Why CEE Do Not Adopt Euro?
Reviewing 3 possible explanations
Narek Sukiasyan
3056458
[email protected]
Introduction to Institutions and Developments
of European Economic and Monetary Union
Sebastian Heidebrecht, MA
University of Duisburg Essen
March 2017
Introduction
As the debate around the future format, size or level of integration, if not simply the future of the European Union as a whole is currently (or maybe as always) underway, the future of the Euro-zone is a hot topic on the agenda. The number of the countries (19 in the present) that should become part of the single currency has been set to grow since the Eastern European post-communist countries committed to the EU integration and have had an initial burst of enthusiasm towards Euro convergence. For this purpose, though, the countries should have joined as soon as they have had fulfilled the Maastricht Criteria, a set of criteria including targets or rules for inflation, limits for budget deficits, national debt, interest rates, exchange rates and a two-year membership in the European Exchange Rate Mechanism II (ERM II) detailed in the article 140 of the Treaty on the Functioning of the European Union. Even though it has been established and agreed upon as a legal tender for the candidate countries to be adopted in the foreseeable future, no clear-cut timeline has been set for the Euro accession. One reason might be the objective impossibility to draw a strict calendar for meeting the Maastricht entry criteria, and expressing the political will for convergence, as a too complex of a task to be applied for countries coming from differing economic and political entanglements. The convergence of these countries with the Euro-zone is continuously being delayed and there is no such guarantee that it will not be postponed furthermore. The aim of this paper is to give a general view of the existing scholarly literature on the tendencies, trends and the domestic and external reasons of this failure concentrating on three works.
Adaption of Euro by CEE (Centre Eastern Economies) would provide these economies with at least two possible advantages: improved country risk perception by providing access to the lender-of-last resort facilities and by getting rid of risks related with the exchange rate; and the elimination of currency mismatches, which is beneficial for the already highly euroized economies, as well as for those whose FX debt is in euro. It also makes currency community more transparent and efficient, contributes to the economic certainty and stabilises long-term interest rests.These main advantages make euro convergence for CEE countries considerably attractive. Aside from this 'carrots' the joining countries, nevertheless, have to face also the 'sticks' of the currency union by losing the power to independently set an optimal monetary policy and make fluctuations in exchange rates, as painkillers of the economic modifications. However, as the issue is no less political, I suggest visiting the publicly made positions of the states and their counterarguments and interpretation of practiced policy orientations.
The Polish side, for example, criticized the 'boom and boost' debt cycle caused by the membership in the single currency. Consequently, according to them, of this responsiveness of fiscal policy can weaken regarding the sovereign debt burden. In general, the Polish argument is that when going to economic convergence unneeded indebtedness is being encouraged.
Slovakia and Slovenia are used in arguments of the other governments as examples why euro adaptation is yet to be avoided. Miroslav Singer, the governor of the Czech Central Bank, during a lecture in UK in 2013 explained the shortcomings of the Slovak membership in several points: the Slovaks were affected harsher in 2009 recession; resulted in lower FDI inflows; the country's primary budget balance declined more than that of Czech Republic's.
In addition to this, large, inflation-targeting states – Poland, Czech Republic and Hungary – have been objecting the ERM II requirement, especially when some of them already used inflation targets and floating rates. As ECB kept declining to weaken Maastricht Criteria, it made the governments and the central banks more cautious when deciding on whether to give up the autonomy over monetary-policy flexibility with no clear guaranteed timeline for the euro adaptation.
As we can see, there is a clear shift from willing to join the single currency up until mid 00's, the phase of active European integration, and a decline of this trend thereafter. I will try to briefly present three theories that explain the phenomenon and try to bring them together at the end.
The failure of the conditionality logic.
