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

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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/

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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 3.3.3 Exchange Rate Stability ...... 25 3.3.4 Long Term Interest Rates ...... 26 3.4 Estonia ...... 27 3.4.1 Price stability ...... 28 3.4.2 Public Finances ...... 29 3.4.3 Exchange Rate Stability ...... 30 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

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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 4.1.3 Exchange Rate Stability ...... 42 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

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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. .

Benefit and Cost of Euro Implementation in Poland Page 6 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,

Benefit and Cost of Euro Implementation in Poland Page 7 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)

Benefit and Cost of Euro Implementation in Poland Page 8 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

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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. . 4 "Towards a single currency: a brief history of EMU." Europa. EUR-Lex, PreLex and Europe Direct., 19 July 2011. Web. 25 Mar. 2013. .

Benefit and Cost of Euro Implementation in Poland Page 10 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;

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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. .

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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.

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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,

Benefit and Cost of Euro Implementation in Poland Page 14 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. . 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. .

Benefit and Cost of Euro Implementation in Poland Page 15 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.

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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

25000

20000

Estonia 15000 Poland

10000 Slovenia Slovakia

5000

0 2003 2004 2005 2006

Source: Chart of my creation using Eurostat data

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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

160.0

140.0

120.0

100.0 Estonia Poland 80.0 Slovenia 60.0 Slovakia 40.0

20.0

0.0 2005 2006 2007 2008 2009

Source: Chart of my creation using Eurostat data

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

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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. . 10 "Convergence Report May 2006." European Central Bank. N.p., n.d. Web. 29 Apr. 2013. .

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Figure 3: Slovenia’s Inflation Rate and Criterion Figure 4: Slovenia’s Inflation Rate 2006-2012

6.00 5.00 4.00 3.00 2.00 1.00 0.00 2006 2007 2008 2009 2010 2011 2012

Source: Chart of my creation using Eurostat data

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.

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

4.000

2.000

0.000

-2.000

-4.000

-6.000

-8.000 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Source: Chart of my creation using Eurostat data

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 "Convergence Report May 2006." European Central Bank. N.p., n.d. Web. 29 Apr. 2013. .

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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 "Convergence Report May 2006." European Central Bank. N.p., n.d. Web. 29 Apr. 2013. .

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Figure 7: Slovenia Long-Term Interest Rates

7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2003 2004 2005 2006

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.

3.3.1 Price Stability

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 Figure 9: Slovakia’s Inflation Rate 2006-2012

5.00 4.00 3.00 2.00 1.00 0.00 2006 2008 2010 2012

Source: EC Convergence Report (2008) Source: Chart of my creation using Eurostat data

3.3.2 Public Finances

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. . 13

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

0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 2003 2004 2005 2006 2007 2008

Source: Chart of my creation using Eurostat data

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.

3.3.3 Exchange Rate Stability

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. .

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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. .

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Figure 12: Slovakia Long-term Interest Rates

5.50

5.00

4.50

4.00

3.50

3.00 2003 2004 2005 2006 2007 2008

Source: Chart of my creation using Eurostat data

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. .

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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.

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3.4.2 Public Finances

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)

3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Chart of my creation using Eurostat data

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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3.4.3 Exchange Rate Stability

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

Benefit and Cost of Euro Implementation in Poland Page 30 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. . 18 "Convergence Report March 2010." European Commission. N.p., n.d. Web. 18 May 2013. .

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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

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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

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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.

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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

Benefit and Cost of Euro Implementation in Poland Page 35 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

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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

Benefit and Cost of Euro Implementation in Poland Page 37

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.

4.1.1 Price Stability

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 "Convergence Report March 2010." European Commission. N.p., n.d. Web. 18 May 2013. .

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Figure 17: Poland’s Inflation Rate and Criterion

Source: EC 2012 Convergence Report

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)

Non-Energy Industrial Goods 29% 27% Energy

Unprocessed Food

Processed Food 13% Services 21% 10%

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

Benefit and Cost of Euro Implementation in Poland Page 39

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)

18 16 14 12 10 M2 Supply 8 Poland's 6 Inflation 4 2 0 2006 2007 2008 2009 2010 2011 2012

Source: Graph of my own creation using Eurostat data

Benefit and Cost of Euro Implementation in Poland Page 40

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.

4.1.2 Public Finances

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. . 22 "Convergence Report March 2010." European Commission. N.p., n.d. Web. 18 May 2013. .

Benefit and Cost of Euro Implementation in Poland Page 41

Figure 20: Poland Deficit to GDP

0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 -7.0 -8.0 -9.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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.

4.1.3 Exchange Rate Stability

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

Benefit and Cost of Euro Implementation in Poland Page 42 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

Source: EC 2012 Convergence Report 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. . 25 "Convergence Report March 2010." European Commission. N.p., n.d. Web. 18 May 2013. . 26

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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

7.50 7.00 6.50 6.00 5.50 Poland 5.00 European Union 4.50 (27 countries) 4.00 3.50 3.00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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

Benefit and Cost of Euro Implementation in Poland Page 44 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.

Benefit and Cost of Euro Implementation in Poland Page 45

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

Benefit and Cost of Euro Implementation in Poland Page 46 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

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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

Benefit and Cost of Euro Implementation in Poland Page 48 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

Benefit and Cost of Euro Implementation in Poland Page 49 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.

Benefit and Cost of Euro Implementation in Poland Page 50

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.

Benefit and Cost of Euro Implementation in Poland Page 51

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.

Benefit and Cost of Euro Implementation in Poland Page 52

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:

Benefit and Cost of Euro Implementation in Poland Page 53

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

Benefit and Cost of Euro Implementation in Poland Page 54

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

Benefit and Cost of Euro Implementation in Poland Page 55

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