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Determinants and implications of the Eurozone enlargement


Abstract and Figures

Aside from the United Kingdom, which is withdrawing from the European Union, only Denmark has the option of staying outside the single European currency area. All other member states which have not adopted euro as their currency have the right and obligations to do so under the Treaty of Accession. The condition to join the Eurozone is to meet all five nominal Maastricht convergence criteria and to ensure compliance of national legislation with acquis communautaire, or the EU legal order. What poses special difficulties to candidate countries is the fiscal criterion relating to the maximum allowed budget deficit. If it's not met, the European Commission launches the Excessive Deficit Procedure, EDP. Currently, this procedure is in place for France, Spain and the United Kingdom. In 2015, EDP for Poland was lifted, but there is no certainty it won't be imposed again at the end of the decade due to the risk of exceeding once more the threshold of public sector deficit, which stands at 3 percent GDP. It is to be expected that in the 2020s the European Monetary Union will be joined by all the countries that are still using their national currencies, including Denmark, and that the EU will be extended to include new member states, enlarging the euro area, too. Although the issue is not absolutely certain, it needs to be assumed that euro will overcome the present difficulties and come out stronger, though the economically unjustified euroskepticism of some countries, especially Poland, is not helping. © 2018 Russian Presidental Academy of National Economy and Public Administration. All rights reserved.
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Acta Oeconomica, Vol. 68 (4), pp. 477–498 (2018)
DOI: 10.1556/032.2018.68.4.1
Grzegorz W. KOLODKO – Marta POSTULA
(Received: 27 April 2018; revision received:10 June 2018;
accepted:3 July 2018)
To join the Eurozone (EZ), a candidate country has to ful l ve nominal Maastricht convergence
criteria and ensure compliance of national legislation with the acquis communautaire. With this
regard special dif culties pose the scal criterion relating to the maximum allowed budget de cit
of 3 per cent of GDP. If it is not met, the European Commission launches the Excessive De cit
Procedure. Currently, such formula applies to France, Spain and the United Kingdom. Although the
issue is not absolutely certain, one can assume that euro will weather the present dif culties and
will come out stronger, though the economically unjusti ed Euro scepticism of some countries is
not helping. It may be expected that in the 2020s the European Monetary Union will be joined by
all countries that are still using their national currencies and that the EU will be extended to include
new member states, enlarging the euro area further. In this article authors are discussing the issue
whether Poland will join the EZ in the coming years, considering the challenges of meeting all
Maastricht criteria, on the one hand, and the reluctance of the government to give up the national
currency, on the other. A mixed method combining the results of qualitative and quantitative re-
search has been used to empirically verify the research question presented.
Keywords: integration, euro convergence, Maastricht criteria, excessive de cit procedure, public
JEL classi cation indices: E44, E63, F02, F45, G01, G18, P34, P52
Grzegorz W. Kolodko, corresponding author. Director of Transformation, Integration and Global-
ization Economic Research (TIGER), Kozminski University, Warsaw, Poland.
Marta Postula, Associate Professor and Chair of the Center of Entrepreneurship at the Faculty of
Management, Warsaw University, Poland. E-mail:
Acta Oeconomica 68 (2018)
The issue of the euro is not just an internal affair of the Euroland or, more broadly
speaking, of the European Union (EU) as a whole, but also an international or
even a global problem, because it is the currency in which ca. 20% of all foreign
exchange reserves are held. Globally, it is the second reserve currency after the
US dollar (ca. 63.5%). According to the International Monetary Fund’s data, total
reserves amount to ca. USD 11.3 trillion1, of which we know the currency com-
position for the equivalent is of 9.65 trillion. These are the so-called allocated
reserves, and the rest, 1.65 trillion, are unallocated reserves.2
It is understandable that in the foreseeable future, despite all the troubles it got
itself into (Prasad 2014), the dollar will keep playing the leading role in global
economic relations, not only as reserve money but also as the principal means of
payment in international transactions and the major measure of value of goods in
the global market. However, with time it will have to give some ground to other
currencies, including the Chinese renminbi (Kolodko 2018). As regards the euro,
though only one fifth of those reserves are kept in it, surely its fate will have a
more-than-proportionate impact on the global economy’s stability, despite the
fact that the euro’s share of all countries’ aggregate reserves has declined by over
seven percentage points since 2009.3
This downward trend can be expected to reverse, though it depends on a
number of factors, especially those related to economy but also to politics. It is
beyond any doubt, however, that both the overall condition of the EU’s single
currency area and the euro’s international status as one of the world’s reserve cur-
rencies will be significantly affected by the changes in the methods of Eurozone
(EZ) regulation and supervision as well as by the enlarging area of its circulation.
This process also has its complex political, social, economic and technical deter-
minants. The most difficult problems, hence the most important ones, are those
involved in fiscal determinants of convergence with the EZ of the economies that
are now outside the single currency area.
1 As of the end of the 3rd quarter of 2017 (exclusive of monetary gold).
2 Slightly over 4.5% of the former are denominated in the Japanese yen, 4.5% in British pound
sterling, 2% in Canadian dollar, 1.1% in Chinese renminbi, and only 0.16% in Swiss franc.
The remaining 2.4% are reserves in other currencies, e.g. Australian, New Zealand, Singapo-
rean and Hong Kong dollars, Korean won, South African rand and Saudi riyal.
3 In 2009, euro represented 27.7% of global reserves, and USD 62.0% (IMF 2014, Appendix I,
International Reserves: 2).
Acta Oeconomica 68 (2018)
The euro is in circulation in 19 out of 28 EU member states. In 11 of them –
in Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, the
Netherlands, Portugal, and Spain – it has been so since the clearing system was
established in 1999 and was put in circulation in 2002, and since 2003 – with
huge problems until today (Galbraith 2016; Kolodko 2016) – in Greece. Then, in
2008, the area was joined by two Mediterranean countries, Cyprus and Malta, and
five post-socialist countries, in the following order: Slovenia in 2007, Slovakia
in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015. The euro is also
in circulation, pursuant to the agreements signed, in four tiny European states: in
Andorra, Monaco, San Marino and Vatican, and de facto also in Liechtenstein, a
fifth one from this category, where it functions side by side with the official Swiss
franc, and based on its unilateral introduction, in Montenegro and Kosovo.
Out of 9 EU member states that are still outside the euro area, only two of
them, Denmark and the United Kingdom, pursuant to the Maastricht treaty opt-
out clause (1993), are not obliged to join the monetary union (MU). All the other
countries, including Sweden, an EU member state since 1995, and five post-so-
cialist countries – Bulgaria, Czech Republic, Hungary, Poland and Romania –
have the right and the duty to join the MU pursuant to their membership treaties.
In line with the treaty, one can expect all of them – of course except the United
Kingdom which is leaving the European Union – to join the EZ, though there is no
telling when that will happen and in what order. One can also conjecture that with
the further enlargement of the MU and the resulting accession of subsequent post-
socialist economies – Bulgaria and Romania most probably being the first ones –
and especially if the problems besetting the Euroland are effectively solved, also
Denmark will adjust its strategy and may give up on its own currency.
The economic integration processes as part of the EU are regulated by a legal
framework, whose main element is the Treaty on the Functioning of the Euro-
pean Union (TFEU)4. In accordance with the treaty provisions, the EU member
states pursue their own economic policy, but, at the same time, some coordination
measures are undertaken at the supranational level. TFEU lays down the basic
policy-making methods and principles for the single economic policy (Postula
2015). These issues are dealt with in Chapter 1 “Economic Policy” of Title VIII
“Economic and Monetary Policy”. The key provisions of this chapter are pro-
vided in Article 121, which speaks of multilateral surveillance and coordination
of economic policies, and Article 126 about avoiding excessive budget deficit. It
4 The consolidated version of the “Treaty on the Functioning of the European Union” can be
found in Official Journal of the European Union, C 83/01 of 30.03.2010.
