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Healthy people of Europe

Published on January 25, 2012 by: in: Economy

Growing compatibility of Polish and German economies is an argument for closer co-operation for financial discipline and stronger economic integration of the European Union.

‘Polnische Wirtschaft’ – this cluster of words has never sounded flattering in German mouth. In the colloquial language of our western neighbours Polish economy was for a long time a symbol of flaws, poor quality, and weak organization. This phrase also served as a counterpoint to German economic system, which was based on innovation, the newest technologies, and perfect planning. Although “polnische Wirtschaft” is just a stereotype, there was a grain of truth in this saying during dozen or so years after the fall of the Berlin Wall. The truth is that Polish and German  economies have followed separate paths. Poland (a bit of coercion) has relied on foreign investments and inexpensive labour force. German on the other hand has based its economy on export and technological innovations. It would seem these two countries were almost worlds poles apart. With such divergent economic models, it was very difficult to reach agreement, for instance on the matter of common European budget. The financial crisis, and actually the process of overcoming it, has changed the trajectory of economic perspective for both countries, which – toutes proportions gardées – appeared to be surprisingly similar. It also seems that this union of economical fate may become the strongest bond for the joint Polish – German actions on the European stage.

V for Victory

In the early phase of the economic crisis a negative reaction of German economy turned out to be much stronger than in case of Poland. At the end of 2008 and in 2009 quarterly decreases of GDP in Germany were  deeper than the average in the eurozone, while Poland remained a green island. The main cause of such a deep decline of German economy was, above all, the decrease in the value of export (especially of industrial goods). Germany based its economy on export to a much larger extent than Poland. This downward trend in the German economy underwent a significant turn in 2010, when it appeared that German economy dealt with the crisis much better than other countries of the eurozone, and in the second half of the year reached GDP comparable with Polish one (almost 4% in the 3rd and 4th quarter, year on year). The whole 2010 ended for German economy with 3.6% growth of GDP – the highest since 1989. According to the European Commission an estimate growth of GDP for Poland in 2010 reached 3.5%.

The anti-crisis actions taken by the government in Berlin were one of the main reasons for the upturn in the German economy. The condition of the automotive sector of industry visibly improved owing to the introduction of bonuses for people who buy new cars. The value of industrial production in this sector in 2010 increased by almost one-quarter. Regulations, which enabled companies to shorten working time, curbed the potential of raising unemployment rate, and in consequence prevented consumers from cutting on their expenses for fear of loosing their jobs. In 2010 a real growth in consumer spending in Germany reached 0.5%, and according to the prognosis of Deutche Bank in 2011 this growth can reach the level of 1.25%. German companies have managed to withdraw almost entirely from regulations introduced due the crisis. At the end of 2010 shorter working time applied to almost 200,000 workers, that is almost eight times less than in 2009. A stable domestic consumption of our western neighbour was one of the basic reasons for Poland’s economic growth during crisis. Germany is the biggest recipient of the Polish export.

According to the prognosis of the European Commission the growth of GDP in Germany in 2011 would be lower than in Poland (2.2% and 3.9% respectively). This slowdown in German economy is, above all, connected with expiration of some of the specific factors which boosted the economic growth in 2010. These were the impact of changes in stocks, and the delay in investment for 2009 which were carried out in 2010 instead. Nonetheless, the growth of German GDP will be still much higher than the growth of GDP in the eurozone (1.5% according to the prognosis of the European Commission).

In the last few years situation on job markets of Poland and Germany also became more similar. In May 2004, when Poland joined the European Union, unemployment rate in our country was on the level of 20% and was therefore almost two times higher than in Germany. It was one of the reasons why during accession negotiations Germany demanded relatively long (7 years) transitional period before opening its job market for workers from Poland. According to Eurostat’s data unemployment rate in November 2010 in Germany and in Poland was on a level of 6.1% and 9.4% respectively. This statistics illustrates how much smaller is the distance between both countries with respect to the situation on the job market. Poland, ipso facto, rose from the position of one of the countries at the tail-end of EU characterized by one of the highest levels of unemployment rate, to the position of an average country – in the whole EU the unemployment level reaches 9.5%.

