Attila Ágh: Positive and negative externalities of the eurozone: An approach from the “wait and see” countries

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Theses for the FEPS Scientific Council Meeting “Possible futures for the Eurozone governance: Progressive perspectives” (15 December 2015)

Positive and negative externalities of the eurozone: An approach from the “wait and see” countries (pdf version)

(Discussion paper)

Attila Ágh

1. Basic statements of Vivien Schmidt as the starting points:

Eurozone crisis: “(T)he Eurozone was unprepared to respond to a major crisis” due to its “flawed policies” and “missing elements” (Schmidt, 2015: 35). “The EU’s increasingly volatile politics” – “Increasing Euroscepticism and anti-European feeling is part and parcel of the political volatility.” (Schmidt, 2015: 39-40).

Alienation of Central Europeans: “Most concessions alienated not just the Northern European leaders, who felt that Greece had not followed ‘the rules’, or the Central and Eastern Europeans, who were hostile because they went through harsh austerity too, and are poorer than the Greeks, but even other Southern Europeans, committed to continuing their own efforts to impose structural reforms.” (Schmidt, 2015: 48).

Hard core and failure of policy coordination: “With proposals for greater deepening of economic integration, some have argued for a ‘core Europe’ in which a compact group of Member States agreeing to fiscal union would be surrounded by a larger circle constituted by a loser group united by the Single Market. But this ignores the reality of what the EU is.” (Schmidt, 2015: 55). “Creating a hard core around the Eurozone may make other potential community clusters more difficult to pull together, with the other clusters likely to be characterized by an increasingly high degree of differentiation without integration (…) there is no guarantee that even a hard core around the Eurozone will expand to incorporate these other policy areas.” (Schmidt, 2015: 56).

Schmidt, Vivien (2015) “Changing the policies, politics, and processes of the Eurozone in crisis: will this time be different?”, in Social policy in the European Union: state of play, 16th edition, European Trade Union Institute and European Social Observatory, 33-64

2. The effects of the Eurozone on the non-euro member states

This short discussion paper has focused on the issue of the changing relationships of the Eurozone and the non-euro member states. The issue of the effects of the Eurozone on the non-euro member states has been a relatively under-researched topic. In a doctoral dissertation on the euro accession this issue has been formulated in the following way: “In the 2003 Treaty of Accession, the signatories agreed that all New Member States (NMS) that joined the European Union (EU) in 2004, would adopt the euro, even if no timetable was provided. Why have some NMS not been able to join the euro area even if they made serious attempts at the outset? What are the circumstances and policies in these countries that have led them not yet to adopt the euro? Has it been lack of political will on the part of the government, a strong voice in the opposition, a euroskeptic president, insufficient administrative capacity, or lack of policy learning? Though there is no consensus among economists as to whether or not adopting the euro in the short run is a good idea, an economic cost-benefit analysis would suggest that in the long run euro adoption is positive for NMS. Yet, macroeconomic analyses cannot explain the change in government policies that may lead to euro adoption. Political scientists have typically focused on collective identity, policy learning, ideas and knowledge transfer among central bankers and other political elites, as well as adjustment to global pressures and Europeanization. This political science literature is unable to provide a satisfactory explanation as to why the Czech Republic, Hungary and Poland have not adopted the euro yet. I argue that the role of domestic politics is key to explaining the process of euro adoption in Czech Republic, Hungary and Poland: government policies, elections, electoral cycles as well as constitutional rules, veto points, central banks, public opinion and the media turn out to be crucial in explaining the lagging euro adoption process in these countries.” (Dandashly, 2012: iii).

I have participated in a project elaborating the theory of differentiated membership under the conditions of the Eurozone crisis. These current issues of the differentiated integration at the time of the Eurozone crisis have been discussed in an edited volume (Magone, Laffan and Schweiger, forthcoming). Some chapters of this book deal with the relationships of the Eurozone and the non-euro states as well as with the effects of crisis on non-euro member states as follows:

Béla Galgóczi argues that there was an “unsustainable expansion” of the Eurozone to the South, since – paradoxically – even the non-euro countries of East-Central Europe are much more integrated to the production structures of the core countries than the Eurozone member states of the South: “The divergent patterns observed in Eastern and Southern Europe in the catching-up process result from a number of underlying structural differences among European countries that have affected their respective paths in economic integration.” Namely, “While surplus countries in the East have enjoyed large-scale foreign direct investment (FDI) in their productive sectors, this has not been the case for Southern European crisis states. (…) Central and Eastern European countries also tend to have a high export share in their GDPs, again, this is not the case for the deficit countries in the South.” (Galgóczi, 134-135, 136).

