By Michael Winfrey
Economics Correspondent, Central Europe and the Balkans
PRAGUE, Sept 19 (Reuters) - Poland's plan to qualify for the
euro zone by 2011 is a one-way bet for investors that will boost
the country's competitiveness over the long term even if some
euro zone diplomats fear it should wait longer.
Poland's centre-right government will have to buckle down to
lock in the low inflation and fiscal reforms that analysts say
it needs to hold to euro zone conditions. It also faces a battle
to win support from the public and euro-sceptic opposition.
If the largest ex-communist European Union state joins the
ERM-2 ante-chamber by next year as planned, it will probably see
strong currency appreciation before euro entry, likely in 2012.
This would pinch exports, but better allow Poland to compete
and lure foreign investors over the long term than if it waits.
"You end up locking it in at a more competitive rate than
what would have been the case if you had stayed out," said Koon
Chow, an FX strategist at Barclay's Capital Markets.
The earlier Poland joins, the sooner it can profit from a
euro effect economists say could add half a percentage point of
growth to gross domestic product, up 5.8 percent last quarter.
That's what is expected to happen in Slovakia, due to become
the euro zone's 16th member on Jan. 1.
Although its crown has jumped 24.5 percent against the
common currency since Slovakia joined the EU in 2004 -- causing
Bratislava to revalue its ERM-2 central parity to the euro twice
-- investors still see it as a bargain.
Having now fixed the crown at 30.126 per euro, the only way
Slovaks can converge with EU price and income levels is through
inflation and salary growth -- factors possible to manage with
fiscal and wage policies.
Compare that to the Czechs, whose government rejected calls
this month from industry for a euro adoption date, preferably
2012. A Reuters poll <EMUPOLL30> sees 2013 as the likely date,
although many analysts say it could be later.
The strategy of more gradual convergence may let Prague keep
inflation low, but its firming currency, up 26 percent since EU
entry, has hit producers crucial to its export-heavy economy,
and a survey showed last week the strong crown was forcing
nearly 30 percent of firms to cut jobs and mull moving abroad.
BOON FOR INVESTORS
In the ERM-2 regime, the Poles will be forced to prevent the
zloty from weakening 2.25 percent against the euro peg at any
time. And with higher than euro zone interest rates, Polish
bonds that will eventually be euro debt will be attractive.
"People can buy Polish bonds like there's no tomorrow
because the Poles will have to cut rates (once they converge)
and you get into a virtuous cycle for the bond markets and FX
markets," said Lucy Bethell, currency strategist with RBS.
"Unless you think they're going to walk away from the
project... the currency and debt becomes a one-way bet."
But more politically difficult reforms are necessary for
Poland to stick to euro zone criteria and catch up with richer
EU states. It has 55 percent of the bloc's average GDP in
purchasing power standards per capita, versus 71 percent and 83
percent for the Slovaks and Czechs respectively.
And a pegged currency will rob Warsaw of a tool to control
inflation, hitting Poles in the wallet -- which could prompt
interest rate hikes in the near term to tackle price growth.
"The commitment to a Euro accession plan will certainly add
a hawkish bias," said Simon Qijano-Evans, emerging markets
analyst at Cheuvreux, a division of Credit Agricole.
"But on a multi-year horizon, the added convergence dynamics
should outweigh the short-term hardships."
Those may become factors in Prime Minister Donald Tusk's
efforts to change the constitution to allow euro adoption -- a
task that will require him to cooperate with the leftist
opposition or potentially call a referendum in a struggle that
may prompt early elections []
EURO ZONE CONCERNS
The cases of euro zone members Ireland and Spain may provide
some insight. They raced ahead last and much of this decade
before crashing to a stop this year due to asset bubbles.
European Central Bank and European Commission officials will
use Slovakia as a test case but it is hard to compare
export-driven Slovakia, with a population of 5.3 million, with
Poland's 38 million -- the biggest economy to join the zone
since Spain.
Diplomats highlight concerns that Poland may import
inflation into the euro zone, may be politically unstable and
that the entry of such a large country may really shift the
balance of power at the ECB's Governing Council.
Despite having fixed its currency to the euro, Bulgaria has
not joined the ERM-2 although it planned to soon after 2007 EU
entry, because many in the euro zone think it is not ready.
"When a country joins the ERM-2, there is later no way of
preventing it from adopting the euro if it meets all criteria,"
said a diplomat involved with debates on monetary issues.
Diplomats and officials say Poland would need excellent
cooperation between the government and the central bank -- a
link called into question when central bank Governor Slawomir
Skrzypek said he had not been consulted on the entry date.
A final concern from analysts is that global economic
slowdown could threaten growth as Poland keeps tight interest
rates to fight inflation, which could hit public sentiment.
"Someone once told me 'Don't worry about the countries
before they go in, worry about what they do afterwards'. They
won't have the same type of incentive to stick to the same type
of policies," Bethell said.
(Additional reporting by Marcin Grajewski in Brussels and
Gareth Jones in Warsaw)
