Will Poland Rethink the Euro?

Dropping out of the gold standard to adjust monetary policy in the face of a macroeconomic shock is no longer possible. The gold standard, after all, is long gone. But the next-best thing is still visible in Poland, albeit in relative and pre-emptive terms. Indeed, it’s striking how the country is growing while its neighbors are having a rough time. The comparisons of Poland with Ireland and Greece are especially striking. Why is Poland faring so much better? There’s no one answer, but for the moment there’s a connection between Poland’s relatively favorable trend and the fact that it hasn’t (yet) adopted the euro.

Poland retains its own currency, the zloty. Although the country has plans to jump on the euro train, it continues a quaint tradition on the Continent: running its own monetary policy. That’s an advantage in the blowback of the Great Recession. As The New York Times reports, “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.” The country, we’re told, is the lone case of a EU member state that’s sidestepped economic contraction and that scourge of the developed world these days: bank bailouts.

“Output is expected to rise 4 percent or more in 2011, after an estimated 3.6 percent this year,” according to the Times. “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.”

Poland obviously didn’t abandon the gold standard. You can’t give up what you don’t have. But the zloty devaluation relative to the euro can be thought of as something akin to dumping gold…in advance. The euro is effectively a gold standard for those countries that use adopt the currency. The Wall Street Journal drew a parallel earlier this year explained:

Though it may not have been evident to politicians or populations at the time, governments joining the euro were tying themselves to the modern equivalent of the gold standard, the monetary link to the yellow metal which guided the international financial system for more than a century.

In what may be a depressing parallel for the euro zone, that arrangement was ended by the Great Depression of the 1930s. And the lesson that many economic historians have drawn from that era was that sticking to the gold standard was a hugely painful and ultimately unsuccessful strategy.

“The historical record seems very clear,” says Nicholas Crafts, an economics history professor at Warwick University. “In the 1930s, the countries that left the gold standard early did better on average than those who left it later.”

Indeed, the historical record doesn’t lie, as I discussed last month. Tempting as a gold standard appears, the details remind that it comes with a fair amount of baggage.

As for Poland, well, it has its troubles, of course. But it seems to have one less problem compared with Greece and Ireland.

“The creation of the euro imitated the gold standard, or perhaps, the gold-exchange standard with the German mark imitating gold,” Raymond Richman wrote in March when he was analyzing the troubles in Greece—the crisis du jour at the time.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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