Olivér Kovács has elaborated a “more systemic approach to the Hungarian Eurozone accession”. He has pointed out that the domestic political and social factors have a detrimental effect “on a country’s capability to enter the Eurozone, as the case of Hungary illustrates”. Namely, “Eurozone accession requires the full commitment of the Hungarian government, since the EU’s external anchoring mechanisms by no means apply enough pressure on countries to adopt the euro (e. g. stipulating and announcing a target date).” (Kovács, 2016: 232,242,245).

Maciej Duszczyk has put the Polish accession to the Eurozone into the political perspective of Poland moving to the centre of the EU decision-making countries: “In general, Poland still asserts its willingness to accede to the Eurozone, although it has not set any specific date for when this might happen. The main argument in support of such an approach is the belief that the adoption of the euro in Poland during a time of economic instability in the EU would be detrimental, both for Poland and for the states that already have the euro in place (…). However, it is also clear that Poland rather directly links its accession not only to economic, but also to political issues (…). It is difficult to imagine Poland’s shift from the periphery to the core without the adoption of the euro. It should be noted that many key decisions related to the future of the European Union are made during meetings of the heads of states of the monetary union. In this context, the voices of member states that have not yet adopted the euro are rarely heard. (…) If Poland wants to play the role of a core state within the European Union, it should reaffirm its willingness to accede to the Eurozone.” (Duszcsyk, 2016: 257). Written before the latest elections with the victory of the Eurosceptic PiS party, this paper referred already to the “constitutional stalemate” on the issue of the euro accession between the main political parties in Poland.

Attila Ágh (Ágh, 2016: 121-123) has analysed the double evil in the NMS: their national resistance to the structural reforms on one side and the negative externalities of the Eurozone on the other. Although the national resistance dominates in the NMS individual states’ divergences from the EU mainstream in differentiated integration, still the negative externalities of the Eurozone have also played a big role in the delayed accession to the euro. The former assumption was that the Eurozone membership would activate the modernising effects in euro member states and would have a positive spill over to the non-euro member states as well. In fact, it has turned out that these modernising effects have appeared mostly in the core states, while many negative externalities have emerged in the Southern and Eastern peripheral states, usually splitting these member states into two – developed and underdeveloped – parts (Gál, 2013 and Molnár, 2013). Altogether, this has led to an “Unholy Alliance” of the V4 states in the refugee crisis. In general the NMS suffer from a specific crisis of peripherialization that needs a separate analysis (Ágh, 2015).

References:

Ágh, Attila (2015) “The Triple Crisis in the New Member States: The Historical Trajectory of NMS-8 in the Past Quarter Century, Southeastern Europe, Vol. 39, No. 4

Ágh, Attila (2016) “The increasing core-periphery divide and the new member states: Diverging from the European Union’s mainstream developments”, 117-129, in Magone, José, Brigid Laffan and Christian Schweiger (eds) Core-periphery Relations in the European Union, London and New York: Routledge, p. 332

Duszczyk, Maciej (2016) “Periphery, or perhaps already the centre? The impact of ten years of membership in the European Union on the position and perceptions of Poland”, 251-265, in Magone, José, Brigid Laffan and Christian Schweiger (eds) Core-periphery Relations in the European Union, London and New York: Routledge, p. 332

Galgoczi, Bela (2016) “The southern and eastern peripheries of Europe: Is convergence a lost cause?”, 130-145, in Magone, José, Brigid Laffan and Christian Schweiger (eds) Core-periphery Relations in the European Union, London and New York: Routledge, p. 332

Kovács, Olivér (2016) “The Hungarian agony over Eurozone accession”, 231-250, in Magone, José, Brigid Laffan and Christian Schweiger (eds) Core-periphery Relations in the European Union, London and New York: Routledge, p. 332

Conclusions:

This investigation on the non-euro states has to be divided to two periods (1) of the emergence of Eurozone and (2) of the Eurozone crisis, since its effects upon the non-euro member states differ in these periods. First, the emergence of the Eurozone has drastically transformed the European architecture, the EU institutional system as a whole. It impacted upon non-euro member states both directly with its decisions and indirectly with its intergovernmental approach and policy – positive and negative – spill overs. The workings of the Eurozone have been blurring the boundaries of EU decision-making mechanisms, first of all between the intergovernmental approach of the Eurozone and the community approach of EU28. The same tension applies between the community and member-state approaches, or the claim for the (limited) participation of non-euro countries in the Eurozone decisions, at least getting some information about the decision-making (raised above all by Poland).