Above-mentioned analysis is not aimed at proving obviously untrue thesis that Polish and German economy and hence their priorities in economic policy are practically the same. German GDP per capita and after taking into account differences in purchasing power was in 2009 still almost two times higher than in Poland (it is, however, worth noticing that 10 years earlier German GDP was two and a half times higher from Polish GDP). There is also a difference in the structure of both economies – German one is based to a larger extent on branches of industry and services which create higher value added and use modern technologies. This difference is reflected in an enormous difference in expenditures on research and development which, according to Eurostat’s data, amounted only 0.6% of Polish GDP in 2009, whereas Germans spent on research end development almost 2.8% of their GDP.

Polish and German economies are not identical but undoubtedly came closer in the last few years. Ties between both economies are strong partially because of the geographical proximity of both countries. Export to Germany constituted 26% of Polish export in 2009, which made our western neighbour our biggest trade partner. It is also worth mentioning that a lot of exported products contained components imported from Germany. Therefore we can discuss not only about economic situation in both countries becoming similar, but also about growing interdependence of their economies, bearing in mind that the impact of German economy on Polish one is obviously much stronger than the other way round. This correlation between Poland and Germany can be a foundation on which common economic interests and political vision for Europe can be built.

Essential pact of the disciplined.

In the context of the above-mentioned similarities and differences between the economies of both countries, in my humble opinion, Poland and Germany should work together on European forum especially in case of one crucial matter. They should focus on real and effective functioning of the Stability and Growth Pact (SGP), although probably in a version adjusted to the changed post-crisis reality, and during a period which will give Member States a chance to put down a fire which is spreading in public finances. SGP was established by Member States and anchored in the Amsterdam Treaty as an integral element of the third stage of establishing the Economic and Monetary Union (EMU), and as a result adopting common currency.

SGP obliged the Member States to maintain the discipline of public finances in such way that an annual budget deficit was no higher than 3% of GDP. In the case that the deficit of a given country breaches this level, Council of the European Union starts so called Excessive Deficit Procedure to issue recommendations to the Member State concerned to take appropriate steps in order to assure the stability of public finances. In the event of not sufficient progress in realization of these recommendations the Council can decide about imposing financial sanctions on the given Member. This system was passed on the verge of a full currency integration in order to assure stability of the common currency and to eliminate the possibility that the Member States which run balanced budgetary policy will have to suffer the consequences of excessive debt of some of the other Members. Germany, which always attached great significance to the stability of its currency, especially solicited enforcement of this specific emergency break.

In theory SGP was supposed to prevent the situation with which we are dealing currently. Some of the Member States can hardly gain resources on the free market to cover their  growing debts. In order to save them from bankruptcy the European Union must create a special aid found. The Excessive Deficit Procedure was enforced in the vast majority of Member States (Germany and France therein) although financial sanctions were never imposed on any of those countries. Therefore SGP did not become a real mechanism of preventing attempts of the Member States to giving impetus to excessive debt – some of those countries breached the deficit level of 3% of GDP even in times of prosperous economy. This lack of obedience brought five of the European countries’ budget deficits to a two-digit figure in 2009 (Ireland, Great Britain, Greece, Spain, and Latvia). Germany presents itself in this context on the top of Europe – although in 2010 its budget deficit exceeded 3% and was on the level of 3.7%, in 2011 it should fall to the level of 2.7% according to predictions of the European Commission. The prognosis of the Commission shows that Poland is in a slightly worse situation, because in 2011 its budget deficit should still exceed 6%. Nevertheless, it is worth mentioning that Poland is at the same time characterised by the level of national debt lower than in Germany and other EU Members.

