Poland's euro challenge: economic and social consequences of euro adoption

1 BACHELOR’S DEGREE FINAL PROJECT DOUBLE BACHELOR’S DEGREE IN BUSINESS AND ECONOMICS POLAND’S EURO CHALLENGE: ECONOMIC & SOCIAL CONSEQUENCES OF EURO ADOPTION FACULTY OF ECONOMICS AND BUSINESS SCIENCES UPV/EHU COURSE 2024/2025 Autor: Markel Zarandona Cañas Tutor: Juan María Barredo Zuriarrain 2 INDEX 1. INTRODUCTION .....................................................................................................5 2. THEORETICAL FRAMWORK.....................................................................................6 2.1. The Euro: Origins & Development ....................................................................... 6 2.2. Conditions for joining the EU and Eurozone ........................................................ 7 2.3. Poland’s Path to the European Union .................................................................. 8 3. LITERATURE REVIEW ............................................................................................ 10 4. EVALUATING THE IMPACT OF EUROZONE TRANSITION.......................................... 12 4.1. GDP per Capita ................................................................................................... 16 4.2. Inflation .............................................................................................................. 18 4.3. Foreign Direct Investment (FDI) ......................................................................... 21 4.4. Trade Balance ..................................................................................................... 23 4.5. Government Debt .............................................................................................. 29 5. POLITICAL PERSPECTIVES FOR THE DEBATE ON MONETARY INTEGRATION ............ 31 6. CONCLUSION ....................................................................................................... 33 7. BIBLIOGRAPHY .................................................................................................... 34 3 FIGURES INDEX Figure 1: Interest Rates Evolution ............................................................................................ 13 Figure 2: Economic Growth Evolution ..................................................................................... 16 Figure 3: Inflation Evolution ..................................................................................................... 18 Figure 4: Foreign Direct Investment Inflows Evolution ............................................................ 21 Figure 5: Slovenia’s Trade Balance ........................................................................................... 23 Figure 6: Slovakia’s Trade Balance ........................................................................................... 25 Figure 7: Lithuania’s Trade Balance ......................................................................................... 26 Figure 8: Trade Balance Evolution ............................................................................................ 27 Figure 9: Government Debt Evolution ..................................................................................... 29 4 ACRNONYMS LIST ECB - European Central Bank EEC - European Economic Community EMU - Economic and Monetary Union EMS - European Monetary System ERM II - Exchange Rate Mechanism II EU - European Union FDI - Foreign Direct Investment GDP - Gross Domestic Product HICP - Harmonised Index of Consumer Prices MRO - Main Refinancing Operations NBP - Narodowy Bank Polski (National Bank of Poland) NCBs - National Central Banks OCA - Optimum Currency Area SGP - Stability and Growth Pact SSM - Single Supervisory Mechanism 5 1. INTRODUCTION The adoption of a common currency is one of the most important steps a country can take in its political and economic regional integration. For Poland, a country that joined the European Union (EU) in 2004, this step still remains a complex and controversial topic. This work tries to analyze the economic implications of adopting the euro, focusing on how a transition like this could impact Poland's economy. It will try to show the possible benefits and challenges for the country, making us understand the possible consequences the euro adoption could cause to Poland. The country’s relation with the euro is defined by its obligations as an EU member and its domestic circumstances. Although Poland must adopt the euro under its accession treaty to the EU, a fixed date has not been set to do so, and public skepticism has slowed progress. Joining the euro could strengthen Poland's ties with the central EU nations, increasing trade and investment and lowering currency risks. However, there are fears of rising prices, loss of control over monetary policy and threats to national identity. These factors make the topic especially relevant at this time. To understand the economic implications of adopting the euro in the country and to assess its potential benefits and challenges for the country's economy, a comparative analysis of key variables such as Gross Domestic Product (GDP), inflation, Foreign Direct Investment (FDI), trade balance and government debt was done with Slovakia, Lithuania and Slovenia, countries with similarities to Poland that have already joined the euro. This research is divided into five parts. In the first one, the theoretical framework is discussed, including the history of the euro, the criteria for adopting this currency and Poland’s path to the EU. The second point explains the literature of the topic, presenting the studies that have been carried out so far and how this thesis will contribute to the debate. The third one analyzes the experiences of the selected countries of the eurozone and compares them to Poland’s trend. In the fourth part, a summary of the analysis is done, explaining the main findings of the work and the possible consequences of the accession to the euro in Poland. Finally, conclusions are drawn. 