The December issue of Foreign Policy has a provocative – and slightly wrong-headed – short on Central and Eastern Europe’s growing distaste for the euro. Number two on The Stories You Missed in 2011, “‘New Europe’ Falls Out of Love with the Euro” argues that the post-communist EU members are cooling to the currency amid the escalating sovereign debt crisis. Citing several countries, including Poland and Bulgaria, that recently postponed euro adoption dates, FP says:
For all the talk of Greeks and Italians seriously entertaining the thought of dumping Europe’s common currency … the more troubling indicator for the decade-old euro may be all the Eastern European countries that have pushed for years to be part of the monetary union but are now having second thoughts … Only two years ago, eurozone membership was being touted as a solution to Eastern Europe’s debt worries … But these countries now worry about the straightjacket that being in a currency union has put on troubled European economies as they push to recover. The shift in opinion in what U.S. Defense Secretary Donald Rumsfeld once defined as new Europe, where countries have long yearned for European integration, has been as rapid as it’s surprising. Membership in the EU club isn’t what it used to be.
FP is correct that some economists advocated rapid eurozone expansion in 2009 to stabilize and protect from further shocks the economies of post-communist Europe, which, to the surprise of many, were harder hit by the 2008 global financial crisis than their western neighbors. To the expansionists, the crisis had shown the wisdom of former Federal Reserve Chairman Paul Volcker’s observation after the implosion of the Thai baht led to the Asian financial collapse of 1997. In the sea of global capital markets,Volcker said, it’s best to be on a big ship when the waters get rough; an ocean liner can better negotiate the swells that would capsize a smaller vessel.
Thus even stalwart euro holdouts like the Czech Republic began to change their tune in 2009, as I wrote about here. Could it and other post-communist countries have joined the eurozone then, mid-financial crisis and pre-sovereign debt crisis, they might have. But eurozone accession is a lengthy process, circumstances have changed radically, and the fact that post-communist Europe is waffling on the euro today is hardly historically extraordinary, surprising or more troubling than the prospect of Greece and Italy bailing on the euro.
First, euro ambivalence is nothing new in Central and Eastern Europe, nor is flip flopping on adoption plans. Before EU membership, all 10 post-communist aspirants knew their accession treaties bound them to euro adoption, and all 10 set ambitious target dates. Yet all but Slovenia, Slovakia and Estonia have failed to meet – or, in some cases, seriously pursue – the so-called Maastricht criteria for joining the currency union, missing target after target after target for years.
Why? Quite simply, Maastricht is tough. Under the criteria, euro aspirants cannot have annual inflation more than 1.5 percent above the average of the three lowest inflation rates in the EU, and they must keep finance deficits below 3 percent of GDP and public debt under 60 percent of GDP. Such fiscal austerity is politically unpopular in the best of times. Now, with post-communist Europe facing possible recession as the eurozone crisis spreads, it’s toxic. Moreover, concerns about the “straightjacket” of sacrificing independent monetary policy by joining the eurozone are long-standing; why would central bankers want to give it up now, when they might soon need to cut interest rates to stimulate growth?
It’s both expected and understandable, then, that new Europe is recoiling from the euro. Many of these countries were never in much of a rush to join the eurozone, and the circumstances for membership are hardly opportune today. And that’s fine. Though the holdouts will probably have to join the currency union eventually, the euro has survived and will continue to survive their vacillating.
Greece and Italy, on the other hand, represent a serious threat. As many economists warn, the shock to the global economy of a eurozone breakup following a disorderly default on Greek and Italian debt could eclipse the 2008 collapse of Lehman Brothers. Now that is troubling indeed.
Picture from Wikimedia Commons