in terms of culture

a) Very important culturally 22.22

b) Culturally important 35.56

c) Culturally indifferent 28.89

d) Just a cultural necessity 13.33

Do you think that Poland should join the Euro eventually

a) Yes 51.11

b) No 48.89

When should Poland join the Euro

a) As Soon as Possible 6.67

b) Within 5 years 8.89

c) As soon as euro area stabilizes 40.00

d) Never 44.44

Table 7 above allows you to see the exact results for each multiple choice question found

on the survey. From here we can look at some of the trends and conclusions that can be drawn

regarding those whom participated. As stated in the intro to this chapter, with only 45

respondents we cannot use this generalize for the population as a whole, but I did use it to further

my understanding of why citizens are hesitant to accept the Euro and as a reference for new area

of interest during the research process.

Before my yearlong study abroad in Europe, I only understood the Euro from an

American economics point of view. I had studied it in more than one class at my home

university, and thought that it was not only an amazing new form of integration but also

something the general public was pleased with. Through my time here I have discovered that

while the Euro currency has made tremendous steps towards further economic integration within

Europe, the public opinion is still not as positive as an outsider would think. I felt this would

apply even more so to youth in Europe, for the simple reason that they have grown up with it and

are much more apt at responding to and accepting change. What I found was the opposite, most

of the young people whom participated or that I spoke to, have a negative or at least not positive


feelings towards the change, whereas the few respondents I had over 25 show mostly positive or

non negative feelings.

In Table 8 below you can find a correlation table for all six multiple choice questions. I

used it to see if any underlying correlations can be found within the results, something that

would not be obvious for just looking over the results.

Table 8: Survey Correlations

Q1 Q2 Q3 Q4 Q5 Q6

Q1 1.0000

Q2 -0.1274 1.0000

Q3 -0.1835 -0.1072 1.0000

Q4 -0.2766 -0.2138 -0.2614 1.0000

Q5 0.2911 -0.0848 0.3768 -0.5675 1.0000

Q6 0.1885 -0.0122 0.2702 -0.4602 0.7754 1.0000

The most significant correlation coefficient that can be found within this table is between

question five and six, which I do not find surprising due to the nature of these two questions.

The next highest on the table is that between question four and five at -.568 or -56.80%.

Showing there is a strong correlation between the importance one places on the złoty, and the

idea of switching to the Euro currency. This is something I thought was true before even

starting this paper, from simple taking to Polish citizens I have met living here, but can now be

shown with statistical proof. The złoty has a long and important history, with the first

denominations dating back as far as the Middle Ages.

Another correlation I find interesting in Table 8 is that between question one and five at

almost 30%. The ultimate meaning of this is that the female respondents were more likely not to

want to enter the eurozone. This might just be a sign of correlation and not causation; I think

there would have to be further investigation in order to be certain.

I would like to present this part with a focus on questions seven and eight because the last

question was too difficult to evaluate in a numerical context. The answers for question nine were


quite varied and impossible to group. The first two questions I was able to categorize due to the

limited reasons given by participants. Table 9 below shows the grouping system I used, how

many respondents cited that particular reason and total number of participants to answer the

question.

Table 9: Essay Question Responses

Question 7 Total Question 8 Total

Travel 1 Price increases 12

Lower foreign transaction cost 8 Instability (economic or currency) 6

Common currency 5 loss of independence 3

Further integration 3 Economy not ready 2

Stability (economic or currency) 4 Uncertain wages 1

lower exchange rate cost 10

unifying wages 1

Total responses 18 Total responses 16

From looking at the table you can see that for reasons relating to agreeing with eurozone

entrance, there is great variation and multiple responses. The most common reasons stated are

lower exchange rates and foreign transaction costs. Another common reasoning was for further

integration by increasing common currency participation. Question eight has a much more

centralized theme, with the number one reason being an increase in prices, which I have

indicated to in the results portion of the case studies. I intend to further address this topic in the

conclusion and so will move on. The second most significant reason given here is that of

instability. This is not much of a surprise given we are barely out of the Great Recession which

caused much instability and uncertainty in Europe as a whole.


5. Conclusion: Should Poland Make the Switch?

To end this paper I will state my findings and show why I think it would benefit Poland

overall to enter the eurozone. Using the research presented in this paper, I will make the

argument that although public opinion is low in regards the Euro currently, the pros outweigh

the cons. I will also give a couple of ideas for how the Polish government could improve public

opinion which would make the changeover more successful.

I started this thesis determined to answer yes, even thinking that Euro adoption could be

used as a form of development. Most of this came from a perception I had of the Euro as an

outsider from the United States. This currency is something that economic classrooms all around

the USA are studying, and in my experience it was with a very strong emphasis on the theoretical

side, along with understanding positive changes it has brought about in Europe.

While what I studied at home was all true, the act of coming here and conducting my

research in such depth has given me a completely new perspective on all EU related topics, and

more specifically the Euro currency. This does not mean that my answer is now “No”; it just

means that my yes means something completely different than it would have one year ago.

Today I can give an informed opinion that Poland would receive net benefits from

entering the eurozone. In real terms the actual cost of making the change is outweighed by

positive increase to trade and investment. I feel that one of the most important benefits that

would come about from this change would be the increase in free trade within their economy. It

would facilitate an increase in imports and allow Poland to focus and improve on what they

already specialize in, while also encouraging investments in new and more advanced industries.

Taking into consideration all conducted analyses and own empirical survey, the assumed

hypotheses has been proved.