Acta Oeconomica 68 (2018)
stipulates the form of corrective actions against countries which have too high
public debt or excessive public finance sector deficit. In accordance with Article
140 of TFEU, the European Commission (EC) and the European Central Bank
(ECB) are obliged to make reports, in every two years, on the progress made by
the member states not meeting the requirements to adopt the euro in fulfilling
their obligations regarding the economic achievements and the MU. These are
so-called member states with derogation (Article 139 of TFEU).
The monetary convergence is contingent on meeting five well-known nominal
financial criteria pertaining to inflation, interest rate, budget deficit, public debt
and the exchange rate.
Although the common European currency exists already for almost 20 years,
it is no surprise that the controversies about this bold project still continue. The
furthest going scepticism dares to refer to this endeavour – or a particular issue,
as the upper limit of acceptable fiscal deficit not exceeding a threshold of 3 per
cent of a country’s GDP – as something nonsensical (Pasinetti 1998; de Grauve
2010; Stiglitz 2018). Yet far from perfect, the supporting of economic and politi-
cal integration by applying the common currency does make sense.
An economy aspiring to join the EZ should have a floating exchange rate
mechanism in place and for two years leading up to the conversion, it should be
a member of the European exchange rate mechanism, ERM-2. In this period, the
exchange rate of the domestic currency against the euro may, generally speak-
ing, deviate from the central parity negotiated between the candidate state, the
ECB and the EC in minus or in plus by 15%.5 In practice, when enforcing the
exchange rate stability criterion, a more narrow and asymmetric margin from
+15% to –2.25% is in effect. However, it is not always the case. In particular, two
departures from that rule have been applied in current practices: pegged exchange
rate or revaluation.
With respect to the Baltic states – Estonia, Latvia and then Lithuania – the use
of a pegged exchange rate or currency board arrangement was accepted instead
of a two-year participation in ERM-2 with a floating but stable exchange rate.
For Lithuania, a country which was the last of the current member states to join
the EZ, a wide range of +/– 15% deviations was formally applicable throughout
the entire period of participation in ERM-2, for ten years, from mid-2004 until
entering the EZ in 2015. Without major tensions, Lithuania maintained, in the
two-year reference period, a pegged exchange rate against the euro as used previ-
ously as part of the currency board arrangement and it was at this exchange rate of
3.4528 lits per euro that the national currency was finally converted to the euro.
5 When the Treaty of Maastricht was being adopted, this range was only +/– 2.25%. In 1993, it
was widened to +/– 15%.
Acta Oeconomica 68 (2018)
In the reference period, devaluation is prohibited, but revaluation is accept-
able. That was the case of first Greece and then Slovakia. It was similar with Ire-
land, which has been a member of the EZ since its creation. Over there, with work
productivity growing faster than elsewhere, Irish pound followed a strengthen-
ing trend. This type of appreciation pressure, contrary to short-term currency
strengthening due to speculation, promotes economic equilibrium and is con-
sidered “healthy”. The Irish pound in the period leading up to the conversion to
the euro stood, on average, 4.6% higher than the central rate, with the maximum
deviation approaching 11% (Schadler 2005).6
To join the European MU, one must meet all the criteria in a durable and sus-
tainable manner. They are of importance to the functioning of the single monetary
area as they concern achieving and maintaining a high level of price stability,
stable exchange rate, convergence of long-term interest rates and a stable overall
situation of public finance. There is also a sixth criterion, which requires national
legislation on monetary and fiscal matters to be compatible with the EC law.
More detailed treaty provisions as regards the coordination of economic poli-
cies of the EU member states were formulated in the Stability and Growth Pact
(SGP) passed in 1997, composed of a relevant resolution7 and two regulations of
the European Council8, pursuant to which the EU member states are obliged to
have a sound public finance and meet both fiscal criteria. From the perspective
of budgetary policy, the fiscal criterion referred to as the avoidance of excessive
deficit is of key importance. SGP, expanding on the treaty provisions regarding
the avoidance of excessive deficit, introduced the duty to prepare a medium-term
convergence and stability plan indicating the medium-term budgetary target9.
Every year in April, the EZ member states submit their stability programs with
the EC and the European Council, and non-member states submit their conver-
gence programs. These programs must contain relevant information on the state’s
medium-term budgetary target and explanation of the intended way to achieve it
(Postula 2012). Moreover, the states must present an analysis and evaluation of
the results of economic changes affecting the state’s fiscal position.
6 Poland has had a floating exchange rate mechanism in place since 2000, but is not part of the
7 Resolution of the European Council (EC) of 17 June 1997 on the Growth and Stability Pact,
Official Journal C 236 of 2.8.1997, p. 1.
8 Council Regulation (EC) no. 1466/97/EC of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies, Of-
ficial Journal L 209 of 2.8.1997, p. 1 and Council Regulation (EC) no. 1467/97 of 7 July 1997
on speeding up and clarifying the implementation of the excessive deficit procedure, Official
Journal L 209 of 2.8.1997, p. 6.
9 Declaration of 16 December 1996 and European Council Regulations of 16 June 1997.
Acta Oeconomica 68 (2018)
The implementation of both stability and convergence programs is monitored by
the EC. Based on its recommendations, the European Council launches the exces-
sive deficit procedure (EDP), if the criteria are not met. The procedure imposes a
duty on the state to present the planned corrective actions to improve the condi-
tion of public finance. If none are implemented or those in place are inadequate,
various kinds of sanctions may be imposed. These refer to the EZ member states
to a greater extent, but there are also possibilities to apply them to the EU member
states that are still outside the single currency area.
The insufficient effectiveness of SGP made it necessary to significantly modify
it (Schick 2010; Schaechter et al. 2012). The so-called six-pack was used to that
end10, which was aimed to ensure more effective budgetary and public debt con-
trol. The legislative changes to the principles of fiscal policy that were introduced
as a part of it (Marneffe et al. 2011) were confirmed and specified in the Treaty
on Stability, Coordination and Governance in the Economic and MU (known as
the fiscal compact). In particular:
 The existing fiscal criterion regarding the deficit limit and public debt limit
was developed (3% of GDP and 60% of GDP, respectively).
 A duty was introduced to reduce public debt at an average rate of one twen-
tieth per year of its excess over the limit.
 Structural deficit should be reduced by 0.5% of GDP until the medium-term
budgetary target is achieved.
 Costs of pension reforms can be deducted from the deficit.
10 The adopted legislative acts came into effect on 13 December 2011. These were four joint
regulations of the European Parliament and of the Council, one Council regulation and one
Council directive, i.e. a non-legislative act:
Regulation (EU) of the European Parliament and of the Council No. 1173/2011 of 16 No-
vember 2011 on the effective enforcement of budgetary surveillance in the euro area,
Regulation (EU) of the European Parliament and of the Council No. 1174/2011 of 16 No-
vember 2011 on the enforcement measures to correct excessive macroeconomic imbalances
in the euro area,
Regulation (EU) of the European Parliament and of the Council No. 1175/2011 of 16 Novem-
ber 2011 amending Council Regulation (EC) No. 1466/97 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies,
Regulation (EU) of the European Parliament and of the Council No. 1176/2011 of 16 No-
vember 2011 on the prevention and correction of macroeconomic imbalances,
Council Regulation (EU) No. 1177/2011 of 8 November 2011 amending Regulation (EC)
No 1467/97 on speeding up and clarifying the implementation of the excessive deficit pro-
Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frame-
works of the Member States.
Acta Oeconomica 68 (2018)
Moreover, it was recommended that a fiscal rule should be introduced in re-
spective member states’ national law, enforcing sustainability of the structural
balance of the general government sector (achievement of the medium-term
budget target).
