Euro 2012: The Cost

As the UEFA Euro 2012 tournament opens and soccer madness grips everyone in patriotic fervor, there are already calls and questions on whether the games were actually worth it to Poland and Ukraine.  (By the way, the games opened yesterday with a 1-1 tie between Poland and Greece.  Russia stomped the Czechs (think 1968 style) 4-1.)  Several articles—a couple are here and here—bring up the enormous cost of the games as well as citing precedents, namely Greece with the 2004 Athens Olympics, but also the Euro 2004 Portugal games.
First off, cost: it's widely claimed that Poland spent $25 billion dollars getting ready for the games.  That's a staggering amount, no doubt, and one should look a little more closely at it.  The real cost was in infrastructure improvements, ($15 billion on roads alone), whilst the cost of the four stadiums (construction and renovation) amounts to something around $1.5 billion.  There are also other costs, such as: security (not just providing security, but also the cost of arrests and trials.  Notably, inmates were moved from host cities to jails in other cities to make room for expected arrests.  Many judges were put on standby to handle the increase in prosecutions as well), building the strefa kibica (fan zone), clean up, etc.  But these are paltry sums compared to the overall total.  Poland spent more than Ukraine, but then again, it did have access to EU money.
The claim that Poland spent $25 billion preparing is ludicrous and wrong.  Much of that money is EU money that was flowed in Poland to help rebuild its decaying infrastructure.  All the projects were already earmarked before Poland even made its bid for the games.  Now, the tournament probably increased the priority of certain projects—the case in point being the semi-notorious A2 Berlin-Warsaw highway.  It gained notoriety for: A) Having the Chinese contractor be kicked out because it failed to pay its sub-contractors.  B) Being opened when still incomplete for the Euro 2012, and will have to be closed afterwards to finish it up (an extra layer of pavement is needed on a good-sized portion).  But the A2 highway wasn't built for the games, it was going to be built anyway, and probably on the same schedule.  The second metro line has as much to do with the Euro 2012 as do the new trams in Lodz, Krakow, and just about everywhere else (cities that are not hosting the games, but renovated their tram lines).  It has not been noticed much, but Poland has also been using EU funds to build small, rural roads (this will be covered in a future post).
That's not to say the games did cause infrastructure and other projects to be done.  There are, but not what everyone thinks.  The real cost that can be directly attributed to the games was building the stadiums, and it's quite shocking to see the main contractor file for bankruptcy protection.  There was a big push to beautify the cities before the games came, and it shows.  Renovations the rail stations, finished just in time, have turned the dank platforms and corridors into hallways of light.  Warszawa Centralna's transformation has eased travel through there and really updated it as a gateway into the city.  Speaking of gateways, it may have been planned long ago, but the recent opening of the SKM line to the airport is sure to be a boon for travelers.
Infrastructure has received much of the attention, but the stadiums themselves have attracted their fair share of criticism.  Most barbs are aimed at the National Stadium in Warsaw.  The high cost of the structure, at almost 2 billion zlotys, has dropped some jaws.  Critics say that it'll turn into a white elephant, a costly building to maintain and will be under utilized.  The Polish National team doesn't have a long schedule to ensure that paying fans will be packing the stands every week, but events have already been scheduled.  From concerts to the Polish Bowl (I think I'll attend that), the building is a prime venue.  It has to compete will the Sluzewiec racetrack (hippodrome) and the Bemowo airport for such events like concerts and music festivals.  Other stadiums have taken the fashionable thing and sold their naming rights to offset the cost of construction and operation.  (Note:  Ironically, when the Polish National Team recently played Andorra, they played at the Pepsi Arena, home Legia Warszawa, and not in the National Stadium, which was under UEFA control.)

Now that we have spent so much time harping on the cost, let's look at the gains.  Poland is betting on two things to recoup the cost of the games: an increase in tourism (not just the short-term spike, but also long term), and an increase in investment.  Tackling the second hope first, Poland is trying to show that it can execute big projects on time, plus show off its shiny new roads and rails.  An influx of foreign capital will cause the ever-growing forest of stationary cranes standing above halted construction projects to finally move once more.  The first hope is for an increase of tourism, on which Europe is increasingly becoming reliant (think Greece and Portugal).  Poland wants to show that they're not all racist anti-semites, regardless of what the BBC aired.  The increase of tourists during the games is a given, and they'll spend big, buying all sorts of bric-a-brac and crap in the form of Euro 2012 souvenirs.  As for the future, Poland hasn't showcased its crown jewels (read: Krakow), here, but the hosting cities are known to be beautiful, Wroclaw and Gdansk in particular.