The argument is suggested by Juliet Johnson (2008) in the article 'The remains of conditionality: the faltering enlargement of the euro zone' published in the Journal of European Public Policy. The author splits the euro candidate countries into two groups of 'pacesetters' (the Baltic states, Slovenia, and Slovakia) and 'laggards' (Poland, the Czech Republic, and Hungary). Her arguments are that 1) the smaller states have turned to be pacesetters after a domestic cost-benefit analysis and 2) the Maastricht criteria had a discouraging effect, letting the candidates to further delay adaptation and undermined Eurozone's legitimacy and attraction. After the 2004 and 2007 accession of 12 new states, Brussels lost the long-dangling carrot of the entry conditionality and therefore had less leverage on these countries to push for more domestic adjustments, including in the economic institutions. Johnson asks 'Why did the
conditionality of Maastricht prove less potent than that of Copenhagen?' For the smaller states, the material benefits of meeting the requirement outweighed the costs and therefore these 'pacesetter' were enthusiastic about the convergence. For small states, the trade-based market is more important than the internal one and adopting euro would be a way of achieving economic stability and convergence with the European market, which cannot be fully applied to the big states. On contrast, for the large states the benefits of the sacrifice were less clear and more risky. As there was no timing set, it let the issue become a matter of domestic political debate, even though the countries had been legal tender to complete the third phase of convergence. In addition to this, the claim of strict interpretation of Maastricht criteria, also made the fulfilment less attractive. Finally, the author comes to add the weak legitimacy and harmed reputation of the EU and the Eurozone as motives of the shift in the member state willingness. First, opt-outs by Sweden (or simply not meeting the criteria), the United Kingdom, and Denmark (countries with nevertheless well performing economies) have proven that, even if there is no such clause, the opt-out is practically possible, which makes the debates in the candidate countries legitimate from the political perspective. An example is the case of the supposed Polish referendum, maybe inspired by the Swedish referendum. Conversely, the Eurozone members had troubles dealing with policy coordination and management of the public opinion, both influencing the scepticism in members-to-be. In short these countries, with powerful centre-left parties did not want to give up fiscal and monetary flexibility in uncertain political developments for future ambiguous membership in the Eurozone, especially when there was no strong conditional incentive to rush the process up.
International credibility vs. Domestic Regime and Institutional Discontinuity
The second presented argument is authorized by Rachel Epstein and Juliet Johnson (2010) put in 'Uneven Integration: Economic and Monetary Union in Central and Eastern Europe' published in the Journal of Common Market Studies. The authors suggest looking at the developments of the reactions of the member states to requirements put by the economic and monetary union from the prism of two variables - regime and institutional discontinuity at the domestic level and the credibility of international institutions' policies. The main line of argument is that domestic discontinuity produces an appropriate environment for foreign advice, and even smother policy orientation if the international institution is highly credible. Conversely, in case of domestic continuity, the government is less likely to prioritise or adhere to the foreign advice and even less, if the international institutions are lacking widespread credibility. Applying this theory to the CEE countries, the authors use the early stages of convergence process, precisely the establishment of Central Bank Independence (CBI) in these countries. Poland, Czech Republic and Slovakia, with poor domestic continuity, were receptive of advising from The International Monetary Fund (IMF), the World Bank, the
Bank for International Settlements (BIS), the US Agency for International
Development (USAID) and the EU as internationally credible institutions in 90's. The same credibility of these institutions, however did not have the same outcome for Romania, due to the enduring networks and regime continuity by the 'heirs' of the previous communist regime that would resist international 'intervention', up until 1996 when the Democratic Convention of Romania (CDR) changed the regime in presidential and parliamentary elections. In mid-00's, when the EEC countries have built mature domestic institutions and joined the EU (weakening the conditionality effect, as described above) the governments have become less interested in foreign advice, especially when it was lacking credibility due to the inconsistent advice and action of ECB, IMF and OECD, and the ambiguity of the process of euro adaptation. In addition to this, the authors also mention the effect of the EU members who had not joined and add the violation of the Growth and Stability pact by the old members. The authors argue that if the EU wants to enlarge the Eurozone incorporating larger CEE countries it has to work on Euro's international credibility, as the continuing problems around it have lowered the credibility of the Maastricht criteria and of the currency. I would put the decline of the credibility into the general picture of the Euroscepticism and in the image of the never-ending crisis the Union finds itself. It is a hard political decision (as I have already shown that the countries see at as more of a political decision than a legal obligation) to make, when worrying messages come from old members questioning the very existence of the Union. It is also ironic to anticipate Europhile enthusiasm to join the euro from governments who categorically disagree with the Brussel position on number of fundamental issues. This general theme of pro- and anti-euro (read EU) leads us to the next theory that tries to explain the behaviour of CEE countries on the issue of Euro convergence.
