Schuppan Kyle Global Exhange Rate Professor Strauss 3/11/11
Poland and the Financial Crisis
The financial crisis we are facing in the United States is felt much more than that. The crisis has stretched across the world and is felt by almost every country. The crisis however was not a surprise, or is something the world has not seen before. This crisis was caused by a series of events that are very similar to events that have caused financial crisis in the past in other countries. The crisis was caused by five main mistakes made by the United States. The first was fiscal policy brought on by the United States. Bad fiscal policy by the United Sates led to the shadow banking collapse and the de-regulation of the stock market. The second cause to the crisis was excess borrowing by bad credit consumers because of low interest rates and too much asset appreciation which led to the housing bubble pop. The third cause was global imbalances, this happened due to the United States spending too much, while China saved money. The fourth cause to the crisis was macroeconomic policy, which was because the Federal Reserve left the interest rate too low for too long. The fifth and final cause to the crisis was contagion, the world, especially the United States, are interconnected economies, so when one falls then they all fall like dominos.
While seeing the causes of the crisis, its easy to see how it is a huge, global problem in todays economy. One country that was affected very little was Poland. Poland is a strong, thriving, European country. A few factors led to Poland not being as affected by the financial crisis as other European countries. First the Polish economy is very closed, so the decline in global trade did not affect Poland. Second, Poland still has the monetary policy as a tool to influence the economic activity since it is not member of the Euro-zone. The Polish government used a strong depreciation against the Euro to increase its competitiveness. Lastly, the Polish banks were not so much involved in high risk speculation. The conservative regulatory policy and sound balance sheets preserved them from high losses. Therefore it is the only European Union country to have had positive GDP growth throughout the financial crisis. The current GDP per capita is 3.8% however it is expected to grow to roughly 4.5%. While seeing that Poland has not recently had much trouble with the financial crisis does not mean they will not experience problems in the future. One major problem for countries when a global financial crisis hits is linkages. This basically means economies are intertwined through importing and exporting, that when one goes down they all go down in a domino effect. In Polands case in particular they are decent importers and exporters. A majority of their imports are capital goods needed for industrial retooling and manufacturing goods. Consequently Polands main exports are just the same, capital goods. Polands main trade partners are Germany, Italy, and the Netherlands. However Poland has begun trading with countries in the United Arab Empire. With these all linkages to other countries economies its safe to say Poland did feel a domino effect from the recession.
Another possible problem that could cause Poland problems is how investor friendly it is. Poland ranks 7th in the world in terms of investment attractiveness, due to the fact that Polish law is rather investor friendly, as well as its geographical location is attractive to investors. However with the recession many companies have obviously slowed down foreign direct investment, which could hurt Poland in the future. Lastly Poland could have trouble with exporting goods to other countries, because other countries cannot afford them, which could lead to a trade deficit. Currently Polands current account is roughly -9.5 billion dollars. Now a negative current account usually is a warning sign to a crisis, however not in this case. The negative current account is bad, however it is miniscule compared to say the United States current account of roughly -127 billion dollars. When looking at the warning signs the United States had before the crisis Poland did not experience many if any warning signs. Polands banking system did not undergo a deregulation like the United States did, Polands banking system is still sound today. Poland also did not drop their interest rate dangerously low, or have any type of asset appreciation (i.e. housing bubble). With regards to global imbalances Poland is spending a little more than it should, however when compared to other European countries it really isnt spending that much money. It also does not have huge foreign investors buying its debt, i.e. China, like the United States does. The Polish interest rate did drop to its lowest it has ever been in June 2009 to 3.50; it has now been put up to roughly 4%. Lastly is the warning sign on contagion, this is the only warning sign Poland experienced. However you cannot really take this into account because every developed country can be considered intertwined with other countries.
With regards to borrowing from other countries Polands current foreign debit is $55.4 billion dollars. However their current reserves and investment in other countries is $70.08 billion. With that being said its safe to say the Poland is a fairly big, smart investor in the world. Looking at Polands exchange rate you can see both the real and nominal have stayed somewhat equal the past few years.
This again is eveidence showing that Poland did a good job keeping its exchange rate stable during the recession. Also looking at the Current Account balance we see that Poland does run a Current Account deficit.
However that seems to be fairly normal. They did have a spike in deficit during the peak and end of the recession; however they are slowly bringing it down as of late. With all the evidence provided and taking a in depth look into Polands economy I do not see any sign of them being the next Ireland or Greece. They simply just do not show many or any at all of the warning signs the other countries did and are still looking good for the future, overall Poland has a sound economy in place.