Aug. 6 (Bloomberg) -- The Polish government’s decision to drop its 2012 target for adopting the euro allows policy makers to address the economic and budgetary risks that need to be tackled, President Lech Kaczynski’s top ministerial aide said.

The president and central bank fought with Prime Minister Donald Tusk over his earlier insistence on linking the zloty to the common currency in the exchange-rate mechanism as early as this year and joining the euro in three years. Deputy Finance Minister Ludwik Kotecki told lawmakers on July 29 that the Cabinet’s goal became unfeasible because of budget problems.

Poland, the only one of the EU’s 10 eastern members to have avoided a recession, has been hampered by shrinking revenue swelling the deficit. The global crisis may stall other euro hopefuls, including Hungary, Latvia and Lithuania as candidates struggle with the worst economic slump since shedding Communism.

“There are no compelling reasons for us to adopt the euro now, so let’s get prepared thoroughly, let’s stabilize public finances, let’s go into the exchange-rate mechanism without haste,” said Presidential Chief of Staff Wladyslaw Stasiak in an interview yesterday in Warsaw.

Zloty Reaction

The zloty fell to 4.1383 against the euro as of 3:35 p.m. in Warsaw, from 4.1107 yesterday. The yield on the government’s two-year bond fell 2 basis points to 4.899 percent. A basis point is 0.01 percentage point.

To be accepted into the euro region, candidates need to keep inflation down, hold debts to 60 percent of GDP and deficits to within 3 percent of GDP.

The biggest challenge for Poland’s currency changeover at the moment is the general government deficit, which is expected to total 6.6 percent of GDP this year, according to the European Commission, and may not fall within the limit until 2011 or 2012.

The dispute over whether Poland should be the European Union’s next eastern member to make the currency transition, after Slovenia and Slovakia, echoes a fight between Czech President Vaclav Klaus, the EU’s most strident euro critic, and the government of former Prime Minister Mirek Topolanek, who lost power in March.

Delayed Adoption

Topolanek’s government had promised to set a euro date on Nov. 1, while his successor, Jan Fischer, has dropped the issue entirely, raising speculation euro-adoption in the Czech Republic may be put back until 2015 at the earliest.

Kaczynski, who threatened to hold a referendum to block the government’s planned euro adoption timetable, said on July 30 that 2015 is an “optimistic but realistic” date for Poland, while Fitch ratings forecasts the country, the largest of the EU’s eastern members, will make the switch in 2013. Stasiak said the government’s agreement to postpone euro adoption meant a referendum on euro adoption is no longer needed.

“It seems as though the economic situation has started to stabilize, but we have no need to adopt the euro as soon as we possibly can,” said Stasiak. “So if it happens in a few years’ time, let’s wait; 2015, for example, seems much more realistic.”

The adoption-target dispute is easing as Poland’s economy shows signs of improvement.

Gross domestic product, which grew 0.8 percent in the first quarter, may continue expanding this year and pick up in 2010. Poland is also the EU’s only eastern member to show rising retail sales in June, when the inflation rate dropped to 3.5 percent from 3.6 percent.

Counter Forecasts

The government’s prediction that it will escape a recession this year is in contrast to forecasts by the International Monetary Fund, which sees a 2009 contraction of 0.5 percent, and the European Commission, which said GDP may shrink as much as 1.4 percent.

The Commission, which is scheduled to publish new forecasts on Sept. 14, may revise its prediction to show Poland’s economy will expand slightly this year, daily Dziennik reported today, without citing anyone.

“It’s vital that the currency has stabilized first --and that will only happen when the economic situation has improved,” Stasiak said.

After falling to a record low against the euro in February, the zloty has gained 19 percent, recouping most of this year’s losses and proving its fluctuations are too great for the central bank to defend it from speculative attacks. The currency gained 7 percent in July alone.

“The recent crisis has made central European currencies highly volatile,” said Pasquale Diana, an economist at Morgan Stanley. “If any of them had been in” the exchange-rate mechanism, “the national central banks would have spent significant reserves trying to defend them.”

To contact the reporter on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.netKatya Andrusz in Warsaw at kandrusz@bloomberg.net

Last Updated: August 6, 2009 10:05 EDT