Without getting into a detailed discussion, one can formulate a view that most
member states did not have an economic policy in place that would take full ac-
count of the idea of SGP, so no wonder its goals were not achieved, either. As
a result, the condition of public finance in most EU member states was deemed
insufficiently stable.
Irrespective of any regulatory specifications introduced at the EU level as part
of the modified SGP, the principal parameters subject to fiscal evaluation are still
the public sector deficit and debt. In the years from 2005 to 2016, the ratio of gen-
eral government deficit to GDP stood at levels that made it necessary to initiate
excessive deficit procedure for most countries.
In 2016–2017, the fiscal situation was relatively good. Following the favoura-
ble economic situation in 2016, public finance was balanced in two countries and
in as many as 9 countries there was a budgetary surplus. It was similar in 2017.
Table 1. General government deficit/surplus in EU countries, 2005–2016
(% of GDP)
Country 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Austria –2.5 –2.5 –1.4 –1.5 –5.3 –4.4 –2.6 –2.2 –2.0 –2.7 –1.0 –1.6
Belgium –2.8 0.2 0.1 –1.1 –5.4 –4.0 –4.1 –4.2 –3.1 –3.1 –2.5 –2.5
Bulgaria 1.0 1.8 1.1 1.6 –4.1 –3.1 –2.0 –0.3 –0.4 –5.5 –1.6 0.0
Croatia –3.9 –3.4 –2.4 –2.8 –6.0 –6.5 –7.8 –5.2 –5.3 –5.1 –3.3 –0.9
Czech Republic –3.0 –2.2 –0.7 –2.0 –5.5 –4.2 –2.7 –3.9 –1.2 –1.9 –0.6 0.7
Cyprus –2.2 –1.0 3.2 0.9 –5.4 –4.7 –5.7 –5.6 –5.1 –8.8 –1.2 0.5
Denmark 5.0 5.0 5.0 3.2 –2.8 –2.7 –2.1 –3.5 –1.2 1.1 –1.8 –0.6
Estonia 1.1 2.9 2.7 –2.7 –2.2 0.2 1.2 –0.3 –0.2 0.7 0.1 –0.3
Finland 2.6 3.9 5.1 4.2 –2.5 –2.6 –1.0 –2.2 –2.6 –3.2 –2.7 –1.7
France –3.2 –2.3 –2.5 –3.2 –7.2 –6.8 –5.1 –4.8 –4.1 –3.9 –3.6 –3.4
Germany –3.4 –1.7 0.2 –0.2 –3.2 –4.2 –1.0 0.0 –0.1 0.3 0.6 0.8
Greece –6.2 –5.9 –6.7 –10.2 –15.1 –11.2 –10.3 –8.9 –13.2 –3.6 –5.7 0.5
Hungary –7.8 –9.3 –5.0 –3.7 –4.5 –4.5 –5.4 –2.4 –2.6 –2.7 –2.0 –1.9
Ireland 1.6 2.8 0.3 –7.0 –13.8 –32.1 –12.7 –8.0 –6.1 –3.6 –1.9 –0.7
Italy –4.2 –3.6 –1.5 –2.7 –5.3 –4.2 –3.7 –2.9 –2.9 –3.0 –2.6 –2.5
Latvia –0.4 –0.5 –0.5 –4.2 –9.1 –8.7 –4.3 –1.2 –1.0 –1.2 –1.2 0.0
Lithuania –0.3 –0.3 –0.8 –3.1 –9.1 –6.9 –8.9 –3.1 –2.6 –0.6 –0.2 0.3
Luxembourg 0.1 1.9 4.2 3.3 –0.7 –0.7 0.5 0.3 1.0 1.3 1.4 1.6
Malta –2.6 –2.5 –2.1 –4.2 –3.2 –2.4 –2.4 –3.5 –2.4 –1.8 –1.1 1.1
Netherlands –0.3 0.2 0.2 0.2 –5.4 –5.0 –4.3 –3.9 –2.4 –2.3 –2.1 0.4
Poland –4.0 –3.6 –1.9 –3.6 –7.3 –7.3 –4.8 –3.7 –4.1 –3.6 –2.6 –2.5
Portugal –6.2 –4.3 –3.0 –3.8 –9.8 –11.2 –7.4 –5.7 –4.8 –7.2 –4.4 –2.0
Acta Oeconomica 68 (2018)
Currently, the excessive deficit procedure is imposed on three member states: on
the UK since 2008, and on France and Spain since 2009. Only in two countries,
Estonia and Sweden, it has never been applied to date and in all the others it was
periodically imposed by the Commission and lifted upon implementing relevant
corrective actions.
After many years of financing budget deficits, non-compliance with the sec-
ond fiscal criterion has been frequent. In the non-EZ economies, it has been the
case also due to the decline in the value of national currency in the countries
where the public debt consisted partly of debt in a foreign exchange that was
gaining strength at the time. In the period of 2005–2016, out of 28 member states
11 complied with this criterion. It must be emphasized that as many as 8 of those
countries are post-socialist economies: Estonia, Latvia, Lithuania and Slovakia,
which are the EZ member states, and Bulgaria, Czech Republic, Poland and Ro-
mania, which are still outside the EZ. In 2016, in as many as 17 countries pub-
lic debt (calculated according to ESA, General Government Gross Debt) stood
above 60% of GDP. Record-breakers in this respect are Greece and Italy, where
this index exceeds the acceptable limit respectively three times and more than
twice. In 2017, the situation was similar, though these two countries got closer to
the debt limit, recording a slight budget deficit. In Finland, with 2016 public debt
amounting to 63.1% of GDP, the deficit stood at 1.7%, while the Netherlands,
with the debt of 61.8%, recorded a surplus of 0.4% of GDP. Against this back-
drop, one can conclude that in 2018 the country may successfully go below the
Maastricht threshold.
It is worth emphasizing that in some economies, for example Greece and Italy,
the fiscal criterion relating to the acceptable debt was not met already at the time
the euro came into being. Such tolerance for noncompliance with its own inten-
tionally hard rules right from the inception of the single currency is one of the orig-
inal causes of the difficulties faced by the EZ at a later time. This makes itself felt
now, as well, and will represent a major burden also in the future. One can double
the public debt very fast while it’s very hard and time consuming to halve it.
Table 1 continued
Country 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Romania –0.8 –2.1 –2.8 –5.5 –9.5 –6.9 –5.4 –3.7 –2.1 –1.4 –0.8 –3.0
Slovakia –2.9 –3.6 –1.9 –2.4 –7.8 –7.5 –4.3 –4.3 –2.7 –2.7 –2.7 –2.2
Slovenia –1.3 –1.2 –0.1 –1.4 –5.8 –5.6 –6.7 –4.0 –14.7 –5.3 –2.9 –1.9
Spain 1.2 2.2 1.9 –4.4 –11.0 –9.4 –9.6 –10.5 –7.0 –6.0 –5.3 –4.5
Sweden 1.8 2.2 3.4 1.9 –0.7 0.0 –0.2 –1.0 –1.4 –1.6 0.2 1.1
United Kingdom –3.2 –2.8 –2.6 –5.2 –10.1 –9.4 –7.5 –8.2 –5.4 –5.5 –4.3 –2.9
Source: Eurostat.