While the games are costly, the cost isn't so high as is reported.  Most of the work done was financed with EU help, but there were also smaller contributions, such as the EEA and Norway grants.  The great part of the infrastructure improvements were already set forth and would have happened anyway.  What we're seeing is a developed economy rapidly modernize, closing the gap in deficiencies, and increasing its debt.  This happens all the time with developing economies, and is now going on in China (all eyes are on them).  The question is whether the EU money will continue to flow, especially as other countries are one-by-one seeking bailouts.  The spigot could be turned off and Poland could be left with a mess of half-finished projects and join the sad graveyard of countries who were too ambitious in their hopes to host major international competitions.
What will the future be and what will the games leave as their legacy?  I don't know and no one does, but they have served a purpose to strengthen national pride and open Poland to the rest of Europe.  Whether the gamble that they'll increase tourism and investment will pay off, that's something we'll just have to wait and see.

The Outlook for Poland for the Next Two Years

2010 has been a wild year, especially in the financial and business world.  In the beginning, the markets didn't know what to do with Greece and their pesky financial problems.  The PIIGS shook the world's faith in the EU and the euro; China surpassed Japan in terms of GDP; the US fears of a double-dip recession are ongoing; and the stock market doesn't know what the hell to do.  Most EU states have implement almost-draconian austerity measures to curb debt.  Meanwhile, Sarkozy tries to tweak France's retirement age a little (upping it from sixty to sixty-two) and that causes them to go on strike yet again.  Poland, all the while, has been growing and growing.  Its infrastructure projects and renovations have exploded into a rush to complete everything before 2012.

2012 seems to be a magic year.  Besides the "Mayan prediction" and superstitions, there's a super sun storm that might disrupt electronics on earth; there's the EuroCup 2012; the 2012 Olympics in London; and 2012 may be the year that when investors get cold feet over Poland's debt and stop buying its bonds, forcing major austerity measures.

How it works:

Right now, Poland's economy is growing (let's say, 4%.)  With a rise in its GDP, there is also a rise in its debt, this is natural.  EU money (as well as Norwegian money) is pouring into Poland in enormous amounts.  The rub is when the debt grows faster than economy does (let's say, 5%.)  With Poland's economy growing, Poland looks to be a good place to invest money (buying bonds.  In a month or two, Poland will hike rates, which will make it more attractive to buy Polish bonds.)  When more money is invested, the economy grows, which leads to more investment, which leads to further growth and so on.  This can all come to a head when investors start to doubt Poland's ability to pay back its debt (bonds).  They will pull their money out of Poland, which will cause the economy to shrink, which will cause further doubt about the Polish bonds, which will cause more investment to be pulled out, etc.  Pretty much what happened with Greece.

Now, a little birdy told me (someone who is intimate with the situation) warned that Poland has about two more years until the party is over and the government has to enact difficult-to-swallow reforms.  I should warn that the amount of time is purely circumspect and no one really knows; it could be two years, eighteen months, three years, or any amount of time in the near future.  It's like waiting for a small bomb to go off, not knowing how long the timer is.

Right now, Poland is standing in the middle of the tracks, watching the train rush towards it.  Solving the problem is not so much about knowing what to do—most people know what must be done—but about having the political will to actually do it.  Poland needs reforms in government spending, and it needs it soon.  The recent election might have given PO a stronger grip on power, but the surprisingly strong show for Kaczynski sent a message.  The cutbacks in spending that are needed will not be coming any time soon: PO can't risk it politically to make such unpopular decisions.

Members in the financial community have consulted with ministers of Poland, sharing their pessimistic outlook.  The ministers (Boni in particular.  Boni is the fourth-most powerful minister in Poland) agreed; however, told them point blank that the government cannot risk such a politically dangerous program.  Instead, Poland has resorted to accounting tricks to hide and cover its debt (not unlike Greece.)  These tricks serve as a temporary solution and will make the blowup all the more painful.  The tricks do, however, allow the politicians to make claims and be bullish about the economy and government spending.  So, Poland will stand in front on the train until either the last minute, or until the train runs them over.

When austerity measures come (and they will come), it probably won't be as bad as in Greece.  A few things to look for:

1)  The VAT will rise, but gradually.  It'll be 1% at a time in increments.

2)  The retirement age will rise.  Right now, it stands at sixty years for women and sixty-five years for men.  Expect at least two-year rises in each.  Poland's aging (and shrinking) population will have to work longer and expect less benefits when they retire.

3)  Public salaries will be frozen at the least, cut at the most.  Public-sector jobs will have their raises and benefits trimmed.  Also, layoffs probably will happen.

4)  The construction boom will wind down.  Poland's construction boom, financed with a lot of EU money, might wind down.  That's not to say that it won't go on, just at a slower pace.

5)  An increase in fees.  Fees, fees, fees.  They raise money.  Expect them all over the place, and increases in the current ones.

