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Anne W McNeill  10/19/2006 03:34:38 PM  From  DB/Inbox:  Search Results

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UNCLAS        WARSAW 01529

SIPDIS
CXWARSAW:
    ACTION: ECON
    INFO:   POL ADM MGT ORA FCS DCM AMB PAS

DISSEMINATION: ECOX
CHARGE: PROG

APPROVED: ECON:LGRIESMER
DRAFTED: ECON:MSKWARCZEK/AJAR
CLEARED: ECON:NONE

VZCZCWRI803
PP RUEHC RUCNMEM RUEATRS RUCPDOC RUEHKW
DE RUEHWR #1529/01 2081159
ZNR UUUUU ZZH
P 271159Z JUL 06
FM AMEMBASSY WARSAW
TO RUEHC/SECSTATE WASHDC PRIORITY 1468
INFO RUCNMEM/EU MEMBER STATES  PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY
RUEHKW/AMCONSUL KRAKOW PRIORITY 1216

UNCLAS SECTION 01 OF 03 WARSAW 001529 
 
SIPDIS 
 
Sensitive 
 
STATE FOR EUR/NCE DAVID KOSTELANCIK AND MICHAEL SESSUMS 
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS, MWILSON, JKIMBALL 
TREASURY FOR OASIA MATTHEW GAERTNER 
FRANKFURT FOR TREASURY JIM WALLAR 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL PL
SUBJECT: POLAND'S EURO ADOPTION A DISTANT PROSPECT 
 
This cable is sensitive, but unclassified, and NOT for Internet 
distribution. 
 
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SUMMARY 
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¶1. (SBU)  Begin Summary.  Poland has not yet set a target date for 
Eurozone entry even though it must eventually adopt the Euro.  The 
Euro convergence issue, however, is being actively debated among 
economists and politicians in Poland.  Bankers, as expected, support 
fast Euro adoption, while most GOP representatives prefer to take 
time and do their homework in order to fulfill the Maastricht 
criteria and prepare the legislative framework.  Newly confirmed 
Prime Minister Jaroslaw Kaczinski did not discuss Euro adoption 
while outlining his priorities.  In light of the current political 
situation, a realistic date for Euro convergence in Poland is 2012 
at the earliest.  (End Summary). 
 
---------------------- 
Background information 
---------------------- 
 
¶2. (U)  Poland, in ratifying the EU Accession Treaty, committed 
itself to eventually becoming a full member of the EMU (European 
Monetery Union) and adopting the Euro.  While the other EU-10 
countries have set target dates for meeting the necessary economic 
provisions, Poland does not have a set timeline or plan for Eurozone 
entry.  Recently appointed Minister of Finance Stanislaw Kluza 
stated that he expects Poland will fulfill the Maastricht criteria 
by 2009 and begin discussions on Euro adoption.  He recently stated 
that "Giving a date neither speeds up nor slows down the date for 
entering the Eurozone - however, a missed target date, like in the 
case of Hungary, can undermine confidence in the economic policy of 
a country." 
 
¶3. (U)  While adopting the Euro has advantages and disadvantages, 
studies done by Polish authorities including the National Bank of 
Poland and the Finance Ministry, and international organizations 
suggest that Poland would gain substantially from joining the 
Eurozone.  Some economists argue that now, while the economy is 
growing at an annual rate of nearly five percent, is the best time 
to join.  Others believe that it is necessary to further develop and 
stabilize the economy before moving forward with the Euro.  There is 
consensus, however, that as long as there is no GOP commitment to 
enter the Eurozone at a pre-determined date, there will be no 
motivation or pressure on the government to take the steps necessary 
to fulfill the Maastricht criteria.  Public support for Euro 
adoption is slowly increasing, but many Poles are afraid of the 
potential for abuse and cheating on prices during the changeover. 
 
 
--------------------------------------------- ---- 
Poland is close to meeting the Maastricht Criteria 
--------------------------------------------- ---- 
 
¶4. (U)  Poland is close to meeting all of the Maastricht criteria, 
including inflation rate, long-term interest rates, fiscal deficit, 
public debt and exchange rate stability.  For instance, Poland has 
been meeting the inflation standard since early 2003, with a short 
break caused by the price adjustment related to EU accession in 
¶2004.  This criterion requires that inflation be no more than 1.5 
percentage points higher than the average of three EU member states 
with lowest inflation, or approximately 2.7% at present.  Poland's 
inflation rate of 1.4% is significantly below the standard. 
 
¶5. (U)  The interest rate criterion states that long term interest 
rates, or rates of return on 10-year bonds, cannot be more than two 
percentage points higher than the average long term interest rates 
of the three EU member countries with the lowest inflation rates. 
Poland's long term interest rates are currently at 5.0%, below the 
5.9% limit as determined by the standard. 
 
¶6. (U)  Strict fiscal rules contained in the Polish constitution 
guarantee fulfillment of the debt criterion, even though debt levels 
have been rising (41.9 % in 2004 and 42.5% in 2005).  What will be 
most difficult to realize is the 3 percent limit on the general 
government deficit.  In 2005, abnormally strong budget revenues 
allowed the criterion to be met (2.9%).  The Ministry of Finance, in 
its updated Convergence Program 2006-2008 published in January 2006, 
confirmed that it expects a steady reduction of fiscal deficits in 
the upcoming years.  The update assumes continued special treatment 
of Open Pension Funds when calculating the deficit.  In 1999, Poland 
created open pension funds and placed them in the private sector, 
making Poland's long run fiscal position better than that of some 
existing members of the Eurozone, but inflated the budget deficit in 
the short run.  Without continued special treatment of the funds, 
the government deficit will exceed 3 percent of GDP. 
 
--------------------------------------------- - 
Poland Vis a Vis Other Visegrad (V4) Countries 
--------------------------------------------- - 
 
¶7. (U)  Poland's current status in fulfilling the Maastricht 
Criteria is often compared to that of the other three Visegrad 
countries: the Czech Republic, Slovakia and Hungary.  While none of 
the V4 countries have met all of the Maastricht criteria, Poland is 
behind the rest in its planning for currency convergence.  Slovakia 
was admitted into the ERM II in November 2005, while Hungry is the 
V4 country that has met the fewest of the Maastricht criteria at the 
present time.  Nonetheless, all of the EU-10 nations with the 
exception of Poland have set target dates for Euro adoption. 
 
--------------------------------- 
CASE-BRE Euro Convergence Seminar 
--------------------------------- 
 
¶8. (U)  A Euro convergence seminar sponsored by the Center for 
Social and Economic Studies (CASE) and BRE bank was recently held in 
Warsaw.  Panelists included Jaroslaw Pietras, Secretary of State in 
the Ministry of Finance, Jerzy Pruski, First Deputy President of the 
National Bank of Poland and Maciej Krzak, the chief economist of 
commercial bank Societe Generale.  Since Poland is expected to 
eventually join the Eurozone, the panelists' presentations and the 
discussion that followed revolved around when the Euro should be 
adopted rather than if.  Although each panelist offered a different 
perspective on the issue, Pruski and Krzak generally agreed that 
more timely Eurozone entry would be better for Poland's continued 
economic development while GOP representative Pietras voiced several 
legislative obstacles and potential drawbacks to rapid entry. 
 
¶9. (U)  All participants agreed that Poland could potentially 
benefit by becoming a full member of the EMU, but stressed the 
importance of choosing the right moment for entering to maximize the 
benefits.  They argued that if Poland used the Euro, businesses will 
be more willing to trade and to carry out transactions in Poland due 
to lower costs, thereby increasing efficiency.  There is also 
evidence that joining the Eurozone will increase foreign direct 
investment.  Most importantly, Polish investors will gain better 
access to Euro capital markets and benefit from the increased 
transparency of the financial system. 
 
--------------------------------------------- ---- 
Three Points of View: Central Bank, Commercial Bank and GOP 
--------------------------------------------- ---- 
 
¶10. (U)  Jerzy Pruski offered the Polish National Bank perspective 
that Poland should strive to adopt the Euro as quickly as possible. 
He pointed out that international trade would increase as a result 
of Eurozone entry, which would boost economic growth and 
development.  In addition, any potential adverse effects to Poland's 
economy would be small due to its high level of integration with the 
rest of the EU.  Pruski believes that Poland should attempt to begin 
its participation in the ERM II soon, in order to take advantage of 
the current favorable macroeconomic situation.  He argues that 
Poland is experiencing the best configuration of macroeconomic 
parameters since 1998: GDP is at its potential, inflation is low, 
the current account deficit is at its historically lowest level, and 
there is external, and to a great extent, internal equilibrium. 
Pruski is convinced that postponing the decision on the Euro means 
wasting an opportunity that may not reappear. 
 
¶11. (U)  Maciej Krzak from Societe Generale also argued for quick 
adherence to the Maastricht criteria and timely entry into the 
monetary union.  He emphasized that Poland should adopt the Euro at 
approximately the same time as its neighbors -- particularly the 
other three V4 countries.  Krzak saw this aspect of timing to be the 
most crucial in terms of keeping Poland competitive and low-risk in 
the eyes of investors.  He argued that if other V4 countries adopt 
the Euro first, outside businesses and investors may choose to go 
there instead of Poland, taking economic development with them. 
 
¶12. (U)  Jaroslaw Pietras of the Finance Ministry maintained that 
Poland is not yet ready for Euro convergence.  He pointed out the 
need to align legislation related to monetary and exchange-rate 
management, including a change in the constitution.  He also 
mentioned drawbacks to entry into the EMU such as the loss of 
control over monetary policy and possible higher levels of 
inflation.  He enumerated the nation's priorities as economic growth 
and social solidarity.  While the Finance Ministry recognizes 
potential benefits of the common currency, Pietras stated that Euro 
adoption is a major technical and logistical challenge affecting all 
sectors of society and hence requires a well designed plan and sound 
institutional backing.  He also pointed out that non-Euro zone 
economies currently are experiencing a faster rate of growth than 
the EMU member states, a fact Poland - which is still catching up to 
the EU-15 - cannot afford to disregard.  Nonetheless, he stated that 
the government hopes to meet the convergence criteria during the 
current Parliament's term (which ends in 2009) and that a 
convergence timeline will most likely be established when the 
criteria are met. 
 
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Comment 
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¶13. (SBU)  When the ruling Law and Justice party won the 2005 
parliamentary elections, it declared that Euro adoption was not a 
priority.  PiS politicians continue to maintain this position and it 
is our opinion that the decision on targeting a date for Eurozone 
entry is unlikely to be made before the next parliamentary elections 
in 2009.  Thus, the earliest date for Polish Euro adoption would be 
¶2012.  The divergence of views on Euro adoption in Poland polarizes 
both economists and politicians.  Even within institutions that 
support Euro adoption, such as the National Bank, there are credible 
voices that are opposed to the move.  While most economists agree 
that Euro adoption will eventually benefit the economy, most 
politicians and the public will need to be convinced.  Until a 
target date is set, it is unlikely that the Ministry of Finance will 
take the necessary political and legislative steps to allow Euro 
adoption.  Thus, Polish Euro convergence policy, like most other 
economic policy, will continue to drift 
 
HILLAS