Central Europe Activ

After the IMF has formally accepted huge loan requests from Hungary and Ukraine (and also Iceland on the other periphery of the European economic area), Belarus, Bulgaria, Latvia, Romania, Poland, Serbia are in the waiting line – not to forget our almost forgotten EU-applicant Turkey, too. I think the French presidency should send out another summit invitation before it becomes a habit that the new member states are seeing each other in Washington.

Edward Hugh follows the process with a lot of underlying statistics and explanations on a A Fistful of Euros blog. Although I not always agree with his focus and priorities, there is a lot of information and expert opinion in these articles. The basic facts: Romania denies to take loans at these moments because it has a very low public debt by European standards and huge currency reserves. Bulgaria claims that it is seeking advice only at this point. Belarus, which used to live on cheap Russian gas, and transit revenues from Russian gas exports through its territory, is in a big trouble, and Lukashenko’s regime is indeeded seeking a €2 bn assistance from IMF. (They should rather go for the advice, as they have not changed neither the structure of their economy or the economic legal system since the Soviet Union collapsed). Poland, the biggest new member state may also need to rely on the IMF loan facility. Latvia and Serbia are also ‘consulting’ the IMF.

Now as the the new member states finance ministers could hold a partial EU summit in Washington, it is time to assess the situation in a European Union context, too. The region went through a remarkable economic transition. The new member states have been catching up with the old ones at a higher speed that anyone had expected. Their huge and unsaturated markets have been the drivers behind the relatively small growth of Germany, Austria, Finland and Sweden, all important EU economies. The depth of the integration still remained thin and at the first recession these countries had to run to Washington instead of Bruxelles.

I think the first signal of something going in the wrong way was the dismissal of Lithuania’s bid for adopting the euro. That time the Baltic country was well within three Maastricht target values and had only slightly higher inflation. But that inflation was rather healthy by all economic analysis and part of a natural transition path accompanied by very high growth – exactly the opposite that the old member states had in mind one and a half decades before in Maastricht. Latvia gave up it’s euro-plans soon after the rebuff received by its Southern neighbor. Hungary, which is extremely tightly knot to Austria and Germany has even gave up on a euro adoption target date.

The rules set up in the Economic and Monetary Union of the EU where established by old member states with a stable, unchanging economy. The new entrants are in a phase of healthy adjustment and integration into the European economy and the rules of the EMU do not leave any room for member’s structural adjustment. Ironically, while some old member states had been always reluctant to enter the euro zone (like Britain, Denmark and Sweden), the new member states would be eager to join. The old member states judged that the EMU rules will be cautious so that they do not import inflationary or other risk from premature new member states. After one and a half decades of economic integration and adjustment it looks now more costly to leave them out than in: in the Hungarian bailout scheme the EU will have to participate anyway. Though not an EMU member, Hungary by many measures is more deeply integrated into the euro-zone than some old member states.

The recent queue in Washington reminds me to the summer queue of MoD’s after Russia has scared the whole region with the Georgian invasion. (One year after crippling Estonia with a cyberwar). In lack of a common understanding on Russian relations, and also in the absence of a European defence system, these countries assume that their closest millitary ally is still the United States. Now they can assume that they have to go with their financial problems to Washington, too. I would propose a real EU summit instead.

Update: The Euroepan Union: A Divided House, on the manifest East-West rift in the Union.

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