6 2. THEORETICAL FRAMWORK 2.1. The Euro: Origins & Development The euro (€) is probably the most ambitious accomplishment of European integration in unifying economic and monetary policy among member states. The concept of an Economic and Monetary Union (EMU) was introduced in the late 1960s to align fiscal policies, create a common currency and simplify trade while stabilizing economies. However, progress in that sense was delayed due to a lack of political will, conflict over economic priorities and international financial instability. The launch of the European Monetary System (EMS) in 1979 represented a change of direction, introducing a system of fixed exchange rates for its member states with the objective of stabilizing currencies and fixing the base for further coordination in monetary policies (European Union, n.d. - A). The guide for the euro was established with the Delors Report in 1989, which described a three-stage process to achieve EMU. The report, under the leadership of Jacques Delors, then President of the European Commission, expressed the need of much stronger monetary cooperation and proposed a step-by-step approach to ensure economic alignment among the participating countries. The first stage focused on closer economic coordination, the second one on establishing the European Monetary Institute and the third one on creating the European Central Bank (ECB) and launching the euro itself (European Central Bank, n.d. - A). These recommendations were formalized in the Maastricht Treaty, officially known as the Treaty on European Union, which was signed in signed in 1991. It provided the legal framework for the euro and introduced the convergence criteria that member states needed to meet to adopt the currency. These criteria included conditions for fiscal discipline, price stability, exchange rate alignment and long-term interest rate targets. The treaty also provided the basis for the creation of the ECB, which would be responsible for monetary policy, and established a timeline for the introduction of the single currency (EUR-Lex, n.d.). After years of preparation, the euro was finally established on January 1, 1999, as an accounting and financial transaction digital currency. Physical euro banknotes and coins were introduced three years later, on January 1, 2002, replacing the national currencies of the 12 member countries in the Europea Union in what was one of the biggest monetary changeovers in history. On December 31, 1998, permanent exchange rates were fixed between the euro and the national currencies of the first countries to join. During the threeyear transition period, governments and companies adapted their accounting systems and dual pricing was introduced to help consumers understand the value of the euro. By January 3, 2002, 96% of ATMs in the euro area were providing euro banknotes and, within a week, more than half of all cash transactions were being done in euros (Banco de España, n.d. - A). From that moment onwards, the euro area has expanded to include other member states. Slovenia joined in 2007, followed by Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014, Lithuania in 2015 and Croatia in 2023. (Banco de España, n.d. - A). Today, according to the Bank of Spain, “the euro is used by more than 300 million citizens across 20 countries, representing economic unity and the result of decades of planning”. (Banco de España, n.d. - B) 7 2.2. Conditions for joining the EU and Eurozone The process for joining the EU involves meeting certain criteria concerning political stability, economic readiness and alignment with EU values and policies. Two sets of criteria make up the requirements: the Copenhagen Criteria for EU membership and the Maastricht Criteria for euro adoption. The Copenhagen Criteria, which was established at the European Council meeting in Copenhagen in 1993, defines the requirements for the candidate countries to become member states of the EU. These include three main aspects: politically, countries must have stable institutions that guarantee democracy, the rule of law, human rights and protection of minorities; economically, they must demonstrate the existence of a functioning market economy that can resist the competitive pressure within the EU; lastly, candidate countries must accept the EY acquis, which involves aligning their national laws with the EU legislation and demonstrating the administrative capacity to implement these laws effectively (European Commission, n.d. - A). The Maastricht Criteria, previously mentioned, sets the economic criteria that EU member states must meet to adopt the euro. Introduced as part of the Maastricht Treaty in 1991 with the aim to ensure economic stability and alignment among eurozone members, it included several requirements: firstly, price stability is required, with inflation rates not exceeding 1.5 percentage points above the average of the three EU member states with the lowest inflation; secondly, stable public finances must be demonstrated either through a government budget deficit that must not be greater than 3% of GDP and public debt levels that must be below 60% of GDP or in a downward trend toward this target; thirdly, there should be exchange rate stability through participation in the Exchange Rate Mechanism (ERM II) for at least two years, showing no significant deviations from the agreed central parity rate; finally, convergence of long-term interest rates is necessary, with the rates not exceeding 2 percentage points above the average of the three EU member states with the most stable prices (European Commission, n.d. - B). These requirements were designed to ensure that countries adopting the euro would be economically stable and aligned with the existing eurozone members. 8 2.3. Poland’s Path to the European Union Poland’s journey toward membership in the European Union (EU) was a process that lasted more than a decade and included deep reforms, diplomatic achievements and a collective aspiration to integrate with Europe. This process began in September 1988, when Poland established diplomatic relations with the European Economic Community (EEC). A second agreement on trade and economic cooperation, called “Agreement between the People’s Republic of Poland and the European Economic Community on Trade and Commercial and Economic Cooperation”, was created in Warsaw on 19 September 1989. This agreement improved economic relations by lowering customs duties and removing limits on exporting certain products, bringing Poland much closer to complying with the norms of Western Europe while it was taking democratic reforms as communism collapsed within the borders of Eastern Europe. On December 16, 1991, the Europe Agreement identified Poland as an associated member of the EEC. The agreement supported trade and encouraged political dialogue to prepare the framework for further integration. Two years later, in 1993, the Copenhagen European Council confirmed that Poland, together with other countries from Central and Eastern Europe, would be allowed to become members of the EU once they had fulfilled certain political and economic criteria, which were the previously Copenhagen Criteria. Poland submitted its formal application to join the EU on April 26, 1994, during the summit meeting held in Athens. At the European Council in Essen later that year, a pre-accession strategy was adopted, outlining areas of cooperation and reforms necessary for integration (Wallas, 2023). In January 1997, Poland adopted the National Strategy for Integration (NSI), which prioritized institutional reform, legal harmonization and public education about the EU (European Commission, 1997). Formal accession negotiations began in March 1998 and covered 37 chapters of EU law and policy. By 2002, Poland had completed negotiations on all chapters, resulting in the signing of the Treaty of Accession in Athens on April 16, 2003. The treaty was ratified through a national referendum in June 2003, where 77.45% of voters supported EU membership. On May 1, 2004, Poland officially became a member of the European Union, together with nine other countries (Wallas, 2023). In this moment, Poland also entered the European System of Central Banks (ESCB), which includes the ECB and the national central banks (NCBs) of all EU Member States (European Central Bank, n.d. - B). Although being part of this system, Poland does not have to follow the ECB’s monetary policy, as the National Bank of Poland is responsible for its monetary policy. Nevertheless, as an EU member, it is still linked to the ECB, having to comply the Single Supervisory Mechanism (SSM), the framework through which the ECB supervises banks in the euro area and participating non-euro countries (European Central Bank, n.d. - C), and the Stability and Growth Pact (SGP), which establishes rules to maintain fiscal discipline within the EU by setting limits on budget deficits and government debt (European Commission, n.d. - C). Despite its legal obligation under EU treaties to adopt the euro, joining the eurozone remains a distant goal for Poland. Donald Tusk, former Polish prime minister and co-author of a report in 2015 on strengthening Europe’s economic and monetary union, has not prioritized euro adoption in Poland, even if his recent campaign emphasized closer alignment with the EU. The 9 economic case for adopting the euro is strong: 75% of Poland’s trade is with the EU and the volatility of the złoty has created uncertainty and raised transaction costs for businesses, as its value against the euro has fluctuated by up to 26% below or 12% above its current level over the past two decades. Nevertheless, significant barriers persist. Most Poles remain against replacing the złoty and constitutional amendments needed for euro adoption would require a two-thirds parliamentary majority, which the government lacks. For now, Poland’s focus remains on solving domestic challenges, such as addressing judicial independence, securing €25 billion in EU recovery funds and managing a budget deficit nearing 5% of GDP. While adopting the euro may help Poland in the long term, the country has achieved substantial economic growth since joining the EU in 2004, with GDP per capita doubling in real terms, allowing it to surpass some eurozone countries like Portugal. Thus, it seems like euro adoption is a long-term goal rather than an immediate priority (Reuters, 2024). 