Second, the Eurozone crisis has not only embraced the EU as a whole and its future perspectives, but it has become the priority of all priorities, and it has marginalized all other problems, including the special crisis management in the NMS. As the EU has not been resilient to global crisis, the NMS countries have not been either, they have been even much more concerned (given the “asymmetrical external shock” effect). Therefore, they are not yet in the post-crisis stage and their crisis management has been aggravated by the new “dual crisis”, the EaP (Ukrainian) and the refugee crisis. In such a way, they are mostly in the “wait and see” situation as regards the Eurozone crisis management and the euro-accession (see Kalan and Toporowski, 2015), both inside (Slovakia, Slovenia and the Baltic states) and outside (Poland, Czechia and Hungary – Bulgaria and Romania). The first NMS Eurozone member states – Slovenia and Slovakia – are also in big socio-economic trouble (Gál, 2013) and the Baltic States feel threatened also by the Ukrainian crisis.

References:

Angeloni, I., Flad, M. and Mongelli, F. P. (2007) “Monetary Integration of the New EU Member States: What Sets the Pace of Euro Adoption?”, Journal of Common Market Studies, Vol. 45, No. 2, pp. 367–409

Dandashly, A. (2012) “Domestic Politics Comes First – Euro Adoption Strategies in Central Europe: The Cases of the Czech Republic, Hungary and Poland”, Doctoral dissertation, University of Victoria, Available at http://dspace.library.uvic.ca:8080/bitstream/handle/1828/3828/Dandashly_Assem_PhD_2012.pdf?sequence=1

Dandashly, A. and Verdun, A. (2010) “The Slow Trip to the East: The Domestic Politics of Euro Adoption in the Czech Republic, Hungary and Poland”, Paper presented at the 2010 Annual Canadian Political Science Association (CPSA) Conference. Available at http://www.cpsa-acsp.ca/papers-2010/Dandashly-Verdun.pdf

EC, European Commission (2015) 25 years after the fall of the Iron Curtain: The state of integration of East and West in the European Union, https://ec.europa.eu/research/social-sciences/pdf/policy_reviews/east-west_integration.pdf

Flash Eurobarometer No. 377 (2013) Introduction of the euro in the more recently acceded member states, http://ec.europa.eu/public_opinion/flash/fl_377_en.pdf

Gál, Zsolt (2013) “Farewell to the Carpathian Tiger: Impact of Global Crisis on Slovakia”, 337-362, in: Attila Ágh and László Vass (eds) European Futures: The perspectives of the new member states in the new Europe, Budapest: Together for Europe

International Monetary Fund (2004) “Adopting the Euro in the New Member states: the next step in European integration”, Transcript of an IMF Economic Forum, Washington DC, 4 May. Available at http://www.imf.org/external/np/tr/2004/tr040504.htm

Kalan, Darius and Patryk Toporowski (2015) Eurozone Enlargement Frozen: The Deepening Crevasse between Central Europe and the EU, Polish Institute of International Affairs (PISM), No. 16, September 2015

Molnár, Anna (2013) „EU membership and the question of Hungary’s sovereignty: Ideas of the European Union before and following the crisis”, in: Lise Rye (ed.) Distant voices: Ideas on democracy and the Eurozone crisis, Trondheim: Akademika forlag, 75-105

Risse, T. (2003) “The Euro between national and European identity”, Journal of European Public Policy, Vol. 10, No. 4, pp. 487-505

Spendzharova, A. (2012) “Is More ‘Brussels’ the Solution? New European Union Member States’ Preferences about the European Financial Architecture”, JCMS, Vol. 50, No. 2, pp. 315-334

Szőcs, Csongor-Ernő (2015) “Public Attitudes towards Monetary Integration in Seven New Member States of the EU”, Politics in Central Europe, Vol. 11, No. 1, 115-130

3. The Baltic Accession and the recent developments

The accession of the Baltic States to the Eurozone has recently raised the issue of the positive and negative effects/externalities of the euro-membership. There has been a large academic literature on this issue, arguing first of all that the domestic factors matter in the euro accession as the European identity in the newly independent Baltic States, threatened by the Russian expansionism (Maniokas et al., 2015).

