* Polish central bank head warns of banking union
* Possibility exists of deflation taking hold in Poland
* Joining the euro remains unlikely any time soon
(Adds quotes, detail, background)
By Marc Jones and Carolyn Cohn
LONDON, May 21 Poland's central bank governor
Marek Belka criticized Europe's plans for a banking union on
Wednesday, saying non-euro zone countries that joined it would
be at a disadvantage and have little influence over key
He also said he could not rule out the possibility of
deflation taking hold in Poland, while his country joining the
euro was not likely to happen any time soon.
Final preparations are under way for the European Central
Bank to take control of banking supervision in the euro zone,
which has left the door open for other European countries to
join if they wish.
Belka said there were parts of the plans, however, that his
country and countries like Sweden, also outside the euro zone,
did not like.
"There is the argument that the non-euro countries will not
be treated the same," Belka said at a Polish-British forum.
"Non-euro zone countries will not have access to the
liquidity of the European Central Bank... this is a fundamental
"The final decisions will by taken by the EU, by the ECB
basically," he added.
Banking union and the clean-up of banks' books that will
accompany it are intended to restore confidence in the financial
sector battered by the euro crisis, helping foster growth in the
18 economies that use the euro.
It is also supposed to break the vicious circle linking
indebted states to the banks that buy their debt, which is
treated in law as 'risk-free' despite Greece, for example,
defaulting just two years ago.
"I think it is a problematic solution of the banking union
that they want to make macro prudential policy common, or very
much coordinated, for the euro zone countries with others," said
"If you don't have recourse to your own exchange rate
policy, to your own interest rate policy, you have to have some
other instruments in the war chest."
"If something happens locally - and all things happen
locally - then you have to have an instrument to react (with)
that is country-specific."
Poland's economic growth is accelerating more than that of
big neighbours like Germany and the Czech Republic, but like
many it is experiencing a slump in inflation.
Last month inflation slowed more than expected to just 0.3
percent year-on-year, well below the 2.5 percent level that the
central bank sees as optimal for the economy.
"I cannot dismiss the possibility (of deflation)," he told
reporters on the sidelines of the conference, declining to give
a time frame for any possible swing into deflation.
"As long as the economy is in good and improving shape, this
does not cause us much of a headache."
Belka said there was some appeal in the idea of Poland
joining the euro zone, but "the balance of risks from euro
adoption remains unchanged - it is probably negative".
Political opposition to the idea also meant the
constitutional change required to adopt the euro was unlikely to
Belka said last week that scrapping ERM2 exchange rate
mechanism prior to euro zone entry would make euro adoption
easier for Poland. Under ERM2 a country seeking to join the euro
must peg its currency to the euro for at least two years and
keep it in a narrow range.
"I am raising this issue of ERM2," he said on Wednesday.
"Slovakia had to suffer a very steep appreciation of its
currency. I do not want to risk the same."
(Reporting by Marc Jones and Carolyn Cohn; Editing by Hugh