16 4.1. GDP per Capita Gross Domestic Product (GDP) per capita can be considered the most important indicator of economic performance, as it measures the total economic output of a country divided by its population. This helps to understand the average income, productivity and standard of living in a country. Studying GDP per capita is essential when analyzing the effects of adopting the euro because it shows how an economy grows and how people's incomes change over time. From my perspective, Poland’s economic growth would increase after adopting the euro. Joining the Eurozone could strengthen Poland’s economy by attracting more foreign direct investment, boosting trade and improving financial stability, all of which contribute to higher economic output. Additionally, businesses would benefit from lower transaction costs and greater market integration, leading to higher productivity and increased wages. Over time, as Poland aligns more closely with the economic structures of other Eurozone countries, income levels could rise, reflecting an overall improvement in economic conditions. Figure 2: Economic Growth Evolution Source: World Bank, n.d. Figure 2 shows the evolution of GDP per capita growth for Slovenia (gray), Slovakia (orange), Lithuania (blue) and Poland (yellow) from 2000 to 2023. The three shaded areas mark, once again, the years when each country adopted the euro: Slovenia in 2007 (gray), Slovakia in 2009 (orange) and Lithuania in 2015 (blue). The three now Eurozone countries followed a similar economic growth pattern, experiencing constant increasing growh in the early 2000s, a sharp decrease during the 2008-2009 financial crisis and a slow but uneven recovery. While each country showed differences in magnitude and timing, they all went through the same general economic cycles, with a negative influence of joining the euro. Poland, on the other hand, can be seen to have a more stable growth, excepting the last years due to heavy economic crises. 17 From 2000 to 2007, all four countries had fast economic growth. Lithuania and Slovakia had the highest peaks, reaching 12,41% (2007) and 10,79% (2007), respectively. Slovenia also had stable growth before joining the euro in 2007, which closely followed Poland. However, the 2008-2009 financial crisis caused a strong economic decrease. Lithuania was hit the hardest (-13,89%), followed by Slovenia (-8,42%) and Slovakia (-5,63%). In comparison, Poland was the only country that avoided recession, still growing at 2,55% in 2009. After the crisis, recovery was different in each country. Slovakia, which had just joined the euro in 2009, recovered faster than Slovenia. In fact, Slovenia had a harder time after adopting the euro in 2007, with low growth rates in 2010 (0,67%) and 2011 (0,45%), followed by a negative growth in 2012 (-3,12%) and 2013 (-0,96%). Lithuania, which joined the euro later in 2015, had already stabilized its economy by then, with a growth of 3.80% in this year and 6,09% in the next one. Poland, the only country that did not adopt the euro and therefore stayed was less affected by the European debt crisis, had the most stable economy, avoiding extremes and showing steady growth after 2013. The COVID-19 crisis in 2020 caused another economic downturn, with all the countries having negative growths except from Lithuania. Slovenia was the most affected country (-4,73%), followed by Slovakia (-2,67%) and Poland (-1,86%), while Lithuania had a null growth (0,02%). However, all four countries quickly recovered in 2021 due to the ending of restrictions, with Poland growing the fastest with a 9.58% increase, followed by Slovenia (8.10%), Lithuania (6,15%) and Slovakia (5,95%). Despite this, the years after the pandemic saw slower growth due to external events like the Ukraine war. By 2023, Lithuania, the most recent country to join the euro, was the only one with negative growth (-1,05%), while Poland (0,51%), Slovakia (1,47%) and Slovenia (1,71%) had low but positive growth. Even though these economies had similar trends, their decisions on joining the euro seem to have negative effect in their performance. Poland performed the best during economic crises, avoiding recession in 2009 and having the strongest post-COVID recovery. Lithuania had the biggest changes, with the highest pre-crisis growth, the deepest fall in 2009 and the only negative growth in 2023. Slovenia’s economy became less stable after joining the euro in 2007, with multiple years of negative growth after the financial crisis. Slovakia, which joined the euro in 2009, also slowed down afterwards, with more unstable and lower growth than in the early 2000s. If Poland were to adopt the euro, its economic growth might become more volatile, similar to what happened in Lithuania, Slovenia and Slovakia. All three countries experienced strong and stable growth before being part eurozone, but their patterns became more uncertain after adoption. However, it is important to highlight that other factors such as global economic crises and national policies also increase economic volatility. Therefore, while there appears to be some association between euro membership and increased fluctuations in growth, further analysis is needed to determine the extent of this relationship. 18 4.2. Inflation Inflation another important economic indicator when assessing the transition to the euro, as it reflects changes in price stability and purchasing power. Joining the euro could be expected to initially push the price level in the country. As an example, it may worth remembering the adoption of the common currency by Spain, where the transition from the peseta to the euro led to a rise in prices. Then, if Poland adopts the euro, prices may adjust to align more closely with those in the Eurozone, which could lead to an increase in the cost of goods and services. Moreover, the lack of monetary policy that the transition causes would prevent the country from controlling its own inflation, which I believe would cause its increase as well in the long term. In order to carry out this analysis, the Harmonized Index of Consumer Prices (HICP) will be used. This is the European Union reference for measuring inflation, and it is prepared jointly by Eurostat, the statistical office of the European Union and the national