Polish finance minister worries over deflation, eyes 'Brexit' risks

Reuters News
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Posted: Feb 23, 2015 12:41 PM

By Patrick Graham

LANCASTER, England (Reuters) - Europe seem increasingly mired in a deep economic slump with little prospect of it easing within a decade, Polish Finance Minister Mateusz Szczurek said on Friday.

Speaking to Reuters at a Congress of Polish Students in Britain, Szczurek said Poland -- the EU's biggest eastern member and Europe's most robust economy since 2008 -- would have to cope with a generation-long story of ultra-low interest rates, inflation and growth across the rest of the continent.

He warned Poland's relatively higher interest rates could strengthen the zloty sharply, and increase downward pressure on inflation that will make it more difficult for the central bank to influence growth in years to come.

But he said higher rates of return on Polish investments were likely to allow it to avoid the "secular stagnation" of zero interest and very low investment that beckons for Europe as it did for Japan over the past two decades.

"The level of rates currently suggests we are in this for the long haul, certainly for a generation, certainly more than a decade," he said.

"Looking at Japan, a big part of the slowdown was demographics. But in Japan the growth of public debt was there to compensate - is Europe prepared for that? I don't know."

Careful to say that he was not dictating policy to the Polish central bank, he said the bank was obliged by its charter to back government policies aimed at improving growth.

But he warned that complacency in monetary policy could allow expectations of very low inflation or falling prices to bed in.

"We're worried about inflation, about nominal growth," Szczurek said, adding that the real costs of servicing loans for Polish companies, after adding bank margins to falling producer prices and 2 percent base rates, were around 6-7 percent.

"The question is how high are real interest rates and how dangerous is that. The cost of funding for companies is quite substantial," Szczurek said.

BREXIT RISKS

Some estimates say that up to 2 million Poles have moved to the United Kingdom since accession to the EU in 2004, helping contribute to a debate over immigration and Britain's place in the bloc before May's UK parliamentary elections.

The rise of anti-EU party UKIP and Conservative Prime Minister David Cameron's promise of a referendum on Britain's membership if he wins in May threaten to disturb what has been a lucrative economic relationship for Poland in those years.

"(If Britain left the EU) my concern would be more about the broader EU politics and policy than the immediate economic impact," Szczurek said.

"Forgetting the natural conflict between EU net payers and receivers, there are things on which Britain and Poland have common cause, like making sure that the role of the non-members of the euro zone within the EU is protected."

But he also said that any future UK government should think carefully before restricting Poles' and other Europeans' employment rights.

"The message that I would like to get across is that free movement of labor is a crucial part of the common market but not the only one," Szczurek said.

"The fact that thousands of British firms operate in Poland, the fact that City banks all trade Polish financial instruments, that is all part of the deal. Once you start removing pieces of it, you may wind up with a far bigger disintegration of the common market than you initially bargained for."

(Reporting by Patrick Graham; Editing by Dominic Evans and Toby Chopra)