Acta Oeconomica 68 (2018)
For Poland in the years during 2004–2017, the public sector debt did not exceed
the reference value of 60% of GDP. The inflation criterion, i.e. keeping the rate of
inflation under control at a level no more than 1.5 percentage points higher than
the average for three EU member states with the most stable prices, was com-
plied with by Poland in periods of several and over a dozen months ever since it
became a member of the EU and is complied with now. Equally irregular was the
country’s compliance with the interest rate criterion but currently this criterion
is also met. When assessing the stability of prices and interest rates it is worth
Table 2. Public debt in EU countries, 2005–2016 (% of GDP)
Country 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
European Union 61.5 60.1 57.5 60.7 72.7 78.3 81.0 83.7 85.6 86.5 84.5 83.2
Euro area 69.2 67.3 64.9 68.6 78.4 83.8 86.1 89.4 91.3 91.8 89.9 88.9
Austria 68.3 67.0 64.7 68.4 79.6 82.4 82.2 81.7 81.0 83.8 84.3 83.6
Belgium 94.7 91.1 87.0 92.5 99.5 99.7 102.6 104.3 105.5 106.8 106.0 105.7
Bulgaria 26.8 21.0 16.3 13.0 13.7 15.3 15.2 16.7 17.0 27.0 26.0 29.0
Croatia 41.3 38.9 37.7 39.6 49.0 58.2 65.0 70.6 81.7 85.8 85.4 82.9
Czech Republic 27.9 27.7 27.5 28.3 33.6 37.4 39.8 44.5 44.9 42.2 40.0 36.8
Cyprus 62.8 58.7 53.5 45.1 53.8 56.3 65.7 79.7 102.6 107.5 107.5 107.1
Denmark 37.4 31.5 27.3 33.3 40.2 42.6 46.1 44.9 44.0 44.0 39.5 37.7
Estonia 4.5 4.4 3.7 4.5 7.0 6.6 6.1 9.7 10.2 10.7 10.0 9.4
Finland 40.0 38.2 34.0 32.7 41.7 47.1 48.5 53.9 56.5 60.2 63.6 63.1
France 67.1 64.4 64.3 68.0 78.9 81.6 85.2 89.6 92.4 95.0 95.8 96.5
Germany 67.0 66.5 63.7 65.1 72.6 80.9 78.6 79.8 77.4 74.6 70.9 68.1
Greece 107.4 103.6 103.1 109.4 126.7 146.2 172.1 159.6 177.4 179 176.8 180.8
Hungary 60.0 64.1 65.0 71.0 77.2 79.7 79.9 77.6 76.0 75.2 74.7 73.9
Italy 101.9 102.6 99.8 102.4 112.5 115.4 116.5 123.4 129 131.8 131.5 132
Ireland 26.1 23.6 23.9 42.4 61.5 86.1 110.3 119.6 119.4 104.5 76.9 72.8
Latvia 11.4 9.6 8.0 18.2 35.8 46.8 42.7 41.2 39.0 40.9 36.9 40.6
Lithuania 17.6 17.2 15.9 14.6 28.0 36.2 37.2 39.8 38.8 40.5 42.6 40.1
Luxembourg 7.4 7.8 7.7 14.9 15.7 19.8 18.7 22.0 23.7 22.7 22.0 20.8
Malta 70.0 64.5 62.3 62.6 67.6 67.5 70.1 67.8 68.4 63.8 60.3 57.6
Netherlands 49.2 44.7 42.7 54.7 56.8 59.3 61.6 66.3 67.8 68.0 64.6 61.8
Poland 46.4 46.9 44.2 46.3 49.4 53.1 54.1 53.7 55.7 50.2 51.1 54.1
Portugal 67.4 69.2 68.4 71.7 83.6 96.2 111.4 126.2 129 130.6 128.8 130.1
Romania 15.7 12.3 12.7 13.2 23.2 30.2 34.4 37.3 37.8 39.4 37.9 37.6
Slovakia 34.1 31.0 30.1 28.5 36.3 41.2 43.7 52.2 54.7 53.5 52.3 51.8
Slovenia 26.3 26.0 22.8 21.8 34.6 38.4 46.6 53.8 70.4 80.3 82.6 78.5
Spain 42.3 38.9 35.6 39.5 52.8 60.1 69.5 85.7 95.5 100.4 99.4 99.0
Sweden 49.2 44.0 39.3 37.8 41.4 38.6 37.9 38.1 40.8 45.5 44.2 42.2
United Kingdom 39.9 40.8 41.9 49.9 64.1 75.6 81.3 84.5 85.6 87.4 88.2 88.3
Source: Eurostat.
Acta Oeconomica 68 (2018)
noticing the variability of the reference value, namely lack of specifically defined
level of inflation. Meanwhile, with respect to the second fiscal criterion regarding
the budgetary balance, the situation was worse. Except for 2007, until 2014 the
public sector deficit exceeded 3% of GDP, hence corrective actions in the form
of EDP were implemented twice. The first decision to apply it was made in 2004,
though the European Council formally adopted it in 2005 (2005/183/EC), when
Polish authorities were required to take the necessary corrective actions to reduce
the deficit by 2007.
It is interesting that on 8 July 2008, the European Council abrogated the deci-
sion taken three years earlier on the existence of an excessive deficit in Poland
(2008/622/EC), even though it quickly turned out that, in the end, the budget
deficit to GDP stood at 3.6% that year. On the one hand, the evaluators were
impressed by the exceptionally low deficit in the previous year, as in 2007 it
stood at only 1.9% of GDP; and on the other hand, 2008 marked the beginning
of the global economic crisis, which resulted, also in Poland, in a higher-than-
average dynamics of expenditure at the end of the year. Let us add that there is no
quarterly reporting of the sector deficit as per European System of National and
Regional Accounts (ESA), so the data on the condition of public finance is always
available with a certain delay.
In 2009, the deficit was growing fast until it doubled, which stemmed mostly
from the reduced revenues, with greater part of the deficit generated outside the
state budget, in the insurance subsector and by local authorities (local govern-
ments). Consequently, in the middle of the year, the Council adopted decision
2009/589/EC (1), where it declared again the existence of an excessive deficit
and required its reduction until 2012.
In mid-2013, the European Council concluded that Poland had taken effec-
tive actions but after adopting the original recommendation, adverse economic
events took place, which had serious negative impact on public finance. These
events were related to subsequent waves of global economic crisis reaching also
Poland, which could not be without consequences for budgetary revenues and
In the convergence program submitted by the government on 30 April 2015,
it was assumed that the target deficit values would amount to 2.7% of GDP in
2015 and to 2.3 in 2016. Meanwhile, the EC’s spring 2015 forecast provided for
a deficit of 2.8% of GDP in 2015 and 2.6% in 2016. Based on those data, in July
2015 the European Council adopted a decision to abrogate another decision on
the existence of excessive deficit.
The size and structure of the excessive general government deficit recorded in
Poland were quite varied. On the one hand, in the years from 2004 to 2008, the
economic upturn was not sufficiently leveraged to limit the deficit; and on the
Acta Oeconomica 68 (2018)
other hand, there were structural reasons for it becoming excessive. In the period
under discussion, one can observe diverse ways the budget policy addressed the
changing external and internal circumstances. The main measures in the area of
structural challenges involved the commitment and use of ever increasing EU
funds and a systematic though dynamic enough tax streamlining process. In
2009, the social security premium reductions came into force, decreasing the size
of the tax wedge and thus the cost of labour. Next, in 2012, a long-term process of
extending and equalizing the retirement age was started, which was unfortunately
reversed in 2017. Fiscal consolidation has been in place since 2011, involving an
increase of some tax rates (VAT, excise duty, personal income tax freeze), as well
as limiting part of the pension rate allotted to Open Pension Funds (OFE). The
measures intended to streamline public expenditures have also been relatively
effective. The changes in the public sector operating system (the new public fi-
nance law of 2009) have contributed to an improved quality of public finance.
The convergence program update sent by the Polish government to the EC in
April 2017, provided for further reduction of the public sector deficit and of the
public debt to GDP ratio.
In accordance with the government’s assumptions, the public sector deficit
should be reduced to 1.2% of GDP in 2020. This is to be possible due to the sys-
tematic decline in the share of expenditures and taxes in GDP.
According to the government’s assumptions, the result of local government
sector should be balanced as well.