statistical institutes of the EU Member States (European Central Bank, n.d. - D). Figure 3: Inflation Evolution Source: European Central Bank, n.d. – E, F, G; Instituto Nacional de Estadística, n.d. Figure 2 provides a view of inflation trends in Slovenia, Slovakia, Lithuania, Poland and the Eurozone along the 21st century, with each country represented by the same color as in previous graphs: Lithuania (blue), Slovakia (orange), Slovenia (gray), Poland (yellow) and the Eurozone (black). The shaded areas indicate again the years when countries adopted the euro: Slovenia in 2007 (gray), Slovakia in 2009 (orange), and Lithuania in 2015 (blue). Slovenia, which was the first country of the selected ones to join the euro on January 1, 2007, presents different patterns before and after adopting the euro. In the years preceding 2007, we can observe that Slovenia’s inflation was higher and more unstable compared to the Eurozone. From 2000 to 2006, Slovenia’s inflation ranged from 8.4% in January 2002 to 2,6% 19 in January 2006, decreasing as it prepared to join the euro due to the Maastricht criteria (recall section 2.2). The Eurozone, in contrast, had lower and more stable inflation, staying between 1,7% and 2,5% in the same period. After adopting the euro in January 2007, Slovenia’s inflation started increasing, reaching 5,7% in December 2007, while the Eurozone’s was only 3,1%, indicating that Slovenia initially faced stronger inflationary pressures than the rest of the monetary union. In fact, approximate calculations of Eurostat show that the euro changeover contributed about 0,3 percentage points to inflation during this period (Eurostat, 2007). This temporary increase is probably a consequence of the price adjustments related to the currency change, such as rounding effects in certain sectors and the psychological impact of switching to a stronger currency. Specific price increases were noted in categories such as restaurants, cafes, personal care services and household maintenance services (Eurostat, 2007). Because of all these factors, Slovenia’s inflation rate stayed above the average Eurozone rate, the former reaching to its peak in July 2008 with a rate of 6,9%, while the latter having a maximum of 4,1% in the same date. Moreover, this transition coincided with the global financial crisis, which caused a price bubble to explode in 2008, leading to a sharp decrease in inflation throughout 2009 that reaching a –0,6% in July of that year. In the following years, Slovenia had inflation under control and close to the Euro Area average, reflecting how joining the currency change contributed to the country’s inflation stabilization. In recent years, however, inflation has increased due to the Ukraine war, which caused supply shortages, making it reach a peak of 11,7% in July 2022. Slovakia, our second country to adopt the euro on January 1, 2009, presents as well different trends before and after the currency change. In the beginning of the century, Slovakia presented large fluctuations, going from a peak of 16,8% in March 2000 to a 2,2% in July 2002, to further increase to a 9,5% in November 2003. These fluctuations continued in the next years. The Eurozone, meanwhile, had a constant inflation rate, ranging from a minimum 1,6% to a maximum of 2,6%. From August 2007 onwards, both the Eurozone and Slovakia started following similar rates path due to Slovakia’s commitment to comply with Maastricht criteria. In what refers to the transition in 2009, Eurostat estimates that the total effect of the euro changeover on consumer inflation was up to 0.3 percentage points during the period from December 2008 to February 2009. This impact was in line with the experiences of other euroadopting countries. According to them, unusual price increases were observed in specific categories, such as food, beverages, healthcare products and certain housing-related services, but these were not significant enough to influence the overall inflation trend (Eurostat, 2009). Lastly, the post option period was marked by the closely following of Slovakia to the Eurozone rates. However, it is important to mention that Slovakia has been more volatile than the Euro Area, reaching higher rates in peaks like in October 2012, with a 3,9% and a 2,50% respectively, and in crises such as the war of Russia and Ukraine, with a 15,4% for the country and a 9,20% for the area in the end of 2022 and beginning of 2023, respectively. Lithuania, the third country selected for our analysis, adopted the euro on January 1, 2015. In comparison to Slovenia and Slovakia, Lithuania started the century with a much lower inflation rate, being of a 0,9% in January 2009, lower as well than the Eurozone one, which was of 1,90% at that moment. Along the pre-adoption period, two main peaks can be observed: the first one, consequence of a fall of inflation from a rate of 3,2% in January 2002 to a -1,4% in September of the same year; the second one, followed by a constant increase of inflation from 20 that moment onwards, reaching a maximum of 12,7% in 2008 due to the increase in interest rates that followed last year (recall figure 1) , lowering inflation to a –0,6% in February 2010. In the following years, Lithuania prepared to address the requirements of the Maastricht criteria, being close to the average Eurozone rate from this year onwards. The euro changeover contributed approximately 0,12 percentage points to the annual Harmonized Index of Consumer Prices (HICP) inflation rate, representing a very limited effect on overall inflation. Minor price increases were observed in specific service categories, partially attributable to rounding effects, though these were