Summary:
Euro-expansion is aliveand well, despite widespreaddoubts about the future of thecurrency. For a small Europeancountry with an open economydependent on trade with the big economies on the continent, itmakes sense to have a currencypeg and economic and monetaryunion with the rest of the conti-nent. But to reap these greaterrewards, candidate countriesmust become leaner and more
efcient, by rst implementing
underlying structural reforms in their economies, which would put them on a path to greater conver-gence with the current eurozoneeconomies.
Economic Policy Program
Euro-Expansion: Whither the Prospects?
by Miguel Rodrigues
September 2011
1744 R Street NWWashington, DC 20009T 1 202 745 3950F 1 202 265 1662E info@gmfus.org
Euro-expansion is alive and well,despite widespread doubts about theuture o the euro should contagionspread rom Greece to Italy and Spain.Tis paper builds upon views expressedat a recent roundtable gathering o experts and embassy representativesheld under the Chatham House ruleat the German Marshall Fund. Publicenthusiasm or joining the euro variesby region in Europe: Te Baltic coun-tries are euro-enthusiasts, inspired by Estonia’s successul adoption o the euroon January 1, 2011, and euro-accessionremains a strategic goal or Latviaand Lithuania. For a small Europeancountry with an open economy depen-dent on trade with the big economieson the continent, it makes sense tohave a currency peg and Economic andMonetary Union (EMU) with the resto the continent, as this would elimi-nate currency risk, lower borrowingcosts, and open up access to liquidity rom the European Central Bank. Butto reap these greater rewards, candi-date countries must become leaner andmore ecient, by rst implementingunderlying structural reorms in theireconomies, which would put them ona path to greater convergence with thecurrent eurozone economies.Te Eastern Europeans are requiredto adopt the euro under the termso the treaties governing their entry to the EU, but the treaties, whilerequiring that these countries meet theMaastricht convergence criteria, donot speciy a deadline by which they must do so. Joining the euro wouldbe a good thing, both or the currenteurozone and the acceding countries.It would demonstrate that the dreamo greater European unity is alive andwell, and that the European project iscapable o weathering adverse circum-stances. It would expand the collectiveexperience in good governance (inthe case o the Baltics) to the currenteurozone, and it would make Europe alarger, more competitive economy onthe world stage.o successully join the euro, however,it is critical or a country to keep itseconomic house in order. Tis is whatthe Baltic countries did in responseto the East European nancial crisiso 2008-09, when, during the suddencredit crunch ollowing the excesscapital inows o the boom years,they reduced their budget decitsby 8-10 percent o GDP in 2009 by slashing wages and costs and tacklingdicult health and educational sectorreorms. Te lack o liquidity avail-able rom abroad also spurred higherdomestic savings in these countries.Teir currency boards helped oster
2
Economic Policy Program
decline. Its path to the euro will not, however, be withoutchallenges — ination is at 4.2 percent and the budgetdecit, expected at 5-6 percent o GDP this year, is stillabove the 3 percent Maastricht cut-o. Te Polish govern-ment hopes to decrease the budget decit to 2.9 percentin 2012. Other large Eastern European countries, such asHungary and the Czech Republic, are more or less in thesame boat as Poland, but their positions and prospects vis-à-vis euro-accession lie beyond the scope o this paper.By their successul reorms and the hard choices they madeduring the nancial crisis, the Baltic countries showedthat the economic targets under the Maastricht criteria areachievable. Western European nations — including Greeceand Portugal — need to embark on similar overdue reormsto their health sectors, state enterprises, and tax adminis-trations. Indeed, or more than ten years, these countrieshave not played by the rules. Greece, or instance, wasaccepted to the euro even though its public debt at the timewas “only” 95 percent o GDP, exceeding the Maastrichtcuto (the criterion requires that public debt should notsurpass 60 percent o GDP). And Greece has hardly beenthe only oender within the eurozone — Belgium and Italy entered with excessively high public debt levels, at 117 and115 percent o GDP respectively. Germany in 2002-05 andFrance rom 2002-04 exceeded the Maastricht budget decitceiling o 3 percent o GDP. In 2006, Lithuania was deniedentry to the eurozone because its ination rate was just 0.1percentage point above the reerence value, although inthe same year, EMU members Portugal and Ireland bothexceeded the Maastricht budget decit ceiling o 3 percento GDP.Greece has taken steps to rectiy its situation, promisinga scal adjustment o 6 percent o GDP a year, but many question whether this is enough. Tey suggest that Athensmay need to take bolder steps, including more signi-cant structural reorms than those currently proposed.Tis includes more cuts to public expenditure rather thanincreases in revenue intake to reduce its scal imbalance.Currently, the Greek ratio is 50/50. Tis is quite dierentrom the Baltic countries’ example o a 75/25 ratio o cuts in expenses to revenue augmentation, a ratio recom-mended by experts or decit reduction. Greece’s actionshave consequences or the decisions o other countrieswatching rom the sidelines. Unless Greece and other crisis-scal discipline and structural reorm as the best way totackle their budget decits. Te Baltic governments imple-mented austerity programs, and their publics went alongwith the shared sacrice involved, viewing this as the costo enjoying hard-ought reedoms in their now-sovereign,independent countries. Estonia, Latvia, and Lithuania thusconsolidated and improved their public nances and publicsector balance sheets. As a result, Estonia met all the Maas-tricht convergence criteria and was admitted to EMU onJanuary 1, 2011.Lithuania is also doing quite well, having set euro-accessionas its ocial goal or 2014. Its budget decit is down to 2.8percent o GDP rom 5.3 percent in 2009, and it expectsto continue meeting the 3 percent Maastricht budgetdecit criterion in 2012. It has achieved these metrics by severe budgetary cuts to pensions and other outlays, andlike Estonia and Latvia, is sustaining its public nancesby implementing important reorms in the healthcare,pensions, and social security sectors. Te Lithuaniannance ministry orecasts 5.8 percent growth or 2011 basedon new export markets and growth in the manuacturingand service sectors, and this will surely strengthen thecountry’s scal position. Latvia’s progress was particularly impressive. It aced severe problems at the time o the nan-cial crisis, with a total decline in GDP o 25 percent, and acurrent account decit o 23 percent o GDP in 2007, whichit turned into a surplus o 9.4 percent o GDP in 2009.However, in the larger Eastern European countries, such asPoland, the situation is somewhat more complex. Duringthe nancial crisis, Poland, with its oating exchange rateand ination-targeting monetary policy, was the only Eastern European country to record positive growth in2009. Te Polish government, the current holder o theEU presidency, supports euro-accession, viewing the euroas an instrument to achieve greater European integra-tion, but avors a less enthusiastic approach, as suggestedby recent comments rom government authorities. Polandconsiders the current crisis o the euro to be a byproduct o the diculties associated with European integration, and isoptimistic that the euro will survive the current turmoil andthat Europe will be strengthened as a result. Buoyed alongby GDP growth o 3.8 percent, which is orecast to increaseto 4 percent this year, Poland’s public debt is at 55 percento GDP, below the Maastricht threshold, and is expected to
Search History:
Result 00 of 00
00 results for result for
p.
Euro-Expansion: Whither the Prospects?
This policy brief looks at the future of expansion for the European currency.
342
Reads
1
Readcasts
0
Embed Views
More From This User
Notes
Load more
