Poland’s Currency Lifts Economy, Despite the Frailties of the Euro Zone

WARSAW — With its drab, Soviet-era boulevards and standard-issue glass-and-steel office buildings, Warsaw does not look much like green, elegant Dublin. But there are some striking similarities between Poland today and Ireland in the 1990s.

Like the Irish a couple of decades ago, the Poles are a hardy people battered by history but on the verge of prosperity. Foreign capital is pouring in and investment banks are opening offices, lured by resilient growth and 38.5 million people who are close to shedding the “emerging market” label.

And Poland now, like Ireland then, has its own currency. Being outside the euro zone is working to Poland’s economic advantage.

That is not the only reason Poland is currently that rare species: a financially vibrant member of the European Union. But it is to Poland’s benefit not to be bound by a common currency, at a time when euro zone countries like Ireland will have trouble using cheap exports to grow their way out of trouble.

While Poland remains determined to eventually adopt the common currency, Prime Minister Donald Tusk said Monday in Berlin, the country does not plan to “force the pace,” Bloomberg News reported.

One of the big lessons of the European debt crisis, Polish leaders say, is that countries should not adopt the euro until their economies and labor markets are flexible enough to compensate for the loss of control over exchange rates.

The country will not meet the technical requirements for euro membership until 2015 at the earliest, and policy makers do not sound as though they are in a big hurry to join.

“If you analyze the advantages and disadvantages of euro membership, there are more advantages,” Aleksander Grad, the Polish treasury minister, said in a recent interview here. Advantages include eliminating the foreign-exchange risk with nearby trading partners.

But during the global economic crisis, Mr. Grad acknowledged, “Certainly the fact that the zloty could be adjusted helped us.”

The floating zloty, which has fallen about 18 percent against the euro since early 2009, acted as a pressure release valve, helping to keep Polish products competitive on world markets and insulating Poland from the effects of the sovereign debt crisis.

Poland has proved itself to be Europe’s most dogged economy during the last two years. It was the only member of the European Union to avoid recession, soldiering on even after a plane crash in April killed much of the political elite, including the president and the central bank governor. No banks needed to be rescued.

“I wouldn’t say the crisis helped us,” said Ludwik Sobolewski, president of the Warsaw Stock Exchange. “But the fact we proved relatively resistant to pressure enhanced the reputation of our markets.”

There are important differences, of course. For one, Poland is far larger than Ireland, which has over four million people. And Poland’s nearly miraculous economic performance during the global financial crisis was because of a combination of skill and luck. The government pumped stimulus money into the economy during 2009, and took advantage of an International Monetary Fund credit line that reassured investors.

But Poland was also lucky that, in contrast to Ireland, its banking industry was still small compared with the total size of the economy, with less potential to do damage. Household debt is relatively modest. Poland also benefited from the strong economy in neighboring Germany, which accounts for a quarter of exports.

Output is expected to rise 4 percent or more in 2011, after an estimated 3.6 percent this year. Commercial real estate prices in Warsaw are rising at a 10 percent annual clip. Foreign direct investment is expected to be up 28 percent this year, drawn by the country’s status as one of the few growth stories in Europe. And hardly anybody is complaining about the influx of foreign money.

“That’s the least of our worries,” Mr. Grad said, laughing. “We are really happy to have this foreign investment.”

Still, government borrowing is higher than would seem healthy. The deficit is expected to hit 7.6 percent of gross domestic product this year, pushing total debt uncomfortably close to limits under Polish law that would require the government to make drastic spending cuts.

And the economy still has some underlying problems. Poland ranks 70th out of 183 countries for ease of doing business, according to the World Bank. Executives blame the poor rating on an excessive government bureaucracy that hinders the creation of new business, holds back job creation and ultimately hurts Polish competitiveness.

“Everybody is very happy and very proud that Poland was a green island during the crisis,” said Lucyna Stanczak, the Warsaw-based director for Poland at the European Bank for Reconstruction and Development. But “the big issue is structural reforms and fiscal stability. It doesn’t seem that there is very consistent action.”

Jaroslaw Kochaniak, the deputy mayor of Warsaw, put it more bluntly. “We have to do everything we can to avoid the P.I.G.S. virus,” he said, referring to Portugal, Ireland, Greece and Spain and their failure to use years of cheap credit and fast growth to create durable economies. Mr. Kochaniak was speaking at a conference in Warsaw last week sponsored in part by The International Herald Tribune.

One risk for Poland is that some of its growth is based on an influx of European Union aid and other one-time factors, like the construction of new stadiums and other projects related to the European soccer championship, which Poland and Ukraine will co-host in 2012. The country is practically one big construction site, with numerous road and bridge projects and public works, including a new subway line in Warsaw.

If those projects are done well and make the economy more productive, they will contribute to growth. If not, there could be a slowdown when the flow of money ebbs.

Nor can Poland completely isolate itself from problems in the euro zone. It would be vulnerable to an unexpected slowdown in Germany.

“Poland is not able to fully decouple from the European cycle,” said Gyorgy Kovacs, an economist at UBS in London who focuses on Eastern Europe. “If we see European countries going to another significant slowdown, Poland would be affected.”

Polish leaders insist that they have learned from Ireland’s experience, and will not repeat it, vowing to keep economic exuberance in check to avoid the hangover that Ireland is now suffering. “In good times we don’t have to take the punch bowl away,” Jacek Rostowski, the Polish finance minister, told an audience in Warsaw last week. “Because it will never come out of the pantry.”