Figure 1. Budget deficit and public debt, 2005–2020 ( % of GDP)
Source: Eurostat data and Convergence Program 2017 Update.
* Forecast.
Acta Oeconomica 68 (2018)
If we were to trust those assumptions to come true, Poland would undoubtedly
not be in danger of having the excessive deficit procedure imposed on it again,
and on the contrary: Poland could be an example for others to follow as a coun-
try with one of the lowest public sector deficits among the EU member states.
However, we should ask ourselves how feasible the scenario presented in the
convergence program update is.
Figure 2. Revenues and expenditures of the public finance sector, 2005–2020
(% of GDP)
Source: Eurostat data and Convergence Program 2017 Update.
* Forecast.
Figure 3. Forecast of the sectors of public finance, 2017–2020
(% of GDP)
Source: Convergence Program 2017 Update.
Acta Oeconomica 68 (2018)
The Polish government, when forecasting the macroeconomic developments in the
‘Convergence Program 2017 Update’ until 2020, assumed that the economy would
grow twice as fast as the EU as a whole. Thus the gap between Poland and the rich
Western countries will be narrowing, with a growing share of Polish production in
the gross product of the whole grouping. Currently, it stands at only 2.9% at zloty
to euro market rate, while it is 5.3% at purchasing power parity (PPP). The latter
measure is more adequate and reflects the actual situation better.
In 2017, GDP grew faster than announced by the government and then ex-
pected by various organizations monitoring Polish economy: as much as ca. 4.3%
compared to just 3.6% growth provided for in the 2018 draft budget. Neverthe-
less, the forecast for the gross product dynamics in the years from 2018 to 2020
were maintained. According to the ‘Convergence Program 2017 Update’, it should
amount to 3.8, 3.9 and 3.9 per cent in the subsequent years, while according to the
2018 budget, 3.8% is expected in each of these years (and 3.6% in 2021).
The weakening of the production dynamics, though a minor one, implies a
more modest tax base broadening than in 2017. Of course, ceteris paribus, so
here we should leave aside the changes in the efficiency of the collection of re-
ceivables as well as any changes in the amount of taxes and other forms of fiscal
revenues. In this context, one needs to emphasize the risk of tensions related to
the fast growing fixed budget expenditures. Many of them, mainly arising out
Figure 4. GDP growth, 2005–2020 (%)
Source: Eurostat data and Convergence Program 2017 Update.
Note: * Forecast.
Acta Oeconomica 68 (2018)
of a significantly widened scope of the state’s social policy, are already legally
determined as a result of the adopted legislative solutions; others are possible
and may become reality following the unambiguous political declarations of the
ruling party, government and president. This is, unfortunately, the case of the an-
nouncement on the yearly successive increase of defence spending from the cur-
rent 2% of GDP to 2.5% in 2030. The question is how realistic the governmental
and non-governmental budget deficit forecasts will prove in the end.
Table 4. Forecasts of the public finance sector balance, 2017–2020
(% of GDP)
Specification 2017 2018 2019 2020
EC –1.7 –1.7 –1.9
OECD –2.3 –2.3 –2.3
World Bank (General Government
Structural Balance)
–3.0 –3.1 –3.1 –2.6
S&P –1.7 –2.0 –2.5 –2.5
Convergence Program 2017 Update –2.9 –2.5 –2.0 –1.2
Source: Own compilation based on data provided by particular entities.
It is interesting that the EC expected a much lower deficit in 2017 than the
Polish government did, only 1.7% vs. 2.9%. Consequently, it is more optimistic
as to the developments in 2018–2019, for which it also assumes lower deficits
than those expected by the government: 1.7% and 1.9% respectively vs. 2.5%
and 2.0%.
Meanwhile, there is an optimistic concurrence of opinion between the gov-
ernment and international organisations as to the relative size of public debt in
the coming years11. Better yet: international organisations and rating agencies are
11 We are passing over some economists’ scare-mongering comments and alarmist warnings
(publicized by some media) about the allegedly inevitable and fast approaching collapse of
Table 3. Forecasts for GDP growth in Poland, 2017–2020 (%)
Specification 2017 2018 2019 2020
EC 4.2 3.8 3.4
OECD 4.3 3.5 3.2
IMF 3.8 3.5 3.0 2.8
World Bank 4.5 4.0 3.5 3.1
Commerzbank 4.5 3.8 3.2
Fitch 4.4 3.6 3.2
Convergence Program 2017 Update 3.6 3.8 3.9 3.9
Source: Own compilation based on data provided by the particular entities.
Acta Oeconomica 68 (2018)
even more optimistic than Polish authorities because while the latter forecast
public debt to GDP ratio in 2020 at 54%, Standard & Poor’s, for example, sees it
nearly four percentage points lower, at only 50.3% of GDP.
Table 5. Forecasts of public debt, 2017–2020 (% of GDP)
Specification 2017 2018 2019 2020
EC 53.2 53.0 53.0
OECD 53.9 53.9 53.7
IMF 54.2 53.8 53.5 52.9
S&P 49.5 48.7 50.3 50.3
Convergence Program 2017 Update 53.1 54.2 54.6 54.0
Source: Own compilation.
There is much greater disparity of opinion among experts, whether theoreti-
cians of finance and economics from Poland and abroad or economic policy prac-
titioners. We asked them for relevant forecasts, and the group of distinguished
30 respondents included former prime ministers, deputy prime ministers for eco-
nomic affairs, ministers and deputy ministers of finance and economy, members
of the Monetary Policy Council, current members of the European Parliament
as well as members of public finance and budget committees at both houses of
Polish parliament (Sejm and Senate), presidents of large commercial banks and
experts of the World Bank and IMF; many of whom are professors.
Table 6. Experts’ forecasts of GDP growth, fiscal deficit and public debt, 2017–2020
Specification GDP growth (%) Budget deficit
(% of GDP)
Public debt
(% of GDP)
Year 2017* 2018 2019 2020 2017* 2018 2019 2020 2017* 2018 2019 2020
Minimum 3.6 3.5 1.7 2.0 1.5 2.0 1.5 1.0 50.5 52.0 51.5 51.0
Average 4.0 3.9 3.5 3.2 2.5 2.7 2.8 2.8 54.3 54.4 54.6 54.7
Maximum 4.5 5.0 4.6 4.3 3.3 3.5 4.5 5.0 56.0 57.0 57.5 59.3
0.30 0.38 0.47 0.54 0.47 0.37 0.59 0.89 1.23 1.14 1.43 2.06
Variance 0.09 0.14 0.22 0.30 0.22 0.14 0.35 0.79 1.52 1.31 2.04 4.25
Source: Own calculations.
Note: * Expected implementation.
public finance, which, in the coming years, is sure to lead to exceeding the public debt limit of
60% of GDP. Such doom saying is far from being professional as it is politically and ideologi-
cally rather than factually motivated.
Acta Oeconomica 68 (2018)
Low values of standard deviations compared to the means suggest that the
spread of experts’ responses around the mean is rather small. This suggests that
our panel of 30 specialists was pretty consistent in their responses. One can notice
that standard deviations have a tendency to increase across the years which would
suggest that our experts are less certain as to their predictions when time horizon
Extreme opinions as to the economic growth rate in the four-year period under
discussion are 5.0% in 2018 and 2.0% two years later. Meanwhile, for one time
sequence they are highest in 2020, amounting to 4.3% and 2.0%. As for the public
debt to GDP ratio, extreme opinions refer to 2020, where the forecast levels range
from 50.5% to 59.3%. In the entire time interval under analysis, nobody assumes
exceeding the threshold of 60% of GDP.
