Just a year ago, Poland and the Czech Republic were proceeding with plans to ditch their currencies, the zloty and the koruna, and join the euro zone. By doing so, they would benefit from the usually favorable interest rate policies of the European Central Bank and solidify relations with their biggest trading partners. Euro membership would cap off a 20-year transformation from outlier states in the Soviet empire to thriving workshops for Western Europe.
Now—surprise!—the Poles and Czechs are getting cold feet as the euro zone staggers into the new year. Czech central bank board member Robert Holman says setting a date for euro adoption "would be very risky and unwise." Polish central bank President Marek Belka wants the euro zone to "normalize" before his country joins. By pausing in their march to the euro, Poland and the Czech Republic can hold on to their currencies, which have been relatively stable. Their independent central banks can also defend their economies in case of a market upheaval, instead of relying on the embattled ECB.
Not everyone in Eastern Europe is shying away from the euro: Tiny Estonia joined the zone on Jan. 1. Yet its gross domestic product of $19 billion is puny compared with the combined $631 billion GDP of Poland and the Czech Republic, which have built up successful auto, IT, and general manufacturing industries.
Analysts like Ulrich Leuchtmann understand why the Poles and Czechs hit the hold button. "A couple of years ago this would have been negative" for the koruna and zloty, says Leuchtmann, the head of currency strategy at Frankfurt-based Commerzbank. Now, stalling on the euro is "net positive," because the financial health of Poland and the Czech Republic is better than such euro zone weakling states as Greece and Ireland, he says. The Czech economy is forecast to grow 2.3 percent this year while Poland's may expand 3.9 percent, compared with 1.5 percent in the euro region, according to the European Commission.
The Czechs plan to push through austerity measures, which, combined with low inflation, may cut their borrowing costs to below Germany's by 2012, according to forecasts from BNP Paribas. The Czech budget deficit was an estimated 5.2 percent of GDP in 2010; by comparison, Greece's was 9.6 percent. "The East European countries clearly see the benefits of having a flexible currency right now," says Thomas Kirchmair, who helps manage 12 billion euros ($16 billion) in European bonds at Deka Investment in Frankfurt. "In the end they will join, but this is going to be a longer process."
The bottom line: The Poles and Czechs have decided to bide their time before joining the euro. Both benefit from keeping their own currencies.