Not all of Europe is in free-fall

Rebecca Wilder

Poland: the bull of eastern and central Europe. While most of central and eastern Europe are either defending exchange rate pegs – this limits the ability to stimulate the economy through monetary policy – and/or running large current account deficits (see chart 2 here), Poland grew a remarkable 1.1% in the second quarter of 2009 compared to the same quarter last year. Given that its regional trading partners are falling precipitously, that is a real economic feat.

2009 is a great year NOT to be part of the ERM II, which requires a relatively inflexible exchange rate policy. And since Poland can allow its exchange rate to fluctuate a bit more, strong expansionary monetary policy (lowering its policy rate by almost half) has helped to cushion the blow to regional exports.

In the meantime, Poland’s relative immunity to the globally synchronous crash has kept the fiscal balance in check (relatively speaking).

Even though Poland’s fiscal deficit is expected to rise in 2009 (perhaps outside the share of GDP allowed by the Eurosystem), its more stable growth pattern will clearly “cost less” in terms of government spending and fiscal deficits, making it a strong candidate for euro conversion growing out of the crisis currently scheduled for 2012)

As the IMF article suggests, the re-emergence of regional trade is important for sustainable growth. However, Poland’s relatively flexible currency should keep it competitive.

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