Krzysztof Rybiński: The role of the EURO for the future of Poland Speech by Mr Krzysztof Rybiński, Deputy President of the National Bank of Poland, at the International Conference “The role of the EURO for the future of Poland”, Warsaw, 15 June 2007. *  *  *  Only a few months ago the eurozone was enlarged for the second time. Slovenia became the first of the twelve new member states of the EU and the thirteenth country to adopt the common European currency. Now two other countries, i.e. Malta and Cyprus, are knocking on the euro’s door, and others are lining up for the “monetary club membership”. This seems to be a good occasion to return to the, once lively, discussion about the advantages and disadvantages of joining the monetary union. Indeed, there are still more reasons to come back periodically to the euro cost & benefit debate, since we have more and more data, the world changes rapidly and even economic theory is subject to evolution. Let me illustrate this with one example. It has long been a widely accepted view that asymmetric shocks are the biggest threat to currency unions. Nowadays some respected economists think it may not be the case.
Accordingly, the only policy tool left after euro area accession is fiscal policy. For this reason it is of crucial importance to run a balanced budget in the medium run, so that in case of negative shocks, there is room for increasing the deficit, and thus buffer the shock. Additionally, there are also economic forces which can bring the economy back to equilibrium. The most prominent is wage adjustment – after a negative shock, falling wages can help reduce the cost of production and – as a consequence – prices. This will increase demand and help the economy return to equilibrium. A crucial prerequisite for this channel to operate smoothly is a flexible labor market – only if wages adjust immediately, can an increasing unemployment and an economic slowdown be avoided. We know, however, that this downward wage flexibility is rarely seen in real life. Regarding asymmetric shocks, one thing seems certain. We are not able to foresee if serious asymmetric shocks are going to affect the Polish economy after joining the euro or not. We can only speak in terms of probabilities and, given the data, it seems that the probability of huge shocks occurrence seems limited. The Polish economy is strongly integrated with the eurozone, with a majority of exports going to the common currency area. Moreover, most studies (e.g. Fidrmuc, Korhonen 2003, Eickmeier, Breitung 2005) show a relatively high correlation of business cycles between Poland and the eurozone. This substantially reduces, though does not eliminate, the risk of asymmetric shocks.