Monday, June 13, 2011

FT: Eastern Europe pushes back euro adoption

By Neil Buckley, East Europe Editor

Published: June 12 2011

Ask Traian Basescu, Romania’s president, when the country plans to join the euro, and his answer is adamant. The target date is still 2015.

Scratch the surface, though, and the target seems to function mainly as a useful fiscal straitjacket in case Romania’s coalition government, facing elections next year, is tempted to throw money around.

Mr Basescu makes clear that even if it can meet the fiscal criteria for membership by mid-decade, Romania will look hard at whether it is fit to join.

“It’s relatively easy to reach the budget deficit and inflation objectives,” he told the Financial Times. “But at that moment you have to look at how competitive your economy is.”

Beyond Romania, most central and eastern European states are quietly pushing back their likely entry dates.

Poland, having abandoned a previous target date of 2012, has recently been pushing back expectations of a mid-decade target towards the decade’s end, leaving itself maximum wiggle-room.

Jacek Rostowski, finance minister, said last month that the country might not join before 2019.

Viktor Orban, Hungarian prime minister, has said it is “not conceivable” to join before 2020. The Czech Republic is increasingly smug in its long-standing caution on the euro.

“When a 100 per cent unified European market still does not exist ... when the weaker euro states must subsidise the richer ones, and when it is not clear how it will turn out for the euro, it is truly not an appropriate time to join,” Petr Necas, the Czech premier, told the FT.

Even Lithuania and Latvia, leading euro-enthusiasts, are sounding more cautious about when they will be ready to join.

The result is that the next wave of new euro entrants, previously expected by mid-decade, could come several years later.

No country is talking about not going in at all – even if Václav Klaus, the Czech president, suggested last autumn that its government should negotiate an opt-out.

All 12 states that joined the European Union since 2004 are legally obliged to join, although they must meet the entry criteria first, giving some flexibility on the timetable.

Three – Slovakia, Slovenia and, since January 2011, Estonia – are already in.

But the spread of the eurozone crisis from Greece to Ireland and Portugal has over the past year highlighted the pitfalls of membership, and the need for deep reforms of the bloc’s governance.

Eastern European states have also observed the examples of countries that remained outside.

Two that kept control of exchange rates – Poland and the Czech Republic – were among the least badly hit by the financial crisis, and the fastest to pull out.

Poland preserved competitiveness in 2008-2009 as the zloty’s real exchange rate fell 20 per cent. In contrast, Latvia, which had pegged its currency to the euro, had to undergo a painful “internal devaluation”, lowering real wages and prices – just as Greece and Ireland are having to do now.

Marek Belka, Poland’s central bank governor, told a conference last month that the experiences of weaker eurozone members, and new EU members that tethered currencies to the euro, had dented Warsaw’s assumptions on the merits of membership.

Cheap and abundant capital inflows unleashed by fixed exchange rates had not produced more competitive, modern economies, as had been hoped, but had mostly gone into construction bubbles.

Even countries with “sophisticated” fiscal policies, such as the low-debt Baltic states, proved unable to prevent excessive inflows from destabilising them.

Mojmir Hampl, vice governor of the Czech National Bank, told an Erste Bank debate that euro membership had in many cases not stimulated reforms, but made it possible to “borrow like a thrifty German and spend like a profligate Greek”.

“Nobody knows how the eurozone will look in the future. It’s hard to set the date of the wedding if you don’t know what the bride might look like,” Mr Hampl said.

Additional reporting by Jan Cienski

No comments: