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Has Staying Out of the Eurozone Helped Turkey and Poland’s Economies?

By Annibale Marsili [1]
Benzinga Guest Writer

Within the last few months, from an economic standpoint, it seems that a “two-speed” world is emerging.

On the one hand, there are the eurozone countries, where financial turmoil threatens to trigger a recession and put the future of the eurozone at risk.

On the other hand, there are developing and high-growth countries that have no involvement with the euro. Their economic growth is increasing and staving off, to some degree, the chances of a global downturn.

For example, the JP Morgan Global Purchasing All-Industry Output Index rose in December to $53—a 9-month high. During the recession in 2008, when the financial system collapsed after the Lehman Brothers crisis, this index was below $40.

This index, which covers the manufacturing and services sectors, is based on the results of surveys of over 11,000 purchasing managers in around 30 countries. Together, they account for almost 86% of global GDP. The survey questions ask about real events, not opinions.

The main actor of global economic expansion in December seemed to be the US, with a nine-month peak growth. This was in tandem with positive employment numbers, which included an increase of 325,000 jobs in the private sector.

India and Brazil also showed further economic expansion, as did Russia (although growth in Russia may be slowing). Output also rose in both the global manufacturing and the service sectors. The latter sector is increasing at its fastest pace since March.

The chief burden on the world economy appears to be the eurozone, which is running at a speed close to zero; only Germany is displaying positive growth signals.

Luckily, the UK helped shore up purchasing managers index (“PMI”) numbers with a significant increase in the services sector. There, the PMI rose to $54 in December, up from $52.1 in November. This is a good sign, and shows that the possibility of a UK recession may be far less likely than was thought a few weeks ago.

The UK was not the only economic surprise in Europe. Turkey and Poland also performed much better than expected. Turkey, currently the sixth largest economy in Europe, saw its Q3 2011 GDP rise by 8.2%. And in the first quarter of 2011, Turkey’s GDP growth rate was actually the highest in the world at +11%, ahead of both China and Argentina. Productivity in Turkey has been strong since 2010 (their GDP expanded 9% on the year), when Turkey rebounded from a severe recession in 2009 that saw the country’s GDP decline 14.3% in Q1 2009 and 4.8% in Q4 2009.

Domestic demand is steering growth in Turkey, spurred on by the country’s industrial expansion and expansion of credit. Turkey may have been economically successful for two other reasons:
1. Fiscal discipline.
2. Structural reforms.

The structural reforms that Turkey initiated in 2005, when negotiations for entry into the EU began, have expanded the country’s role in the private sector in the economy and improved efficiency in the financial sector.

The biggest pitfall for the Turkish economy is its huge current account deficit, which at $78.6 billion is the second largest in the world after the US, and is about 10% of the GDP. The account deficit is a result of imports exceeding exports by four to one.

The other country that stands out among the European economies is Poland, an EU member. In 2011 its GDP rose a projected 4%, and the latest economic forecasts estimate 2012 and 2013 growth at 2.5% and 2.8% respectively.

It’s a continuation of a rally that began in 2008. In the middle of the Lehman Brothers crisis and other terrible economics news in 2008, Poland’s GDP was up 5.1%. This carried on into 2009, too, which saw a 1.7% increase. Meanwhile, the rest of Europe was in a recession, with the average GDP contracting 4.1%.

This success may be attributed to brilliant fiscal and monetary policy. A reasonable government budget—with the public deficit at 3% to GDP and public debt estimated to peak at 53.8% of GDP—coupled with strong domestic demand (November saw a 12.6% increase in retail sales) and a weak currency experiencing low inflation (forecasted to be at 2.7% next year), has allowed Poland’s economy to post strong growth numbers.

Help has also come from the Polish Central Bank. It exists independently from the broader banking system because it has no supervisory duties. Financial supervision is instead entrusted to an independent authority, known as the Polish Financial Supervision Authority. Because of this, the Polish Central Bank can be completely focused on monetary stability.

The main weakness in Poland’s economy right now is unemployment, which is at 12.1%. However, there is wide regional diversification in unemployment numbers. In some areas, the unemployment rate is as high as 21%, while in other areas it is below 10%.

It is questionable what benefits the euro could offer Turkey and Poland right now. These countries have experienced strong growth despite a global economic situation that is far from idyllic. Would that growth have happened if those countries had to follow the rigid rules associated with the euro?

For example, about two-thirds of Poles oppose adopting the euro, according to a recent survey. Only 12% said they would be completely in favor of adopting the euro. They fear that the euro will lead to higher prices, less job security, and less savings, and will change the national identity, perhaps not for the better. The weakness of the zloty, the current Polish currency, has fueled growth by increasing exports.

There were also complaints about the Polish government’s decision to contribute $200 billion to the IMF loan that will be used to assist at-risk euro zone members.

“Why should we pay for the excesses of the Italians and the Greeks, who are richer than us?” they ask in Warsaw.

They cannot be clearer. In fact, this is the general sentiment surrounding the euro throughout most of Europe.

For now, Turkey and Poland continue to watch the rest of Europe’s economy from afar—but for how long?

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Scott Boyd

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