6)  If Poland hasn't joined the euro area by then, the zloty will be printed en masse and a de-valuation will happen.  When you need to pay debt and you exert control over your own currency: print money.

Sound bleak and depressing?  Kind of is, but it might be necessary.  The thing is, the Polish government has mastered the art of public relations.  Everything is often overstated and in an optimistic light.  Everything from the economic outlook, to foreign relations, to the shale gas that I often yap about.  The government isn't about to admit this coming problem just yet, and will probably deny it until the problem has already broken.  Call it a black swan in the coming.
The crisis probably won't be as bad as Greece's, and these reforms will be able to handle it, but it pays to be prepared.  Poland does have a few weapons to combat it and can also lean on fellow EU members for support.

I'll end this with a big  WHO KNOWS?  Why?  Because a lot can happen in this amount of time.  Poland's shale gas might be just as big as they say it (but probably won't be producing for quite a while.) Poland's economy might outpace its debt; Polish politicians might force the bitter medicine and take reforms; there might be some big global or regional event that will help Poland avoid all these problems. But, all the same, I'll remain bearish in the long-term, but bullish in the near-term.

Poland's Shale Gas: Benefits and Drawbacks

Again on the shale gas issue.

One of the reasons Poland was able to avoid a recession whilst everyone around them contracted was that Poland had an independent currency that happened to be valued lower than both the dollar and the euro.  This low-value currency makes Polish goods and services cheaper (and imports more expensive, which incentives Poles to buy Polish goods), also it makes Poland an attractive place to invest.  Foreign companies are tripping over themselves to set up shop in Poland (Dell, Fiat, GM, and now energy companies.)  The zloty is now being looked at as a cherished pillar of the Polish economy, and skepticism of the euro has grown (especially after seeing what happened recently to Greece.  Many in Greece lamented being tethered, which was relatively strong, and not being able to de-value the currency to give a jump start to Greek exports.  Also, China keeps the yuan pegged lower to the dollar for just this reason: to make Chinese exports more attractive.  Right now, many countries are engaged in a 'race to the bottom' of de-valuing their currencies.)
Huge energy reserves are a mixed blessing, and it is right to fear the onset of Dutch disease.  Dutch disease describes an economic condition where one commodity (usually energy or natural resources) becomes a main engine of the economy and the currency rapidly gains value against other currencies.  It's called a disease because with the rise in the currency, the country no longer becomes a feasible place to manufacture goods and its agricultural exports become more expensive.  Commonly-cited examples are Venezuela (oil), the US (financial services in the '80s and '90s), Russia (oil and gas), and, of course, the Netherlands (the discovery of gas).  When prices are high and everything is humming alone, it's all good; once the price of gas crashes, Poland's economy goes into a tailspin and only recovers when the price of gas does (this recently happened to Russia (the price of oil and steel dropped in 2008) and Venezuela.  It also happened to Ireland and Iceland with the banking crises.)  This can be mitigated by proper investment into wider areas of the economy.
A huge explosion (pardon the pun) of gas exports from Poland would undoubtedly cause the zloty to rise, maybe even overtaking the euro.  If that were to happen, Poland's developing manufacturing and agriculture base would come to a screeching halt.  Foreign companies would move their factories to cheaper countries and Polish-manufactured goods would become quite expensive.
The zloty's rise would, however, coincide with the mandated move to the euro (if the euro still exists around then.  Some think that the euro will be gone within five years, probably because Germany will pull out.  NOTE:  I'm not going to opine whether I think the euro will stick around.  I honestly don't know.)  So, the zloty's rise would be drowned out, because then Poland would enter into the euro area and the currency would depend more on the strength of the area than just that of Poland alone.

Beyond this sudden "doom and gloom" image I painted, the outlook certainly looks good.  Even if the zloty rises, that means that imports, and thus variety, are cheaper (I went shopping today, so I can tell you that I was none too pleased over the choices and variety of foodstuffs.  500 types of pickles, but no tahini: this isn't fair.)  The average salary in Poland, which now stands under $20K, would most certainly rise.  Poland would pour even more money into infrastructure improvements.  Also, it would help mitigate the problem of Poland's aging and shrinking population (another topic to which I will devote a post) by helping to prop up their pension and health programs.
Money is money, and resources are resources.  But Poland will have to be careful how it handles this new-found gas.  If they don't handle it just right, it might come around to bite them in the ass years down the road.

Eurovision

Last night was the great Eurovision Song Contest, the annual performance mega-competition between the states of Europe. It is often a huge point of pride for countries who send their darling pop stars (or unknowns) to compete and win. You see, Europe doesn't fight wars anymore; they do battle on the stage and in the sports arenas (Euro Cup, etc.) These contests can be heavily politicized. Eurovision recently changed their voting rules so politics and voting blocs wouldn't get in the way. These are the wars of the future: wars of talent; to see who can hold the best melody; score the most goals; fly the highest, fastest, farthest; who can write the most annoying tune to get stuck in your head.