As regards budget deficit, nobody predicts a surplus, which is understandable
in Poland’s realities, with forecasts ranging between 1.0% and as much as 5.0%
of GDP in 2020. For 2018, three people expect the 3% limit to be exceeded,
with three others thinking it might amount to exactly 3.0% of GDP. For 2019,
there are 10 and 4 people respectively who believe so, and for 2020, 11 and 3.
In other words, only 10% of the respondents from this selected group expect the
3% deficit to be exceeded already in 2018, one third of them in 2019 and 36.7%
in 2020. To emphasize the significance of these figures, we can reverse the pres-
entation of results and stress that up to two-thirds of the experienced specialists
and responsible economic policymakers do not expect the budgetary Maastricht
convergence criterion to be exceeded and hence do not expect the return of the
excessive deficit procedure, at least until 2021.
It is more than interesting and quite fascinating that there should be such differ-
ences among eminent economists and experienced economic policy practitioners
of the highest level. A four-point discrepancy in the budget deficit estimate does not
stem from applying fundamentally different prediction models, but from making
quite different assumptions as to the scale of fiscalism and efficiency of the state
collecting its receivables, on the one hand, and as to the dynamics of budgetary
expenditures, on the other hand. As a matter of fact, in the forecast optimistically
anticipating a deficit of only 1% of GDP (i.e. even more optimistically than the
government) for 2020, its author assumes that the economy will grow by 3.5% in
every year of the 2018–2020 period. Meanwhile, the sceptic expecting the deficit
to be five times higher at the end of that period, as high as 5.0% of GDP, sees the
production growth rate slowing down over that time from 3.9% to 2.2%. In total,
with respect to real economy, this makes a 2.3 percentage points difference, over
the whole four-year period, between those two forecasts (aggregate GDP growth
by 15.2% and by 12.9% of GDP respectively), but also these are two qualitatively
different perspectives on the fiscal consequences of the course of events.
Acta Oeconomica 68 (2018)
Looking into the future in a responsible manner, one needs to be mindful not
only of the danger of the debt growing higher than expected by the government
due to fiscal deficit being much larger than forecast, but also due to the weaken-
ing of the zloty. External debt accounts for one third of Poland’s public debt,
hence its nominal value in national currency depends on the foreign exchange
rate. When developing forecasts for the years from 2018 to 2021 and planning
the 2018 budget, the government assumed that the average annual euro to zloty
exchange rate would be stable and in each of those four years it would remain
at the level from late 2017, i.e. 4.25. It surely will not happen, even though it is
impossible to predict its development in this time horizon. Since there is a free
floating currency regime, the exchange rate fluctuates according to the surges of
the financial market. Interestingly enough, just in the first half of 2018 it is oscil-
lated between 4 and 4.30 zlotys/€.
The Polish government, however, is very optimistic. After a sound economic
growth in 2017, as well as the improvement of the state of public finances, the
Convergence Program Update adopted at the end of April 2018 has been marked
by a highly optimistic picture of the coming years, assuming further systematic
decrease in the budget deficit as well as public debt.
Table 7. Government forecast of GDP growth, budget deficit and public debt, 2018–2021
Specification 2018 2019 2020 2021
GDP growth (%) 3,8 3,8 3,7 3,6
Budget deficit (% of GDP) 2,1 1,5 1,1 0,7
Public debt (% of GDP) 50,4 50,4 48,7 46,0
Source: Convergence Program 2018 update.
Reducing the deficit to just 0.7% of GDP in 2021 would be a significant
achievement of macroeconomic policy and a reflection of further stabilisation of
public finances; however, achieving this goal seems unlikely, given the prolifera-
tion of new, additional budget transfers due to vast social policy expansion.
Against this backdrop, the budget policy should be very prudent in the com-
ing years. As a top priority, one should show self-restraint in earmarking further
expenditures as in the long term they should grow more slowly than revenues and
both categories more slowly than the national income in order to gradually reduce
the scale of fiscal redistribution. It is doubtful whether the scale of budgetary
imbalance can be controlled and the deficit held in check solely through increas-
ing the discipline of collecting budgetary receivables. It cannot be ruled out that
with the growth of additional expenditures that have already been determined in
political and legislative terms, it will be necessary to increase taxes.
Acta Oeconomica 68 (2018)
However, the government may opt for another path. Since it decided, alas, not
to introduce the euro in Poland for the time being, it can be tempted, even though
it is obliged to maintain the budget deficit to GDP ratio as set out in the SGP, to
exceed the 3% threshold again. Especially in that situation – of course assuming
the deficits will not be too high – it could be quite confident that it will not hit the
public debt barrier of 60% of GDP. Now, let’s remember that it is not only one of
the nominal Maastricht convergence criteria, but there has also been, for twenty
years, a relevant provision on that matter in the Constitution of the Republic of
Poland. Its Article 216.5 stipulates that ‘It shall be neither permissible to contract
loans nor provide guarantees and financial sureties which would engender a na-
tional public debt exceeding three-fifths of the value of the annual gross domestic
product’ (Konstytucja 1997). This principle means in practice that if the 60%
threshold is exceeded – for example as a result of external debt growing due to the
weak zloty – the budget for the next year must be balanced. So far, luckily, this
mechanism has not been activated and it would be good if it continued to function
only as a warning and preventive instrument.
Considering all real, financial, as well as social determinants, politicians may
decide that in the event of acute budget tensions accumulating, and in view of
the inability to cut spending as an adjustment measure, combined with the natu-
ral unwillingness to increase taxes, a deficit exceeding 3% of GDP is a reason-
able choice. Then the excessive deficit procedure would be back, and experience
shows (or some say so) that you can live with it, whether inside or outside the
euro area. However, it is better to maintain the structural deficit, apart from
the cyclical fluctuations, at the lowest possible level to control the state’s bor-
rowing needs, and decrease the long term public debt, the burden of which is
carried by the society – consumers and producers alike, both households and
entrepreneurs .
Sadly, an additional factor has emerged for Poland, unprecedented in the his-
tory of the EU. The EC triggered the procedure under Article 7.1 of the EU Treaty
in connection with Poland’s alleged breach of the rule of law. According to the
Commission, Poland, though now it meets the nominal convergence criteria, does
not meet the criteria of membership in the EU as such, as it is in breach not only
of some principles and values underlying the integration grouping, but also of
its own law, including the constitution. This complicates the situation despite
the country’s relatively good economic position. This way a sort of seventh con-
vergence criterion has appeared, but in essence the matter boils down to what’s
required in criterion sixth, or the compatibility of national legislation with EU
regulations codified in the acquis communautaire. It needs to be sorted out.
Acta Oeconomica 68 (2018)
It is beyond any doubt that the euro single currency area does not represent an
optimal currency area the way this issue is presented in the economy theory
(McKinnon 2002). It is more interesting to note that the co-author of this concept
(Mundell 1961) supported the creation of the EZ at that time (Mundell 2000).
A lot of misunderstandings in the assessment of the euro area functioning, and of
the whole single currency project as a factor that cements the integration process
stem from confusing the causes of disturbances and crisis phenomena with their
manifestations and consequences (Tanzi 2013; Hall 2014). Obviously, there are
some feedbacks but, after all, the euro was not the original cause of the finan-
cial frictions; the cause was that the disturbances in real economy and in public
finance spilled over into the monetary sphere. It was especially the insufficient
supervision over the banking sector and capital market that had a negative impact
on the condition of the euro (Sandbu 2015).
There are both voices predicting the demise of the euro (Brown 2012) or, in the
extreme version, advocating its deliberate abolition (Kawalec – Pytlarczyk 2013),
and academic papers (Pisani-Ferry 2011) and professional opinions (European
2017) pointing out directions for its improvement and ways to strengthen it. Oth-
er authors, bearing in mind the euro’s imperfection, and also the immense costs
of its potential abolition, though not ruling it out, are considering a fundamental
institutional reform of the EZ (Moździerz 2015; Dallago 2016). We adopt a prag-
matic economic approach, which is taking into account not only the theoretical
arguments showing the systemic defects and structural weaknesses of the EZ, but
most of all, the practical realities.
