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25th Jun 2022

Poland continues drive towards euro

The Polish government is pressing ahead with its ambitious plans to adopt the euro by 1 January 2012 as fears that the move would be premature under the current environment appear to be subsiding.

To join the currency shared by 16 of the EU's 27 member states, Poland would first have to first enter a two-year antechamber known as Exchange Rate Mechanism II, which allows only limited currency fluctuations between - in this case - the zloty and the euro. The Polish government hopes to enter ERM-II before the end of June.

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  • The current economic crisis has highlighted the benefits of euro area membership for some countries (Photo: European Commission)

"I think the government will join ERM-II, provided the [zloty's] situation stabilises on the financial markets," Polish Socialist MEP Dariusz Rosati, who sits on the European Parliament's economy committee, told EUobserver on Wednesday (15 April), adding that the government will likely wait until the last moment before making the decision.

This view is shared by Agata Urbanska, an economist with ING Bank specialising in emerging Europe. She feels that the worst of the currency volatility seen last August is over, in part thanks to Poland's ability to distinguish itself from other eastern European markets and especially from the Baltic states.

The desire to further stabilise the county's currency appears the main motivation behind Tuesday's announcement by the Polish centre-right government of its intention to apply for a €15.5 billion ($20bn) credit line from the International Monetary Fund.

"From the very start, we have said zloty stability is one of the conditions for the ERM-II entry," Polish finance minister Jacek Rostowski told Polish radio on Wednesday. "I hope it [zloty volatility] is behind us ... I think access to the IMF funds will significantly help us."

Speculative attack

EU treaties in theory allow for currency fluctuation of 15 per cent both above and below an agreed exchange rate once countries join ERM-II.

In practice however, the European Central Bank usually stipulates a much narrower bandwidth, restricting currency depreciation to 2.25 per cent against the euro.

Despite this, Mr Rosati feels there is little likelihood of Poland being forced to leave ERM-II if it does indeed join in June. "The zloty is deeply undervalued right now," he says, making appreciation the more likely direction.

The potential reasons for a forced departure from ERM-II however are not limited to natural currency fluctuations versus the euro.

In 1992, Britain was forced to leave the European Exchange Rate Mechanism (the predecessor to ERM-II), following a move by currency speculator George Soros in which he sold $10 billion worth of sterling as he predicted the currency would be forced to dip below the minimum level allowed under the ERM.

His prediction proved to be correct, despite the British government's best efforts, which included raising interest rates to 15 per cent. Black Wednesday, as 16 September 1992 came to be known - the day that the UK was forced to withdraw the pound from the ERM, is estimated to have cost the British treasury £3.4 billion.

Mr Rosati feels the Polish repetition of this event is unlikely.

"Our fundamentals are much stronger [than those of British economy in 1992], and the zloty is not over valued, as the pound was at that time."

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