Poland and the Eurozone

Two main objections are raised against the euro. The first is expressed in a popular statement: ‘One monetary policy can’t fit all’, which implies that countries, especially larger ones, should have their own currencies, and — as a result — floating rates of exchange. The second objection is contained in another popular saying: ‘Monetary union requires fiscal (political) union’. I will discuss these two objections and present my own view as to what are the main weaknesses of the euro architecture in its present form and what should be done to improve it.

The formation of a common currency area is usually expected to generate at least seven gross benefits for its members. First, a reduction of transaction costs, such as the cumulative cost of converting one currency into another (and then another). Second, an increase in competition as a result of greater transparency and comparability of prices once they are all expressed in a common currency. Third, a reduction of the rate of inflation, if the management of the common currency is subjected to greater discipline by an independent central bank targeting low inflation. Fourth, the elimination of exchange rate risk in transactions among member countries within the common currency area. Fifth, a lower interest rate associated with lower inflation and the elimination of exchange rate risk. Sixth, in addition to all these factors, trade integration within the area, the promotion of greater foreign investment, given investors’ ability to repatriate profits freely in the same currency in which they are earned. Seventh, benefits of greater financial integration, which would provide among other things a form of implicit insurance against asymmetric shocks.

The prescriptions for dealing with the crisis in the eurozone are as varied as the analyses of the causes of the present crisis. A neoliberal might find government policy at fault, believing that economies are self-righting and policy only disrupts the process of returning to equilibrium. That world view would prescribe neoliberal policies to cure the crisis: the state should consolidate the fiscal position and then retire gracefully from the economic scene. I am deeply sceptical of that position. I do not expect economies to return to equilibrium or indeed ever to occupy a position of endogenous stability that is sustained until disrupted by some outside force. My evidence is the booms and busts of economic history and the failure of the neoliberal experiment, which gave us lower growth rates throughout the neoliberal era (1970s to the crisis) and culminated in the worst financial crisis in history.

The recent experience in the European Monetary Union (EMU) with the debt crisis and its repercussions has revealed the fragility of the common currency area. Some argue that countries like Greece and Portugal should not have joined in the first place as their economies where not aligned with the European economies. Thus, one aspect of the debate on monetary union centres on the readiness of a country to join the EMU. One criterion that many bring forward as an indication of this readiness is the business cycle synchronisation between the country and the EU-wide cycle.

In the current monetary regime, which has been practised since the breakdown of the BrettonWoods system in 1971, there is no explicit coordination rule for economic policies on an international scale. In particular, central banks are not committed to stabilising exchange rates of their currencies. Whenever imbalances occur in international trade and international movements of capital, these should be contained by adjustments of market exchange rates. Nonetheless, an increasing concern has evolved in recent years regarding the growth of external imbalances that have been disclosed in the current accounts. In several G20 summits proposals came on the agenda to limit current account imbalances in relation to GDP. The background to those attempts at implementing an international coordination rule was the experience that high and lasting deficits in the current account of a country may work as an accelerator in the event of a financial crisis.

The carry trade is the attempt to take advantage of deviations from uncovered interest parity (UIP). UIP asserts that, given the free flow of capital, the expected change in an exchange rate over a specific period should be equal to the interest rate differential for the two currencies for the same period. If this is not the case, there is an opportunity to make an abnormal return, using the carry trade, by borrowing a low interest-rate currency and investing the proceeds in one where rates are relatively high. A large body of evidence suggests that UIP does not hold.

Poland weathered the global crisis that started in the summer of 2007 remarkably well. Contrary to many other countries, both European and non-European, developed and emerging, she has not suffered from recession, even in the most difficult growth period, 2008–2009. Because of the country’s economic success the Polish government (followed by some local media) labelled her a ‘green island’ (as opposed to a red-coloured sea, symbolising European countries in recession).

Competition between banks is a subject of interest for bank management, financial markets, bank regulators and academics. This interest is driven by increasing consolidation within the banking sector, changes in production technology and regulation. And the recent financial crisis reignited the interests of policymakers and academics in assessing bank competition, as increases in competition and financial innovation within the markets contributed to the turmoil.

Entrepreneurship was one of the areas of social life that underwent the most dramatic change during the period of political and economic transition in Poland. Some early changes were introduced to the law and regulations concerning private ownership of the businesses even in the mid-1980s, but the real burst of entrepreneurial activity took place in the early 1990s. During last two decades business venturing in Poland had its ups and downs, so the question is: where is it now? How does it compare to other countries? What was the dynamics of entrepreneurial activity in the last couple of years? And what are the conditions for entrepreneurship in Poland? To answer those questions I am going to use various secondary statistical data. The most reliable data comes from the government statistical office, however, it shows only the basic information like the number of start-ups, number of discontinued businesses, industry and the place of start-up. What I am interested in is an in-depth view into attitudes and aspirations of entrepreneurs and not just the raw number of start-ups. The purpose of this chapter is to show the landscape of entrepreneurship in Poland. I argue that to fully achieve that the best way is to use the data that comes from Global Entrepreneurship Monitor (GEM). It captures the additional information on the motivation for start-up, age, gender, level of education and other statistics of the entrepreneur.