not substantial enough to significantly influence inflation trends according to Eurostat (Eurostat, 2015). Nevertheless, highlight the much higher impact that the Russia and Ukraine war had in Lithuania, which was more than double than the one of the Eurozone. Poland, the non-euro country of our analysis, presents, as Slovakia and Lithuania, a downward trend in the beginning of the century, going from a 10,1% in January 2000 to a 0,3% in January 2003. After this big decrease, smaller fluctuations can be observed in the country’s inflation, reflecting external economic shocks and domestic monetary adjustments. In fact, from 2010 onwards, a clear similar but slightly more volatile rate can be observed in the country compared to the Eurozone, which suggests that Poland is strongly influenced by broader European economic trends. However, in the recent years, inflation increased as in the Eurozone countries, more than doubling due to the country’s dependence on Russian and Ukraine products and the war between these two, which made inflation reach a 16,4% in October 22. Overall, the analysis shows that, although the three countries experienced slight short-term increases in their inflation due to the currency change, the long-term effects resulted in less volatile rates, improving investor confidence and facilitating trade. Nevertheless, it can be observed that financial crises also affect the inflation trends in two different ways: on the one hand, they can reduce GDP growth (recall figure 2) and, therefore, inflation, as observed in the Great Recession (2009); on the other hand, they can increase it due to trade bottlenecks as seen in the Russia-Ukraine (2022) war. Regarding Poland, its inflation trends closely follow those of the Eurozone, suggesting that, in terms of price stability, it already meets the Maastricht criteria for euro adoption. This indicates that if Poland were to join the euro, the main change would be the loss of independent monetary policy (recall figure 1) rather than a big increase in its inflation. 21 4.3. Foreign Direct Investment (FDI) When analyzing the euro transition, FDI is as well important economic indicator since it shows a nation's long-term growth potential, economic integration and investor confidence. FDI quantifies cross-border investments, which occur when a foreign investor creates or has a major impact on a company in another nation, frequently contributing money, technology and management skills. Furthermore, trends in FDI are also very important since they can show how economically appealing a nation was both before and after a currency change. We may expect an increase of FDI inflows in Poland after adopting the euro. One of the main reasons is that foreign investors would no longer face exchange rate costs when investing in Poland, making it easier and more attractive to do business there. Moreover, without currency conversion risks, investors from other Eurozone countries could operate more efficiently, increasing their confidence and encouraging more cross-border investments. For this analysis, the percentage of GDP will be used to compare FDI across the countries before and after their adoption of the euro, as well as Poland’s performance outside the Eurozone. In this way, how entering the Euro altered each country’s previous trends and Poland’s trajectory as a non-euro member will be contrasted. Figure 4: Foreign Direct Investment Inflows Evolution Source: Macrotrends, n.d. – A, B, C, D. Figure 3 shows the long-term evolution of FDI inflows as a proportion of GDP in the three euro selected countries, represented by bars, and Poland, represented by a line. Being all colors as in previous figures, the shaded areas in this graph also indicate the years when the countries adopted the euro. When comparing Poland’s FDI inflows to the other three countries, both similarities and differences can be observed. In terms of similarities, all four countries experienced a decline in FDI inflows during the 2008-2009 financial crisis. Poland’s drop from 5,83% in 2007 to 3,19% 22 in 2009 follows the same pattern as Slovakia, which fell from 5,84% in 2007 to 1,70% in 2009, and Slovenia, which dropped from 3,92% in 2007 to -0,69% in 2009. Lithuania also followed a similar trend, decreasing from 6,55% in 2007 to 3,61% in 2008 and further to -0,96% in 2009, showing that the global crisis had a severe impact on all four economies. Additionally, all four countries experienced a post-pandemic investment boost in 2020-2021, with Poland reaching 5,31% in 2021, while Lithuania peaked at 7,91% in 2020 and Slovenia rose to 3,59% in 2021. However, Poland differs significantly in long-term FDI inflows stability compared to the euroadopting countries. Slovakia and Slovenia saw a long-term reduction in FDI levels after joining the euro, as Slovakia’s FDI inflows decreased from an average of 5,24% pre-euro (2000-2008) to 2,14% post-euro (2009-2023) and Slovenia saw a slight decline from 2,68% pre-euro (20002006) to 2,44% post-euro (2007-2023). These declines can be attributed to three key factors: the stabilization of foreign investment inflows as the Eurozone's expected economic stability was achieved, increased competition from other euro countries for foreign investment and a shift in FDI inflows towards safer, long-term investments rather than volatile speculative inflows. This shift does not necessarily indicate an economic weakness but rather a transition to a more sustainable investment environment. In contrast, Lithuania’s average inflows increased from 3,30% pre-euro (2000-2014) to 3,81% post-euro (2015-2023), showing that entering the Eurozone helped the country to attract more foreign