The second reason I feel the benefits outweigh the disadvantages is the political gains the

will see joining. Poland has a large economy, in terms of Europe, and with that should come

increased influential power. This has not been the case from them due to lower levels of

development vis-à-vis Western Europe. I feel that with Euro adoption they will have new

opportunities to grow along with more power to drive policies that benefit Poland.


In order to make this transition a reality the Polish government and leaders need to stand

up and show support. Less than a month ago the president of the central bank was reported, as

stated above, that they have no plans of joining the ERM II and a acceptation should be made.

With this type of information and negativity towards the Euro coming from top officials, it is not

surprising that the public is skeptical. The best course of action would be to start a positive

media campaign for the Euro and encouraging leaders from new accepted countries to speak out

in terms of positive side effects they have experience since Euro adoption. This can be a group

effort with Poland and the EU working together to facilitate a more positive view only in Poland

but around Europe.

To conclude I have found through the research on this topic many reason a person could

have positive or negative feeling towards the Euro overall. I feel each country that is thinking of

joining the EU, needs to take into consideration that with accession, Euro adoption is mandatory.

This should encourage them to start, and/or continue, educating their citizens about the adoption

process as a whole and present to them the benefits a society has at a micro level. The media and

institutions of Europe seem to focus on Macro gains, which are important, but not easily

understood by someone without an Economic background. It would be better to help explain

how it is going to affect you at an individual level to try and battle the misperceptions citizens

have about eurozone entry.


Appendix 1: The Survey (Polish)

Ta ankieta będzie anonimowa i jest przeznaczony dla każdego obywatela Polski w wieku powyżej 18

1. Płeć a) Mężczyzna b) Kobieta

2. Poszę określić swoją grupę wiekową: a) 18-24 b) 25-39 c) 40-64 d) 65 i więcej

3. Czy popierał(-a) i popiera Pan/Pani integrację europejską?

a) Zdecydowanie tak b) Raczej tak c) Raczej nie d) Zdecydowanie nie

4. Jak ważny jest dla Pana/Pani Polski Złoty (PLN) jako waluta pod względem kulturowym?

a) Bardzo ważny kulturowo b) Ważny kulturowo c) Obojętny kulturowo d) Zupełnie nieistitny kulturowo

5. Czy uważa Pan/Pani, że Polska docelowo powinna wprowadzić euro?

a) Tak b) Nie

6. Kiedy Polska powinna wprowadzić euro?

a) Tak szybko jak to tylko możliwe b) W przeciągu 5 lat c) Jak tylko wyklaruje się sytuacja w strefie euro d) nigdy

7. Jeśli tak, proszę podać najaważniejsze korzyści płynące z wprowadzenia euro

8. Jeśli nie, proszę podać najważniejsze powody przeciwko wprowadzeniu euro w Polsce z punktu widzenia polskiej gospodarki.

9. Dodatkowe uwagi i komentarze:


List of Tables and Figures

Figure 1: Purchasing Power in USD ............................................................................................. 17

Figure 2: Labor Cost per Unit of GDP.......................................................................................... 18

Figure 3: Slovenia’s Inflation Rate and Criterion ......................................................................... 20

Figure 4: Slovenia’s Inflation Rate 2006-2012 ............................................................................. 20

Figure 5: Slovenia Deficit to GDP (1992-2011) ........................................................................... 21

Figure 6: Slovenian Tolars (SIT) vs. Euro .................................................................................... 22

Figure 7: Slovenia Long-Term Interest Rates ............................................................................... 23

Figure 8: Slovakia’s Inflation Rate and Criterion ......................................................................... 24

Figure 9: Slovakia’s Inflation Rate 2006-2012 ............................................................................. 24

Figure 10: Slovakia Deficit to GDP (2003-2008) ......................................................................... 25

Figure 11: Slovakia’s Koruna (SKK) vs. Euro ............................................................................. 26

Figure 12: Slovakia Long-term Interest Rates .............................................................................. 27

Figure 13: Estonia’s Inflation Rate and Criterion ......................................................................... 28

Figure 14: Estonia deficit to GDP (2003-2012) ............................................................................ 29

Figure 15: Estonian Kroon (EEK) vs. Euro .................................................................................. 30

Figure 16: Long-Term Interest Rate reference (2006-2012) ........................................................ 33

Figure 18: Poland’s Inflation Rate and Criterion .......................................................................... 39

Figure 19: Poland’s HICP weights of input (2008) ...................................................................... 39

Figure 20: Poland’s y-o-y Δ (Money Supply vs. Inflation) .......................................................... 40

Figure 21: Poland Deficit to GDP ................................................................................................. 42

Figure 22: Polish Złoty (PLN) vs. Euro ........................................................................................ 43

Figure 23: Poland Long-Term Interest Rates................................................................................ 44


Table 1: 1997 ECU Weights and Exchange Rates........................................................................ 11

Table 2: Slovenia After the Switch ............................................................................................... 32

Table 3: Slovenia change in HICP vs. EU-27............................................................................... 33

Table 4: Slovakia After the Switch ............................................................................................... 35

Table 5: Estonia After the Switch ................................................................................................. 36

Table 6: Estonia change in HICP vs. EU-27 ................................................................................. 37

Table 7: Survey Questions 1-6 ...................................................................................................... 47

Table 8: Survey Correlations ........................................................................................................ 49

Table 9: Essay Question Responses .............................................................................................. 50


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