We are in the ex post phase; the euro has already been born, though it was con-
ceived not without many sins, is alive; and it has already come of age. Therefore,
today the right question is: is it more costly to keep and adequately reform the EZ or
to dismantle it? Let us emphasise that such dismantling could be a controlled proc-
ess only in theoretical digressions or in a computerized model; in practice it would
quickly prove to be sheer chaos with disastrous consequences. Therefore when con-
templating, in comprehensive terms, the costs and benefits of the euro’s continued
existence and reforms versus withdrawing from it and its abolition, it is easy to see
a clear advantage of the former solution. And that is why – rather than for political
reasons and due to the power of inertia – the euro shall overcome. There is no abso-
lute certainty about it but there is a very high likelihood: close to one.
The continuation of the euro project, obviously with its relevant modifications,
has its implications and involves specific challenges. Of crucial importance here
is the issue of enlarging the euro area by accepting the new states that meet all
Acta Oeconomica 68 (2018)
the required currency convergence criteria. What speak in favour of joining the
EZ are mostly economic reasons but the political ones should not be disregarded,
either, in a situation where nationalist resentments and protectionist tendencies
are gaining ground (Economist 2016). There is a ground – and the imperative
– for both, parallel deepening the integration of the current, through strengthen-
ing the relevant institutions and policies, and enlarging it by including the new
Replacing national currency with the euro – assuming that the conversion is
carried out at the adequate dynamic equilibrium exchange rate – strengthens the
economy’s competitiveness, eliminates the exchange risk and reduces transaction
costs. At the same time, money becomes relatively cheaper due to Euroland’s
lower interest rates than those in the EU member states maintaining their own
currencies. Importantly, when joining the EZ, a country’s foreign currency re-
serves are liquidated, and only part of them is transferred to the ECB’s common
foreign exchange pool. The freed-up funds can be used to pay off some of the
foreign debt and to invest in infrastructure (Kolodko 2017).
In this context, it is to be expected that in the 5–10 years horizon the EZ may
include all of the 27 European Union member states, of course, by assuming
that the Greek syndrome will be solved and Grexit will not happen nor will any
other country leave the euro area. It is very unlikely, but not completely impos-
sible. Meanwhile, it is not out of the question that in the second half of 2020s
the EU population will grow to include new member states from the Balkan
region: Albania, Bosnia-Herzegovina, Macedonia, and Serbia. There is also a
possibility that Montenegro will become the 28th EU member state (as counted
already after the Brexit), automatically enlarging the Euroland area, as the euro
is already in circulation there, and, interestingly enough, this may happen earlier
than Poland joining the EZ, considering the government’s clear and repeatedly
expressed position on that matter12. It would be weirder considering Poland has
for many years been treated – and rightly so – first as the leader among post-
socialist economies undergoing market reforms (Kolodko 2000), and then as a
country whose post-socialist transformation has been the most significant suc-
cess (Piatkowski 2018).
It must be emphasised that the requirement of achieving a similar level of
economic development, as formulated by some authors and politicians, is too
12 Prime Minister Mateusz Morawiecki in early 2018, when asked about the possibility of Po-
land joining the EZ, replied: “We have a long way before we achieve a more real convergence
with the hard core of the Eurozone (…). As for Poland’s adoption of the euro, there is no
change of our approach, our rhetoric in this respect; this is not a topic today that we take into
consideration” (Morawiecki 2018).
Acta Oeconomica 68 (2018)
far-fetched; and there is no such imperative. Furthermore, the adoption of the
euro by subsequent post-socialist countries, with their GDP per capita (accord-
ing to PPP) now fluctuating around 50–90% of the average value for the EU as
a whole, will speed up the process of bridging the income gap13. Hence those
thinking that catching up with the more developed economies should come be-
fore the currency convergence are mistaken (Malecki 2018) because the currency
convergence itself can become an additional instrument of the real convergence,
so badly needed by Europe in its integration efforts.
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... The conventional arguments to join a monetary area, established in the optimum currency area (OCA) theory, include: (1) the business cycles synchronization, (2) factor mobility and labor market flexibility, (3) the degree of economic openness, (4) the product diversification and (5) the ability to use fiscal policy in a countercyclical fashion (Buiter 2008;De Grauwe 2016;Kenen 1969;McKinnon 1963;Mundell 1961). However, in the case of the Economic and Monetary Union (EMU) to join the Eurozone a candidate country has to fulfil five nominal Maastricht convergence criteria and ensure compliance of national legislation with the acquis communautaire (Kolodko and Postuła, 2018). Moreover, although the reasons for monetary integration in Europe are mostly economic, there are also important political ones. ...
... After 2007, another seven countries joined the eurozone 2 . Nevertheless, it is important to note that it may be expected that in the 2020s all countries that are still using their national currencies will join the EMU and that the EU will be extended to include new member states (with the exception of the United Kingdom that exited the EU and Denmark which has an exclusion clause), which will cause the enlargement of the Eurozone (Kolodko and Postuła 2018). ...
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European monetary integration must be understood as an additional step towards strengthening the close ties that have been fostered after the Second World War. The aim of this research is to determine the effect of adopting the euro in terms of productivity growth, measured as the total factor productivity (TPF) variation. We used a panel data analysis with two-way fixed effects to estimate the effects of Euro adoption on the productivity growth. Two panels from 1996 to 2016 were used –one comprised 28 countries of EU members; the other only included 13 countries which joined the EU since 2004. Our findings suggest that the productivity growth of the countries that joined in 2004 and adopted the euro was higher compared to those that maintained their own currency. In addition, we find that FDI was the main channel through which the adoption of the euro influenced productivity growth.
... На наступні декілька років ці режими будуть призупинені. Також не буде застосовуватися процедура надмірного дефіциту бюджету [34]. З часом уряди також почнуть збільшувати податки -як непрямі, так і прямі. ...
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Based on the study of key indicators characterizing the domestic capabilities of Ukrainian industry (dynamics of research and innovation, high-tech exports, components of the Global Competitiveness Index and the Global Innovation Index), opportunities and threats to its innovative transformations within Industry 4.0 are identified. This allows substantiating a set of stimulating measures for innovative renewal of Ukrainian industry at the level of the state, business and society. The degree of readiness of the Ukrainian industry for technological challenges of Industry 4.0 is revealed and effective measures of stimulation of innovative transformations in the existing conditions are developed. The following measures will contribute to this: assessment of the internal capabilities of Ukrainian industry for the development of technology in Industry 4.0; development of proposals for improving the mechanisms of innovative renewal of Ukrainian industry, taking into account global external and internal challenges. General scientific methods are used (abstract-logical, induction and deduction, system approach; analysis and synthesis), as well as special research methods: statistical comparisons, grouping, sampling (to identify key levers of effective transformation of production systems under the influence of digital technologies). Studies have shown that in the context of global challenges, in particular the fight against the coronavirus pandemic, for Ukraine, as well as for the whole world, it is important to ensure the maximum health of citizens while preventing economic catastrophe. An important role can be played by Ukrainian industry, which, although in difficult conditions, has sufficient potential. For its implementation it is important to do the following: create an effective system of state support, which would increase the spending on science and education; popularize scientific activity; increase the social responsibility of producers; strengthen the capacity of cybersecurity institutions; create conditions for personnel training with digital skills; form innovative ecosystems in various sectors of the economy Keywords: Industry 4.0; industry; digitization; innovative transformations.
... На наступні декілька років ці режими будуть призупинені. Також не буде застосовуватися процедура надмірного дефіциту бюджету [34]. З часом уряди також почнуть збільшувати податки -як непрямі, так і прямі. ...
Full-text available
The euro crisis and its lessons are still not a closed chapter for economists and policy makers. The challenge to find the most appropriate ways to prevent intra-area imbalances is still on the top of the agenda. Nominal adjustment (internal devaluation) remains one of the most critical aspects of this debate. Many are indeed interested in whether austerity measures in several countries “made sense.” But much more is at stake here than evaluating the past. The true question is whether the eurozone can rely on nominal adjustment to align internal economic fluctuations. This paper contributes to the answer by investigating the size of price changes and their impacts on output and trade in the wake of the euro crisis. Selecting the most appropriate variables to measure competitive outcomes, the basic idea of “expansionary contraction” is tested. We rely on a comprehensive panel of all Eurozone member states in the post-crisis years (2010–2017). The results suggest that flexible price levels cannot be taken for granted, and a link to competitiveness is not self-evident, either. Other channels of adjustment may prove to be more important, but scaling them up will ultimately require a sound consensus on the future architecture of the euro.
Budget consolidations in Visegrád countries, which followed European financial and debt crisis, were mainly driven by external factors such as EU fiscal governance. Since the Visegrád countries have accomplished their consolidation effort, it seems topical to study their experience and assess the efficiency of consolidation measures. Involving descriptive statistical analysis, the authors posit that supranational impact on national budgets of Visegrád countries was quite efficient, as all economies concerned have accomplished a relatively sizeable fiscal consolidation. This happened largely due to the fact that the governments did not intend to lose vast amounts of funds from the EU budget. Such an option was quite feasible as a part of possible sanctions related to excessive deficit. The Czech Republic, Hungary, Poland and the Slovak Republic run different consolidations as to scale, structure and measures taken, though one could highlight some similarities. On the one hand, consolidations were to a great extent carried out through the means of indirect taxation, because they have a less distortive nature, given the structural characteristics of countries at issue. On the other hand, the governments refrained from raising direct taxes due to their distortive character. Hungary was the only country, which took some active measures in the field of corporate taxation, and subsequently suffered from drop in tax collection. The Visegrád countries did cut government expenditures, but strived to use the most effective instruments such as curbing employment in public sector. Further, there were some subsidiary factors at place that influenced consolidation pace. For example, three of four Visegrád countries are not members of a currency union, which inter alia contributed to monetizing government debt. At the same time, some measures taken by the countries, were of a quite formal nature. For instance, Hungary totally nationalized pension system in order to increase budget revenues. Nevertheless, all Visegrád countries reached deficit target without any revolutionary changes to main fiscal aggregates, which means that consolidations were at least nominally effective. However, cumulative deficit change was not fully accompanied by lowering debt and was by several times less than cumulative transfers from the EU budget. At the same time the budget consolidations in Visegrád countries could be called efficient as GDP growth rates restored, as did investors’ confidence and exports.
The purpose of the paper is to analyse the weaknesses, both epistemological and applicative, of the contemporary orthodox economics and, based thereon, to indicate the necessary changes it needs to undergo. Two groups of weaknesses are distinguished here – the intrinsic ones and the acquired ones. The former ones result from diversity and variability of its object of study and from the teleological nature of the economy. The latter ones, related to the methodological principles of economics stem from errors or omissions committed by the founders of economics in the historical development. The author identifies and analyses three such weaknesses – superficiality of cognition, overformalisation and the delusion of universalisation. The analysis shows that globalisation processes and other varied civilisational transformations we have been experiencing over the last 15–20 years have brought into light and highlighted the weaknesses of economics. The author comes to the conclusion that consequently the economics for the 21 st century, to meet the challenges of the new times, should undergo three basic shifts: a/ from positive, descriptive science to including also the evaluative and axiological one; b/ from homogeneous, universal science to a considerably contextual one and c/from pure, formalised science to a deeply interdisciplinary one.
Is China still building socialism or has it already built capitalism? Or maybe both? Or maybe none of those two systems? Or maybe with the market reforms that deviate from the traditional socialism, it has created something different from the classical types of political and socio-economic regimes known from the 20th century? Some authors have proclaimed that there has been capitalism in China for some time; others claim that socialism has developed there, of course one with Chinese characteristics. Shortages have been successfully eliminated, but the economic system is unbalanced, showing surpluses this time. So, is it socialism, as the official Chinese authorities claim, or capitalism, as asserted by numerous economists? Tertium non datur? By no means, as there are yet other possibilities of system interpretations and the most fascinating of them is being offered by the present-day China, where a unique internal convergence is taking place. Features of socialism intermingle with essentials of capitalism and vice versa, creating a new, different quality. Tertium datur.
The book is about one of the biggest economic success stories that one has hardly ever heard about. It is about a perennially backward, poor, and peripheral country, which over the last twenty-five years has unexpectedly become Europe's and a global growth champion and joined the ranks of high-income countries during the life of just one generation. It is about the lessons learned from its remarkable experience for other countries in the world, the conditions that keep countries poor, and challenges that countries need face to grow and become high-income. It is also about a new growth model that this country-Poland-and its peers in Central and Eastern Europe and elsewhere need to adopt to continue to grow and catch up with the West for the first time ever. The book emphasizes the importance of the fundamental sources of growth-institutions, culture, ideas, and leaders-in economic development. It argues that a shift from an extractive society, where the few rule for the benefit of the few, to an inclusive society, where many rule for the benefit of many, was the key to Poland's success. It asserts that a newly emerged inclusive society will support further convergence of Poland and Central and Eastern Europe with the West and help sustain the region's Golden Age, but moving to the core of the European economy will require further reforms and changes in Poland's developmental DNA.
Of the 11 post-socialist states that have already become European Union members only five have joined the common currency Eurozone. The other six, including Poland, the region's largest economy, have, pursuant to accession treaties, the right and obligation to adopt euro as their currency. They fail to exercise their right and meet their obligation, which has both causes and consequences. These are economic and political in nature and that is why there is no certainty about how the situation will evolve in future. However, from both of those perspectives, and especially for economic reasons, Eastern European EU members should join the Eurozone, as the resulting benefits, not only for Poland, significantly outweigh the conversion costs. Thus, new countries, especially Poland, adopting euro would have a positive impact on the European integration process, which is experiencing a serious structural, institutional and political crisis.
The aftermath of the US subprime mortgage crisis in 2008 saw its influence spread around the world, including Europe. The European crisis turned out to be longer, deeper and more resilient than anticipated. An unexpected consequence was the increasingly divergent economic and financial situation of two main groups of countries within the Eurozone, which includes the countries that adopt the euro as their common currency. The divergence was caused by a number of factors, fundamentally stemming from the dissimilar economic and financial situation of its member countries and from the incomplete institutional architecture and the monetary and fiscal policies in the Eurozone. One Currency, Two Europes: Towards a Dual Eurozone seeks to explore these factors which give rise to the Eurozone's asymmetric composition and the growing difficulties and ineffectiveness that policies meet. It presents evidence to show how the presently incomplete institutional architecture of the Eurozone is the main reason for the extreme detrimental effects of the international crisis and austerity policies, along with the asymmetric economic situation and the insufficient mutual trust demonstrated by the vulnerable as well as resilient countries. Other than presenting a complete overview and analysis of the events that unfolded in the Eurozone as a result of the financial crisis that first emerged in the US, this book also suggests possible solutions which could help to reunify the Eurozone, and make the common currency sustainable and beneficial for all member countries. One Currency, Two Europes will be useful for policymakers who want to learn from the Eurozone's experience with the financial crisis and the importance of complete institutional architectures and inter-country economic convergence. It will also serve as a reference to students and researchers who would like more in-depth analysis of the crisis and the Eurozone's fiscal, monetary and institutional past, present, and future. © 2016 by World Scientific Publishing Co. Pte. Ltd. All rights reserved.