February 28, 2009
No later than last week, the Hungarian and Romanian prime ministers have both asked the EU officials to speed up their respective countries’ accession to the eurozone. After years of neglecting structural reforms in favour of stimulating domestic consumption, these countries, Poland and the Czech Republic are particularly hard hit in the current crisis. Their current account deficits have ballooned, economic growth has stalled and their currencies are in big trouble.
Still, the fast-track adoption of the euro in Poland, Hungary and Romania is not an adequate solution. Sure, Slovenia and Slovakia have both adopted the euro, but only after years of painful restructuring of their economy and of their fiscal systems. Another group of countries – notably Bulgaria, Estonia, Lithuania and Latvia – had pegged their currencies to the euro years ago. Consequently, they are now in a better position to join the monetary union when the general economic climate improves. (source: The Economist).
The four countries in the group of laggards have kept their floating exchange rates, some have delayed macroeconomic reforms and have preferred to use, over the past 20 years, competitive devaluation as a tool of their macroeconomic policies (for a more detailed discussion of these topics I invite my Romanian readers to access the “Romania’s Lost Decade” study, published in my ebook “Falimentul Republicii Inginerilor”)
The floating exchange rates, which have now become highly volatile, combined with underperforming fiscal systems are a huge cause of concern in European capitals, most notably Vienna, Rome and Stockholm.
The bankers of the latter had been aggressively acquiring Czech, Polish, Romanian and Hungarian banks, effectively owning the best part of these countries’ banking assets. Unfortunately, the biggest share of mortgages and retail loans granted by these banks were in Swiss francs or other currencies, not in euros (source: Wolfgang Munchau, www.eurointelligence.com). If a big chunk of these credits becomes non-performing as a result of the crisis, the ensuing domino effect could endanger the very existence of the banking sectors in Austria, Italy and Sweden.
To prevent such an occurrence, the European Investment Bank (BEI) together with the European Bank for Reconstruction and Development ( EBRD) are currently in the process of putting together a 25 billion euro bailout package for Central and Eastern European EU members in need of financial assistance. This, to be sure, is a much better solution to the problem than the quick adoption of the euro, which is definitely not in the cards in Frankfurt.Florian Pantazi