Trading and Currency Blocks

¶ … prospective members of the European Union Specified by the Nice conference, Poland bears the distinction of both having the largest population at 38.6 million, and the largest GDP at 176 billion. From 1997 through 2001, the Polish economy has grown at a steady 4.1% a year and is in many ways beginning to resemble its new western partners rather than its still-troubled eastern neighbors. (Economist, Jul. 29, 2002) Despite this, Poland differs from the traditional continental powers in several distinct ways. Perhaps most unique is the Republic's relationship with the United States.

It may surprise those that know little of Polish history that the republic owes its existence to the United States. In 1918, the country was re-established by the treaty of Versailles after 123 years of Prussian and Russian control of the region. This was achieved primarily in light of the lobbying activities of the Polish emigre population living in the United States.

Although Poland re-gained nominal independence following the end of the Second World War, the country was never strongly communist and many saw the ideology as a re-attempt by Russia to maintain dominance in the region. It should, therefore, not be surprising that the opinion held by many Poles of the United States remains strongly positive despite the presumed inevitability of integration with the European Union. The latter often defines itself in terms of differences with the United States over policies ranging from war in Iraq to Genetically Modified Food.

Like the other countries of Eastern Europe specified by the Nice conference, Poland is slated for full EU membership in May of 2004. This should be seen as an immense success and a sign of Poland's dedication to free market principles. According to the Economist, "The contribution of the private sector to GDP (gross value added) rose from around 18% in 1989 to 39% in 1995 and 70% in 1999, even though the privatisation of the manufacturing sector proceeded relatively slowly. Private-sector non-agricultural employment rose from 14% of the labour force in 1989 to 61% in 1999." (Economist, Nov.

19, 2001) Despite these achievements, Poland still has a strong "gray" economy, what Hernando De Sota refers to as the "Informal Economy" in "The Mystery of capital. An opinion pole taken last November revealed a resurgeance in nationalistic sentiments: 87% of Poles preferred Poland's largest firms to remain in state hands. Adoption of the Euro is obligatory for the Union's new members. Following the Copenhagen round of enlargement talks, Poland confirmed this in a national referrendum. This has had an ameliorative effect on inflation and debt markets.

According to the Economist, "Poland, a sufferer from hyper-inflation in 1990, still had double-digit inflation in 2000. Yet in the year to December consumer prices rose by only 0.8%." However, Poland has jeopardized this union with deficit spending above the Union's prescribed limits. Debt markets have suffered recent downgrades by Moody's and S&P. (Economist, Jan. 25, 2003) Although Poland will join the EU in 2004, Euro-integration will only take place when the Republic has taken certain efforts to guarantee economic stability.

Poland's government believes the country to be ready to join the euro by 2006 or 2007. Despite this, Poland's finance minister, Grzegorz Kolodko, has presented the Union with proposals to loosen rules dictating strict fiscal policies. His proposal reflects a British plan to make deficit constraints apply to the entire Union rather than to each country in the EU individually. However, this is thought by many Euro-MPs to be counter-intuitive in that it taxes economically robust countries by requiring them to bear the burden of fiscal weaknesses that plague the newer democracies.

Mr. Kolodko is quoted as saying "the EU should think about Italy or Belgium's public debts-not to speak of their levels on the eve of EU and [euro-zone] accession." Many European economists think poorly of Poland's attempt to change the rules for its own benefit; they argue that Poland's deficit reflects its slow-paced adoption of reforms designed to reduce the influence and bulk of the state sector. Despite this, most analysts already see convergence as inevitable and believe Poland will suffer little more than censure. (Economist, Feb.

27, 2003) According to the Economist, this feeling of inevitability may be in itself what is retarding Euro-inclusion. "Most analysts doubt that Central Europe's biggest countries -- Poland, Hungary and the Czech Republic -- have a chance of meeting the 3% deficit limit by 2007. Having secured their places in the EU, these governments may be even more inclined to let budgets and borrowing rip, delaying euro entry as late as 2010." (Economist, December 5, 02) The countries of Eastern Europe can be seen in two categories.

One category, exemplified by Ukraine and Russia during the 90's, is characterized by closed currency regimes and hyperinflation. In such countries, the dollar and Euro are used as a back-up currency and most of the people who have savings keep their savings in dollar accounts overseas. Russia still maintains the largest dollar economy.