investment. Poland, in comparison, maintained an upward trend reaching high levels, peaking at 5,35% in 2022. This suggests that keeping its own currency did not negatively impact its attractiveness to foreign investors. Instead, Poland retained the ability to implement flexible monetary policies while still benefiting from its strong economic ties to the European market. If Poland were to join the Eurozone, its FDI inflows could follow two possible trends based on the experiences of Slovakia, Slovenia, and Lithuania: on one hand, Poland might experience a pattern similar to Slovakia and Slovenia, where investment flows became more stable but slightly lower in volume after adopting the euro; on the other hand, it could also follow Lithuania’s experience, where FDI increased after euro adoption. Overall, these patterns show how euro adoption can reduce FDI inflows volatility and stabilize inflows while having varying effects on overall investment levels. However, a more detailed analysis of the origin and destination of foreign investment inflows would be necessary to complement the evaluation of absolute investment levels. Understanding whether FDI inflows primarily come from within the EU or from external economies could provide important information about the role of Eurozone membership in attracting foreign capital. Additionally, analyzing the sectors receiving the most investment would help determine whether euro adoption has led to a shift from volatile, high-growth investments to more stable, long-term capital allocation. This would clarify whether changes in FDI inflows trends are primarily influenced by macroeconomic stability, investor confidence or sectoral competitiveness, offering a better view of the real impact of euro adoption on foreign direct investment. 23 4.4. Trade Balance The trade balance is another key indicator of a country's performance in international trade, reflecting the difference between the value of its exports and imports. When exports exceed imports, the result is a trade surplus, which can be sign of strong economic production and competitiveness. Alternatively, a trade deficit, where imports are higher than exports, might suggest greater dependence on foreign goods and services or imbalances in trade policies. In my opinion, I believe both exports and imports to increase if Poland adopts the euro. Being part of the Eurozone would make it easier for Polish businesses to trade with other euro countries, as they would no longer face exchange rate fluctuations or conversion costs. This could encourage more exports to Eurozone countries. At the same time, imports might also increase, as Polish consumers and businesses would have easier access to goods and services from the euro area. Since both exports and imports would grow together, the overall trade balance may not change significantly, but total trade activity would likely expand. Henceforth, the trade balance of the selected over the last two decades will be analyzed, focusing on trends in exports, imports and the trade balance percentage. The trade balance percentage represents the trade balance as a share of total trade (exports plus imports), providing a more standardized way to compare performance across different countries and time periods. Figure 5: Slovenia’s Trade Balance Source: Macrotrends, n.d. - G Figure 4 shows how Slovenia had trade deficits in six out of the seven years (85% of them) prior to joining the euro in 2007, with only one year, 2004, the year it joined the EU, registering a trade surplus. However, we can also observe a constant growth of exports and imports in these years, with exports increasing from $10,17 billion in 2000 to $25,61 billion in 2006, while imports rose from $10,91 billion to $25,63 billion in the same period. 24 During Slovenia’s pre-euro period, taking as a benchmark 2002, exports were primarily led by automobiles, parts of seats and medicaments, reflecting the country’s specialization in automotive and pharmaceutical industries. Imports heavily relied on petroleum oils, automobile components and motor vehicle parts, emphasizing the need for raw materials and intermediate goods to support its manufacturing base. Germany was as well Slovenia's largest trading partner for both exports and imports, with a partner share of 24,73% and 18,49%, respectively, followed by other key partners that included Italy, Croatia, Austria and France. Additionally, Slovenia's exports were concentrated in consumer and intermediate goods, which together represented over 70% of its trade, while imports prioritized capital goods, essential for industrial development and expansion (World Bank, 2002). When Slovenia adopted the euro in 2007, it continued to see growth in trade volumes, with exports reaching $32,63 billion and imports $33,27 billion, resulting in a trade deficit of - 0,97%. The adoption of the euro facilitated reduced transaction costs and eliminated exchange rate risks within the Eurozone, further integrating Slovenia into European markets. However, the global financial crisis of 2008-2009 introduced challenges, with the trade balance lowering to -1,56% in 2008. Despite this, Slovenia quickly rebounded, achieving a trade surplus of 1,24% as early as 2009, with exports at $28,96 billion and imports slightly lower at $28,25 billion. From this moment onwards, the country steadily increased its trade surpluses, accompanied by a continuous growth in both export and import volumes. These trends show Slovenia’s quick recovery from the global financial crisis and its successful adjustment to the euro in terms of trade, which shifted the country towards a more exportdriven economy. In 2012, Slovenia's