Well, it's an international event (one I'm not too keen on, but whatever) so many people just watch it because of the tradition. This year's winner was nineteen-year-old Lena (Meyer-Landrut is her last name, but the press knows her as Lena.) A Romanian friend of mine was most proud that the Romanian warrior placed third.

Poland's Champion has his moment to shine.

Deutschland über alles!

It's Official: Buy Złoty!!!

With Greece still swirling around in the toilet, waiting for Germany to scoop them out and pat them down, the Euro is taking a moderate beating. Many economists see the depreciation of the Euro as a moderate-term event; meaning both the Dollar and the Zloty will be gaining ground against it in the immediate future. The US is expected to raise rates from the near-0% it has now before the ECB does, since the Euro Area has to deal with this new crisis. Poland already has higher rates than both the ECB (Euro Area) and the US, so it behooves one to to borrow from the ECB and invest in Poland. You borrow money for almost nothing, and get a higher return.

In a previous post, I commented how the weakness of the Zloty helped the Polish economy by making Polish goods and services cheaper compared to other countries. I also noted that it was a double-edged sword in that it make imports more expensive (it did: the prices rose by about 30%) especially for energy, namely, oil. Well, I have a two points to make concerning the Zloty's weakness.

I forgot to add that while the Zloty was weaker, making energy more expensive, energy prices themselves were falling rapidly. Oil dropped from $147/barrel to almost $30 faster than you could say "Well, fuck me!" So, while the Zloty was trading near 2 PLN to the $1 in mid-2008, it dropped to almost 3.50 PLN to the Dollar in early 2009, but also energy prices followed suit, taking care of the difference.

The second point, is based on Poland as a brand. Let's face it, Poland isn't exactly known for the quality of its products (Belvedere Vodka excluded, which is known as a premium vodka brand in the US.) Countries like China, India, and the Philippines aren't either, while countries like Switzerland, Germany, and Japan are. The point I'm trying to make is that people will buy Polish goods because they are cheap, not because they are expecting quality. People will buy Swiss and German goods (and pay a little extra) because they think they are getting a superior product, especially in the terms of quality. So, until Poland because a known for its high standard of quality, it should have every bit of help it needs to make its goods cheaper, i.e. a weak Zloty.

By the way, I'm looking forward to seeing how this all turns out. If I'm wrong, so what (barely anyone reads this anyway, and I'm sure even fewer actually take my advice to heart.)

Oh, Euro

There is a big focus and scrutiny of the Euro these days. Many analysts are wondering if the decade-old mega-currency can actually survive this economic downturn. Greece, Ireland, Portugal, Spain and any other countries ready to step forward with their massive debts, have all cast a pall over their common currency. This leaves many questions for Poland, which is currently not in the Eurozone.

The Euro: The next world currency? Or resigned to the dustbin of economic history?

Poland, which was aiming to go over to the Euro in 2012 (just in time for the Euro Cup) probably won't any time soon. I can't blame them. It makes economic sense; many credit the Zloty for helping Poland be the only EU country not to head into recession.

See, the weakness of the Zloty makes Polish goods cheaper to foreign buyers, even for other EU countries (which use the Euro.) While a struggling country, like Ireland, has seen its costs of production rise with the Euro's strength, Poland's remain relatively low. It's the same strategy that the Chinese are using. Companies have responded by shifting a great deal of production to Poland (Dell, for one, moved its massive computer plant from Limerick to Lodz.) Poland and the Czech Republic recently overtook Italy for the amount of cars produced. The exchange rate of the Euro-Zloty can also have a effect on tourism. With the rise of the Euro against the dollar, the Americans have found that it's becoming more expensive to visit the typical places like France, Spain, and Italy. Tours to Poland and the rest of Eastern Europe (including Russia) have risen over 100% since the recession began. Medical tourism is also a small cash cow; many Germans pass over the border for dentist visits and such (don't expect many Brits to do that though; they just come for the strippers.)

A weak Zloty is not all good news though, it makes things like foreign imports (energy especially) more expensive. But, with all this production shifting to Poland anyway, that might just deaden the blow; that, and the fact that the Poles have accepted that foreign stuff is going to cost an arm and a leg.

Talking to people on the street, one may get the sense that they aren't really looking forward to the Euro. Many believe it will drive prices up (see: Cappuccino Effect) and that wages won't follow. Not all are against it, the Government is pro-Euro as are some businessmen. The cost of intra-European trade would decrease and become stable and predictable. Ask a Pole on the street what the greatest benefit the Euro would bring, and the answer would be, "I wouldn't have to change money when going to Ireland/Germany/Italy."