Identity matters, not materialistic calculations
This little bit speculative, however empirically supported line of argument is proposed by Michal Parizek (2011) in the article 'Identities, Not Money: CEE Countries' Attitudes to the Euro', published in the Central European Journal of International & Security Studies. The article challenges the conventional mainstream analysis of the Eurozone accession from materialistic, economic prism (as expressed in previous arguments), labelling them as 'largely incomplete and inaccurate' and emphasizes the political and ideational aspects of the policy orientation – what are the overall attitudes towards the European integration project and the beliefs to the European identity. The author tests the approach on Czech Republic to highlight the importance of the ruling parties' and larger public's stand on the federalist/intergovernmentalist spectrum of the EU integration over the materialistic explanations. To prove the little or no significance of the economic, material-based positioning in this regard, Parizek demonstrates the effects of fulfilling the Maastricht criteria. In order to meet it, the government has to put constraints on pro-growth and pro-employment policies, not allowing much fiscal simulation and put pressure on the welfare system by cutting social expenditures. Applying this to the two big Czech Parties – ODS (Civic Democratic Party), as a liberal-conservative party, targeting an educated, economically active population; middle to upper-middle class, that would benefit the most of Euro accession, and left-leaning CSSD (Czech Social Democratic Party), relying in general on less highly-qualified workers, potentially more vulnerable to declines in social spending, - it is logical, in traditional left-right politics, to assume that CSSD will be anti-Euro, as opposed to ODS, taking into consideration their electoral and ideological habits. However, the reality is the opposite of this conventional assumption, as the main parties position themselves on the issue against the material interests of their electorates: CSSD, as an "Euro-as-quickly-as-possible" party (up until Arpil 2009, 8 months into the crises) and OSD an anti-euro one. After proving that economic considerations did not play a major role in this highly political issue, the author pick up the matter of identity in order to explain this paradoxical phenomenon. According to Risse, currency has a major role in people's identity-creation and has to be taken into consideration as much as the materialistic attributes of the convergence. Introduction of Euro has been one of the biggest steps of the European project and thus has a big impact on the creation of a European identity, and indeed is a barometer for European integration. In short, however the country or the party perceives and treats the European project as a whole, in a similar matter it will position itself towards the Euro. In this regard, considering ODS as a part of anti-federalist European Conservatives and Reformists party in the European Parliament along with prominent Eurosceptic MEPs and CSSD being a pro-deeper integrationist, according to Parizek explains the stands of the parties on the Euro issue more accurate than economic or materialistic considerations.
Conclusions
The presented theories shed light on different perspectives of the reasons why the accession of the new member states (if, after 10-13 years, it is still appropriate to call them 'new') into the Euro-zone is continuously being delayed. Even though it might appear from a slight glance that the issue is strictly economic-financial, to be addressed by technocrats, in reality it has become a matter of a political bargaining. Whatever perspective from the above one choses to go with, all of them contain the assumption by the discussed countries that the common currency is not as desirable and as attractive as its creators or the European institutions wanted it to be. The lowered credibility of the Euro and the belief in the European Union as a whole have a fundamental influence on the discussed tendency. To be clear, neither the European institutions desperately desire to take those countries in, whenever they decide to come, given the experience. However, their position is based on economic provisions, contrary to the also politically driven motives of the CEE. The European Union needs to re-think, re-evaluate and re-innovate itself in order to be appealing to the people and the governments of the member states. 'If credibility is the problem, then restoring the credibility is the answer'.
References
Books and Articles
Frank Bonker, (2006) 'From pacesetter to laggard: the political economy of negotiating fit in the Czech Republic'
IMF Country Report No. 15/98 (April 2015) 'Central and Eastern Europe: New Member States (NMS) Policy Forum', 2014
Juliet Johnson (2008) 'The remains of conditionality: the faltering enlargement of the euro zone', Journal of European Public Policy
Katya Kocourek "Will Central Europe (CEE) Ever Adopt the Euro"?
Kenneth Dyson, (2007) 'Euro area entry in east-central Europe: paradoxical Europeanization and clustered convergence', West European Politics 30(3)
Kenneth Dyson,. (2006) 'Euro entry as defining and negotiating fit: conditionality, contagion, and domestic politics', Oxford: Oxford University Press
Michal Parizek (March 2011) 'Identities, Not Money: CEE Countries' Attitudes to the Euro', European Journal of International & Security Studies, 5:1
Radek Sikorski, Foreign Minister of Poland, 28 November 2011 'Poland and the Future of the European Union' Berlin.