trade patterns showed an evolution, reflecting the economic impacts of euro adoption. Exports had diversified to include significant contributions from electrical energy and petroleum products, alongside automobiles and medicaments. Imports followed a similar trend, with electrical energy becoming a key component, highlighting a growing focus on energy trade within the Eurozone. Germany remained the leading trading partner in the export side, with a 21,16% in the partner share. However, Italy became the main exporter of goods to Slovenia, leaving Germany in a close second place and expanding trade network expanded to include China as an important supplier for imports, replacing traditional European partners. In terms of product categories, consumer goods continued to dominate Slovenia’s exports, accounting for 44,10%, followed by capital goods at 25,88%. Imports also evolved, with consumer goods representing 43,06% and capital goods contributing 21,46%. This diversification and shift towards higher-value goods show how euro adoption facilitated Slovenia’s integration into European markets, strengthened its trade efficiency and supported its transition to a more export-driven economy (World Bank, 2012). 25 Figure 6: Slovakia’s Trade Balance Source: Macrotrends, n.d. - F As it can be seen in figure 5, 89% of the years prior to adopting the euro were marked by deficits in Slovakia. In this context, Slovakia’s 2004 trade was characterized by exports primarily dominated by automobiles, petroleum oils and vehicle-related products, reflecting the country’s growing automotive industry. Imports during this period focused heavily on energy resources such as petroleum oils and natural gas, alongside motor vehicle parts, which complemented its export-driven manufacturing base. Germany was Slovakia's largest trading partner for both exports and imports, with a partner share of 28,60% and 23,37% respectively, followed by the Czech Republic, Austria, Italy and Poland in the export side and by Czech Republic, Russian Federation and Italy in the import side. Furthermore, Slovakia’s exports were largely concentrated in consumer and intermediate goods, while imports were led by capital goods, reflecting the country’s reliance on machinery and equipment to support its expanding industries (World Bank, 2004). When Slovakia adopted the euro, it experienced benefits in terms of trade efficiency and reduced transaction costs. Nevertheless, contrary to Slovenia, 2009 marked a decline in both exports and imports compared to 2008, with exports dropping from $80,85 billion to $60,82 billion and imports decreasing from $82,64 billion to $60,97 billion, probably due to the currency transition and the economic crises of those years. However, Slovakia's trade balance improved in that year, reaching to a slight deficit of -0,12%. By 2011, Slovakia had already recovered, achieving a trade surplus of 0,41%, with exports rebounding to $84,27 billion and imports stabilizing at $83,59 billion. From this point onwards, Slovakia maintained consistent trade surpluses and increasing export and import volumes, reflecting the benefits of euro adoption. Five years after adopting the euro, Slovakia's trade patterns had evolved. The export profile expanded to include electronics such as television receivers and transmission apparatus, which joined the automotive and petroleum industries as key contributors. Imports also diversified, with transmission apparatus and optical devices supplementing the traditional 32 Lastly, government debt could become a challenge as well. Before joining the Eurozone, Poland would need to control its debt levels not to increase and meet the Maastricht criteria. However, historical trends show that, after adopting the euro, Slovenia, Slovakia and Lithuania all saw debt levels rise. Without control over interest rates, Poland would be more dependent on fiscal policy as its main tool for managing economic crises, which could lead to higher debt burdens and greater difficulty in responding to crises. Beyond economic factors, adopting the euro would also reinforce Poland’s political and economic integration within the EU. The membership in the Eurozone could increase Poland’s influence in European financial and economic policy discussions. Nevertheless, the impact of euro adoption is not purely positive or negative; as explained, while it may bring benefits, it could also pose challenges. 33 6. CONCLUSION In the following years, it is inevitable that Poland will adopt the euro due to its legal obligation under EU treaties to join the currency. However, the exact timing and impact of this transition remain uncertain. The experiences from countries like Slovenia, Slovakia and Lithuania show both the opportunities and risks of joining the Eurozone. In conclusion, adopting the euro could bring Poland long-term benefits, such as lower borrowing costs, increased trade and investment and a stronger economic and political integration within the EU. However, it also comes with risks, such as the loss of monetary policy control, GDP growth volatility and fiscal challenges. The success of Poland’s transition to the euro will ultimately depend on ability to of the country controls its debt, sustain export competitiveness and manage economic shocks effectively. Nevertheless, without the necessary reforms and stability measures, Poland could face economic challenges that surpass the advantages of euro adoption. 34 7. BIBLIOGRAPHY ▪ Baldwin, R. E., Di Nino, V., Fontagné, L. G., De Santis, R. A., & Taglioni, D. (2008). Study on the impact of the euro on trade and foreign direct investment. 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