Case for floating currencies: Floating currencies help states stay above water

By Jan Cienski in Warsaw, Thomas Escritt in Bucharest and,Robert Anderson in Stockholm

Published: July 13 2009 03:00 | Last updated: July 13 2009 03:00

Hundreds of thousands of Poles who hold mortgages denominated in Swiss francs have watched in alarm as the zloty has fallen in recent months, but for Leszek Waliszewski, the currency's fall is saving his car parts business.

"The weakening of the zloty is very good news for us, it is helping our competitiveness," he says, adding that his company, FA Krosno, has been able to increase sales while competitors from the eurozone are having a tougher time because of the euro's strength. The zloty is about 4.3 to the euro, compared with 3.2 a year ago.

"At the end of last year we were buying components from outside of Poland, but as of January, we are using Polish suppliers, the price is lower and the quality is similar," Mr Waliszewski says.

His experience is one of the reasons Poland may avoid a recession this year, while countries that have pegged their currencies to the euro are in for a much tougher 2009.

"Clearly, a floating exchange rate has helped Poland adjust to the shock," says Thomas Laursen, the World Bank country manger for Poland.

In Latvia, where the government is maintaining the lat's peg to the euro despite the collapse of its economy, the contraction has been more dramatic - with gross domestic product shrinking by 18 per cent in the first quarter. The governments of Latvia, Lithuania and Estonia have refused to abandon their currency boards, plunging them into the deepest recessions in the European Union.

The economy in Slovakia, which adopted the euro in January and thus has been unable to depreciate, contracted by an annualised 11.4 per cent in the first quarter, while neighbouring Czech Republic, which saw the koruna fall against the euro, contracted by only 3.4 per cent in the same period.

Businesses that operate across the region are noticing differences. Coffee Heaven, a chain of central European coffee shops, has seen plummeting sales in Latvia and Bulgaria (which also has a currency board), while latte and cappuccino addicts have been freer with their spending in Poland and even in crisis-ridden Hungary, which has also seen the forint drop against the euro. "In the case of Poland, we have not felt the crisis at all," says Richard Worthington, the chain's CEO. "But the situation in Latvia is absolutely catastrophic."

However, working out the impact of a depreciating currency at a time of general global economic decline is difficult. Although the Hungarian forint has been one of the region's most volatile currencies, analysts are not convinced it has been a decisive factor for exporters - and the economy there, hit both by the international crisis and the government's inability to control spending, contracted by 6.7 per cent in the first quarter.

In Romania, the central bank's policy of managed flotation is widely seen as damping some of the benefits that could have come from depreciation.

In recent weeks central European currencies have started to strengthen against the euro as investor confidence returns, which is concerning Mr Waliszewski. "I would be really worried if the zloty starts to approach four to the euro," he says.