The contrast of the ECE and the Baltic States is in the different approaches to the national identity and geopolitics: “An alternative explanation of the willingness to adopt the euro is based on the importance of the country’s collective identity (Risse et al., 1999; Risse, 2003). Currency affairs have always been closely related to issues of national identity and statehood (Helleiner, 1998). Thus, according to Risse et al. (1999, p. 148-149), only those countries whose elites treat the euro integration as part of its identity will move forward with euro adoption, especially since there are often good economic arguments for and against becoming a eurozone member. As they argue, ‘the Euro is about European union and political order rather than only lowering transaction costs or creating exchange-rate stability’ (Risse et al., 1999, p. 148).

Turning to the empirical cases of Latvia and Lithuania, it would be hard to completely dismiss the identity-based argument. In the Baltic countries, euro-integration has always been at the core of their external economic and political orientation (Austers and Bukovskis, 2013, p. 30), and entrance into the eurozone could be regarded as yet another step in completing this process of ‘return to the West’ (two key steps of which were membership in the EU and NATO). This stemmed from these countries’ geopolitical anxiety due to being small and vulnerable states close to the traditionally hostile power of Russia as well as an identity built on a sense of Europeanness. According to Bukovskis, ‘Latvia has traditionally been very pro-European, at least on the elite level’ (interview with Bukovskis). As was put by Feldmann, ‘in the second half of the 1990s European integration became the main focus of policymaking. Full membership of the EU was the main goal, and most political activity was subordinate to this objective’ (Feldmann, 2008, p. 247). Furthermore, on an even more pragmatic level, entrance into the eurozone was also associated with the desire to have a stronger voice at the EU decision-making level, to be at the core of this project (Austers and Bukovskis, 2013, p. 31). All in all, for the Baltic countries, euro accession has always been as much about foreign policy considerations as it was about economic objectives.

However, this foreign policy orientation of ‘returning to’ and integrating with the West has been present in both countries ever since regaining independence. Thus, it cannot explain why the desire to adopt the euro increased around the years of the last economic crisis or why it intensified more in Latvia. Of course, one could also point out that an identity-based perspective is not expected to account well for short run shifts in policy views and actions, since ‘collective nation-state identities are usually rather sticky and only gradually subject to change’ (Risse et al., 1999, p. 156)” (Markevičiūtė and Kuokštis, 2015).

The conclusions have been summarized in a current Lithuanian paper: “the popular attitudes to the euro introduction improved during the process of preparations and during the first weeks of using the single currency, although popular support for euro zone membership is still lower than support of political elites. With concerns about possible price increases disappearing, partly influenced by effects of the decline of oil prices in the world in late 2014, the future state of the euro zone remains the key concern in Lithuania. The state of Greece and the revival of fears of the ‘Grexit’ after the elections in January 2015 together with the security situation in the Eastern neighbourhood remain the key issues dominating the public debate in Lithuania. This implies that accession into the euro zone is just an episode in the constantly changing economic and security environment in Europe. Eurozone membership by itself does not guarantee economic and security benefits, it rather poses a risk that the political elite might relax and focus only on the next elections rather than continuation of prudent policies. Fiscal policy and the progress with structural reforms in the run up to the parliamentary elections in the Autumn of 2016 will show whether Lithuania’s political elites learned from the experience of the first decade of the EU membership.” (Vilpišauskas, 2015).

The recent Baltic works:

Maniokas, Klaudijus et al. (2015) „Europeanization and Development: Using open regime theory for the post-accession development of Lithuania”, Baltic Journal of Political Science

Markevičiūtė, Anastazija and Vytautas Kuokštis (2015) Explaining the Willingness to Adopt the Euro in Latvia and Lithuania (Draft paper at the Vilnius University)

Vilpišauskas, Ramūnas (2015) “Lithuania’s accession into the euro zone: timing, motives, expectations,” Institute of International Relations and Political Science, Vilnius University, in Diplomatia (Estonian Foreign Policy Journal)