Standard Eurobarometer 84 Autumn 2015 Report: Public opinion in the European Union, Language version EN. European Union. 2016
Thomas Risse (2003), 'The Euro between national and European identity'
Thomas Risse, Daniela Engelmann-Martin, Hans-Joachim Knopf and Klaus
Roscher (1999), 'To Euro or Not to Euro? The EMU and Identity Politics in
the European Union,' European Journal of International Relations, 5:2
Wayne Sandholtz, (1993), 'Choosing Union: Monetary Politics and Maastricht,' International Organization, 47:1
Links
http://www.euractiv.com/section/enlargement/news/poland-to-hold-referendum-on-euro/
http://www.independent.co.uk/news/world/europe/marine-le-pen-france-renegotiate-eu-membership-european-union-front-national-leader-far-right-french-a7511566.html
https://www.theguardian.com/world/2016/dec/21/eu-gives-poland-two-months-to-scrap-changes-to-its-highest-court
https://www.hrw.org/news/2017/02/16/eu-polish-government-undermines-rule-law
http://en.mercopress.com/2016/07/04/czech-president-referendum-proposal-on-eu-and-nato-rattles-brussels
Kenneth Dyson, (2006) 'Euro entry as defining and negotiating fit: conditionality, contagion, and domestic politics', in Kenneth Dyson, (ed.), Enlarging the Euro Area: External Empowerment and Domestic Transformation in East Central Europe, Oxford: Oxford University Press, pp. 7–44.
Katya Kocourek "Will Central Europe (CEE) Ever Adopt the Euro"? page 2.
IMF Country Report No. 15/98 (April 2015'Central and Eastern Europe: New Member States (NMS) Policy Forum'2014' page 7.
Michal Parizek (March 2011) 'Identities, Not Money: CEE Countries' Attitudes to the Euro', European Journal of International & Security Studies, Volume 5 · Issue 1, page 4.
Wayne Sandholtz (1993), 'Choosing Union: Monetary Politics and Maastricht,' International Organization, 47:1, pp 1-39.
Katya Kocourek 'Will Central Europe (CEE) Ever Adopt the Euro' page 3.
Katya Kocourek 'Will Central Europe (CEE) Ever Adopt the Euro' page 2.
Juliet Johnson (2008) 'The remains of conditionality: the faltering enlargement of the euro zone', Journal of European Public Policy, page 834.
Kenneth Dyson, (2007) 'Euro area entry in east-central Europe: paradoxical Europeanization
and clustered convergence', West European Politics 30(3): 417–42.
http://www.euractiv.com/section/enlargement/news/poland-to-hold-referendum-on-euro/
Frank Bonker, (2006) 'From pacesetter to laggard: the political economy of negotiating fit in the Czech Republic', in Kenneth Dyson, (ed.), 'Enlarging the Euro Area: External Empowerment and Domestic Transformation in East Central Europe', Oxford pp. 160–77.
An argument similar to that of Juliet Johnson's is present in Thomas Meyer's and Hanns-D. Jacobsen's 'Ever Closer Monetary Union? – Euro Adoption in Central Europe', May 2005.
Standard Eurobarometer 84 Autumn 2015 Report: Public opinion in the European Union, Language version EN. European Union. 2016. pp. 114–119
http://www.independent.co.uk/news/world/europe/marine-le-pen-france-renegotiate-eu-membership-european-union-front-national-leader-far-right-french-a7511566.html
https://www.theguardian.com/world/2016/dec/21/eu-gives-poland-two-months-to-scrap-changes-to-its-highest-court
https://www.hrw.org/news/2017/02/16/eu-polish-government-undermines-rule-law
http://en.mercopress.com/2016/07/04/czech-president-referendum-proposal-on-eu-and-nato-rattles-brussels
Thomas Risse, Daniela Engelmann-Martin, Hans-Joachim Knopf and Klaus
Roscher (1999), 'To Euro or Not to Euro? The EMU and Identity Politics in
the European Union,' European Journal of International Relations, 5:2, page 148.
Thomas Risse (2003), 'The Euro between national and European identity' page 496.
Juliet Johnson (2008) 'The remains of conditionality: the faltering enlargement of the euro zone', Journal of European Public Policy, page 835.
Radek Sikorski, Foreign Minister of Poland, 28 November 2011 'Poland and the Future of the European Union' Berlin.