Relatively good situation in the stability of the system of public finances of Poland and Germany is obviously not the only argument for more intensive actions of both countries for the enforcement of an effective system of sanctions which would prevent excessive debt of the Member States. In case of Germany these arguments are obvious. It is Germany, as the biggest and at present the strongest economy of EU, that to the largest extent will have to incur the costs of the rescue mechanisms for the countries which will not be able to service their growing deficit through selling more bonds on the free market. In the last few months Portugal, which was considered as the next candidate for the help from EU and IMF, conducted a successful action of its bonds. However, it has to be borne in mind that this success was possible thanks to clear declarations from the European Commission, and also from Germany (but less directly) that they will protect the stability of the eurozone regardless of costs. Current successes of the countries from the so called PIIGS group in raising external capital mean that problems are only postponed. According to calculations of Deutsche Bank, bonus for the risk of buying Greek bonds exceeded in 2010 even 900 basis points (the bonus is calculated as the difference between interest rates of Greek and German bonds). One day Greece and other countries with a high deficit rate will have to repay this extremely expensive debt, and the question arises if the European Commission will have to help them again. Germany will not have to give permission for saving the countries in debt, but action like that may spell the domino of insolvency of other Member States, the slump of their economies, and the collapse of the eurozone. This scenario is not only highly unrealistic politically, but would also strike German economy which is dependent on export, and would reduce financial markets’ confidence in it. From the German point of view it is essential to lobby for the EU regulations which would force PIIGS countries to heal their financial situation and would avert the risk of generating other rescue mechanisms.

Poland hit by ricochet

Why Poland, which is not in the eurozone, should opt for such mechanism? Because of two basic reasons. First of all, alarming news from the eurozone induce currency investors to move to safe harbours, such as Swiss francs. During last 12 months (from February 2010 to January 2011) Swiss franc gained 14% against euro. In a consequence Swiss franc gained also against zloty, which as a currency of a developing country is viewed as more risky investment. In the last 12 months Swiss franc gained 12% against zloty, however, in a three-year period euro lost against Swiss franc much less than zloty. This tendency is much less worrying for an average German than for Pole – for a winter skiing trip they can always choose Zell am See instead of St. Moritz and at the same time be glad with growing worth of savings amassed in Swiss currency.  Unfortunately Poles have more loans than savings in this currency and every month painfully feel its strengthening. This pain will be much stronger when the Swiss will finally raise their interest rates, which now are on an all-time low level. Polish families, which will contend with higher instalments of their mortgages, are not the only ones who should worry about further problems of Greece and Ireland. It also a trouble for Polish country which has to deal with handling the public debt.

Financial markets still see Poland in a group of those less safe economies and demand more for buying State Treasury’s debt than for German or French bonds. When PIIGS countries get into further troubles, in fear of repetition of a similar scenario in Poland, the risk bonus for Polish bonds can also grow. Lack of stability and discipline in the eurozone threatens the household budgets of Poles as well as finances of the entire state.

Currently Poland and Germany have strong joint economic foundation in order to work on a new system that would guarantee stability of systems of public finances in Europe. This situation is quite new, because up to this time Germany, as the biggest net payer, and Poland, as the biggest beneficiary of EU aid, had opposing economic interests concerning many matters. The shape of the successor of the Stability and Growth Pact, which would really extort maintaining long-term fiscal discipline by all Member States, could be a great, joint, Polish-German contribution in the development of the European integration. Although, of course, before we begin to create this great vision, we should primarily take care of one thing – a good example in the field of sustainability of public finances.

Translation: Magdalena Goździk

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About Kamila Lepkowska

Economist and sociologist, graduate of The London School of Economics and Political Science, Warsaw School of Economics and University in Munster. Holder of the UK government’s scholarship within Chevening programme and of the European Union within Socrates programme, has vast experience in writing economic analysis for international consulting companies and economic media. Member of the Projekt: Polska, between 2005 and 2008 member of the Political Board of the Democratic Party, secretary for foreign affairs of the Association Młode Centrum.

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