Poland Won't Set Euro Entry Date, Needs More Time, Kluza Says

Poland, the only new European Union member never to have set a date for adopting the euro, needs more time to trim its $10 billion deficit before deciding when it will do so, Finance Minister Stanislaw Kluza said.

To join the euro area, the 10 nations that joined the European Union in 2004 need to trim shortfalls to within 3 percent of gross domestic product and keep debts and inflation in check. Poland meets the debt and inflation rules, while the deficit is forecast at 4.6 percent of GDP this year, according to EU rules.

Poland is trying to avoid the disappointment that has dogged Hungary and the former Soviet states of Lithuania, Latvia and Estonia, who were forced to abandon their original quests for the common currency because of faster-than-expected inflation.

``Talking about dates for euro adoption is absolutely senseless,'' Kluza said in an Aug. 24 interview in Warsaw. ``The case of Hungary is the best proof of this: setting a date and then postponing it can have a far more negative impact on the market than refraining from fixing the date in the first place.''

Successive Polish governments have said EU methodology distorts the size of the deficit as it won't allow payments to private pension funds to be classified as state revenue beginning in April. Excluding the funds from revenue will add about 1.9 percentage points to the deficit, according to government calculations.

Lower Debt, Deficit

Still, the public debt level, set at 52.9 percent to GDP in this year's budget, may be lower by as much as 2 percentage points, Kluza said. The Finance Ministry forecasts that investment will be around 10 percent this year and sees investment in the range of between 10 and 15 percent next year, making it the main engine of GDP growth in 2007.

Kluza said that growth in the $318 billion economy should reach at least 5 percent this year on high industrial output, retail sales and investments, which will boost budget revenue and may mean this year's gap is ``slightly lower'' than the planned 30.5 billion zloty.

The deficit may be between 1 percent and 4 percentage points lower than planned, he said. Precise estimates are not yet possible because the Finance Ministry does not yet know how much it will have to spend on compensation to farmers for a drought this year that ruined harvests. Additional spending on excise tax for cars and value-added tax returns on building materials are also not calculated.

Investment Ready

``Poland is in a good position to attract investment now, considering how good the fundamentals of the Polish economy are,'' Kluza said.

Hungary is under pressure to trim its deficit, the largest in the EU compared with the size of the economy, from the EU and dropped its 2010 target date and refused to include a new official date in its draft convergence plan being presented to the EU. Finance Minister Janos Veres says the government probably won't drop the forint until 2011 at the earliest.

The EU this year rejected a bid from Lithuania, the largest Baltic country, to adopt the euro on Jan. 1. Estonia, which also wanted to adopt at the beginning of next year, pulled out after soaring economic growth pushed inflation beyond the limits. Latvia postponed its Jan. 1, 2008, start date for the same reason.

Kluza, 34, who became finance minister in July, said Poland won't fall into the same trap, and wants to put off EU demands it meet the deficit requirement as early as next year.

``We will seek to convince the EU about the advantages -- social and economic -- of reducing the budget deficit to 3 percent of GDP more slowly than the EU had requested,'' said Kluza. ``A gradual reduction will, we hope, show the progress we have made.''

Central Bank

Kluza's gradual approach to the switchover contrasts that of central bank Governor Leszek Balcerowicz, who argues that it is in Poland's interest to meet euro-adoption criteria as soon as possible to shore up its credibility and make necessary public finance reforms without delay.

The government will seek EU approval for allowing the country extra time to reduce the deficit to the 3 percent of GDP limit.

``Prudence in planning the budget should be one of our chief arguments in our talks with the European Union, as we are facing the threat of an excessive deficit procedure,'' he said.

Source: ByKatya Andrusz and Dorota Bartyzel,