February 23, 2009
Ever since the global financial crisis started, economists in Central Europe have been making the point that the best solution for a Europe-wide financial crisis would be to let Central Europe in the eurozone without the hassle of the Maastricht criteria that were drawn for different countries in different times. Now that the Financial Times makes the same argument some people might listen.
The Central European countries are by any economic indicators more integrated into the EU single market than a good few of the old member states. Most of their production goes into the eurozone, sometimes more than 50% of their GDP. Most of their imports are nominated in euros. Since these countries came out from the Soviet zone in poverty and in lack of capital, they are hungry for FDI and credit, which comes from the eurozone. Cross-border financial transactions are more common than in some parts of the Union. Yet these transition economies, with the lucky exception of the rich Slovenia and Slovakia (which came out from Communism with little state debt) could not meet the Maastricht criteria.
I always agreed with the view that the non-introduction of the euro in Lithuania back in 2006 was a failure of the EU and not that of the Baltic Republic: at that time, inflation indicators as well as other economic indicators in many of the 2006 euro zone countries were iconsiderably worse than those of Lithuania. By applying the requirements set in 1991 (when the euro zone was just a vision, and not a reality), the EU institutions have simply demonstrated their inability to promptly react to obvious changes that have taken place. Back than the idea was that a countries unsound policies might harm a new and yet unproven currency. In 2006, at the height of a global conjuncture, Lithuania, which accounts for less than 0.5% of the eurozone GDP, could have hardly pose any danger to the 18 members.
In 2008 the eurozone central bank, ECB realized the exposure of the eurozone banks to the risk of the failure of a Central European economy, and although Maastricht rules and the whole logic behind the criteria forbids this, it helped to bail out Hungary. At this point, many Hungarian economists made the claim that probably it would be cheaper and better for both parties if they just let Hungary introduce the euro.
Now Wolfgang Munchau makes this eloquent argument:
But the central and eastern Europeans got one thing right. They made sure their banks were owned by foreigners. Austrian banks are among the most active. Their exposure to eastern Europe is about 80 per cent of Austria’s gross domestic product. If Hungarian households default, it is not Hungary that will go down, but Austria. Italy and Sweden are also exposed. A central and east European crisis is therefore a systemic event for the eurozone as well. One should not therefore treat this as someone else’s problem – because it is not. […]
In my view, the smartest answer to the prospect of meltdown is the adoption of the euro as quickly as possible. There is no need to switch over tomorrow. All we need tomorrow is a credible and firm accession strategy – one for each country – which would include a firm membership date and a conversion rate, backed up by credible policies.
Obviously, this would require the long overdue abandonment of the eurozone’s defunct entry criteria. Of those, the most nonsensical is the reference rate for inflation, calculated as the average of the lowest three national rates. Soon, this will be a deflation rate. So an aspiring member state would be in the absurd position of having to deflate as a precondition for euro entry. […] The inflation criterion is not only insane, it is also in conflict with other parts of European law.
I think this will be a testing case, again, for European governance. If the EU will stick to its Maastricht rules because it cannot agree on anything that is more sensible, both creditors and lenders, old and new member states will go even deeper into this recession. They cannot blame this on America.
PS: I remember when I made this claim in a comment two month ago on afoe they thought I was crazy. Now it looks the other way around.Author : Dániel Antal