With the European Union excessive deficit procedure for Poland coming to an end, RSM Poland managing partner Bartosz Milaszewski looks at the next step for the Polish economy.
By the end of 2015, Poland should have exited the EU’s excessive deficit programme after dragging its deficit back into line. Its GDP growth is still stellar in European terms, and its external debt is slowly inching down. So far, so good for a mature European economy. Yet the question of when it completely throws its economic hat into the EU arena by adopting the shared currency continues to linger. The public are unconvinced, and politicians bicker about the benefits and drawbacks. Is the holdup justified?
In June 2015 European Commission decided to suspend the excessive deficit program implemented in Poland. According to current forecasts, the deficit of public sector in 2015 will stay below 3% of GDP. Moreover, this tendency will continue in next years. Having a healthy public budget and fast growing economy Poland is seen more often as a very important part of EU.
Taking the above into account, it is hard to avoid the question on introducing Euro in Poland. Do we have now favorable economic and political environment to decide on such a significant change?
Unfortunately while economy remains stable and growing, the political conditions are not supporting the whole idea. The governing party is losing in the polls against opposition and that is why it is mainly focused on future parliamentary elections scheduled for autumn. The main opposition party does not approve of the introduction of Euro. They see own currency as a guarantee of independence. Probable rise in prices is used as an argument against Euro. Some politicians also point to Greece as an example of country with lots of economic trouble caused by the common currency.
Unfortunately, following the public debate, espousal of Euro has collapsed dramatically. It was highest in 2002, before Poland joined UE (majority of respondents were keen to vote "yes"), but since then the support for Euro has been systematically going down. Nowadays, only 25% of people in Poland want Euro instead of Zloty but 70% are against the idea. Therefore, in the nearest future Polish authorities, for sure, will not take any significant actions towards the implementation of Euro.
A need for entrepreneurialism
Poland has done well from the EU’s purse, and its companies and citizens have grown significantly richer since joining the bloc in 2004. But closing the gap with the likes of Spain and Italy will need a step change, and a greater focus on innovation and entrepreneurialism. That risk-taking culture, and the finance to fund it, still lags. Getting the country’s biggest companies to start investing in new ideas would be a great way to show it is serious. It shouldn’t be too hard either, the government controls most of their balance sheets.
Lots of people involved in economic issues strongly point out the meaning of innovations. They agree that Polish entrepreneurs are not able to increase their competitiveness basing only on cost advantage. The transition times enabled access to lots of resources misused earlier, but this great benefit seen in resource exploitation has already been exhausted.
It is quite obvious that Polish entrepreneurs have to manufacture high quality and unique products. Focusing solely on mass and low cost production won’t let the society achieve the level of wealth observed in the most developed countries. The question is: who will lead the process and is able to introduce required changes?
The biggest Polish companies with a substantial stake of state in capital seem not to be particularly interested in being very innovative. The privatization process, constantly ran in Poland, has limited number of companies with high influence of government. Most of them can be divided into two groups: big companies with huge market share operating in one of the strategic sectors and quite small companies struggling to survive on the market. The second group is designed to be sold to external investors. The companies from the first group are under strong political pressure. Protection of state strategic dealings is one of their crucial objectives.
Polish private small, medium and large companies are a group with the highest potential in developing and applying innovations. Their rising awareness and desire to succeed are the best motivation for development. Many owners and managers of Polish companies have worked in foreign companies before, which has been a great opportunity to learn how to create and run business on competitive international market.
Strenghtening the locla capital market
Poland’s jolt from the Swiss Franc this spring was a reminder that relying on external financing for mortgages is not always a good idea. It is no different for other industries – even though some, like the real estate market, have got very rich thanks to huge inflows from the US and Europe. The danger is that cash can quickly leave again. Developing local, robust capital markets is the only solution.
Poland had to face jolts caused by the changes in currency rates. The first one took place in 2008 during the world financial crisis. Before that time, Polish Zloty experienced huge overvaluation and a lot of Polish companies suffered from squeezing margins from export of goods. To protect from this risk many of them decided to sign derivative contracts with commercial banks. Unfortunately, as a result of the crisis EUR/PLN exchange rate went north and companies had to face enormous losses.
The second hard situation affected individuals with mortgages taken out in Swiss Francs. Such mortgages were very popular few years ago, due to very low interest rates in Switzerland. From that time Swiss Franc has been systematically gaining in value and lots of properties have been valued below the value of the loan financing purchase. It is a problem when we are talking about securing the mortgage and the capital to be paid off. But thanks to the decreasing Swiss interest rates, looking at budgets of individuals, not much changed. Monthly payments remain at quite stable level.
Both cases are an outcome of insufficient knowledge and gullibility of consumers and entrepreneurs and the blind pursuit of profit practiced by banks and financial brokers. But it has been also a great lesson for the future, on how tricky financial products based on currency exchange rate can be.
Is Poland now less receptive for this kind of threat or should we look for assistance on local capital market? I think the acquired experience makes our country safer. It should result in more reasonable decisions. Local capital market is a very important part of healthy economy and it should be supported anyway. But in case of Poland it won’t be able to sustain rapid development without capital coming from international markets. Government bonds issued in Euro or US dollars deliver not only cheap financing but also confirm credibility of the country. Of course these liabilities should be kept at a reasonable level.