Baltic Business Research

Sammanfattning

Vissa (relativt) nya EU-länder ser ånyo ett EMU-medlemskap inom några få år som en gångbar försäkring mot framtid finansiella spekulationer. Om vi emellertid har lärt oss något av Grekland-krisen, måste det rimligen vara ett en valutaunion inte kan skydda mot hemmagjorda strukturella obalanser – inte ens mindre, av finansmarknaderna vanligen försummade länder. Därför kan inte tillräckligt varnas för en alltför tidig EMU-anslutning av exempelvis de baltiska länderna, vilka alltjämt har en längre tid med tuffa strukturella anpassningar framför sig.

1. In recent months, some new EU-member states (NMS) against raise the issue of an early joining of the EMU/euro, like, for example, Estonia already next year and the two other Baltic countries only a few years later. I have been warning for a premature EMU joining by NMS since 2002 – and I still have the same concerns: Countries should only join the EMU when they are structurally well-trimmed. Greece was not, and that’s why they are in deep troubles now.

2.  It’s the wrong believe that EMU membership shelters against existing economic imbalances and speculations of financial markets. Stability begins at home. No artificial measure whatsoever can break this fundamental rule.

3.  Improving structural problems or maintaining existing good structures urge for continuous structural efforts by the government and the corporate sector. Hard structural work happens usually effectively in emergency situations like the Greek, Latvian or Icelandic – or the Swedish in the 1990s. The new market economies in Central and Eastern Europe had their big ambitions in the 1990s after the fall of the Berlin wall and the iron curtain. Most of them succeeded indeed very well – better than anyone could expect in 1989.

4.  However, since the early years of this century we also could recognize another phenomenon, i.e. that most NMS became reluctant in implementing further reforms. Reforms had become a word that many times was equalized with sacrifices by ordinary people. This declining willingness of more ambitious reform activities did not come unexpectedly because

–   the implementation of further reforms became politically tougher;
–   opponents to changes became better organized;
–   social challenges increased;
–   income distribution worsened, also regionally;
–   Buchanan’s public choice theory about re-election started to penetrate economic policy, leading to more tactical economic policy.

5.  There is an obvious risk that NMS countries with current tough fiscal restrictions and , for instance, the strongly hit Ukraine cannot quite consequently  stick to their needs austerity needs in the forthcoming years simply for social and political reasons. Structural reform policy may weaken again in line with the previously summarized explanations.

6.  But it is important to remind the readers of this blog that the former planned economies in Northern, Central and Eastern Europe are no homogeneous region anymore – but countries with quite different own conditions. Estonia, for example, will certainly achieve a faster and more sustained adaptation process than the Ukraine. The latter country, of course, is no EMU candidate – but a transition and reforming country that has been very negatively affected by the global crisis and that has been facing a lot of troubles because of domestic policy mistakes (such as the previous link of their currency, the hryvnia, to the US dollar and big amounts of foreign credits in USD for domestic Ukrainian purposes).

7.  One of the most demanding challenges for NMS will be to manage innovation, technological progress and the commercialization of new products ready for exports at a higher value-added level. Such a positive development is extremely necessary in order to avoid a renewed structural deterioration of the vulnerable current account balances in several NMS. But where should such progress come from, particularly when public spending is so restrained?

8.  This takes us to a main conclusion:  The current good shape of the current account balances in a number of NMS (Baltic states) will not go on once reasonable GDP growth has come back. Imports will grow again, that’s for sure. But will exports simultaneously grow enough to avoid a sizable, new weakening of the current account? Of course, we all hope so. Unfortunately, the contrary seems to be more probable in a number of NMS. And then (still) having a fixed currency – and  getting new pain?

9.  According to the Maastricht Treaty (article 109 j 1), the current account balance matters when entering EMU. But nobody within EU cared about this important stability indicator in the past decade. Politicians know about the risks of high inflation and budget deficits – but they usually do not understand the complexity of problems that are related to a structurally weak current account balance. This is a main reason why the advantage of a solid – not necessarily positive – balance of current account did not directly become part of the so-called convergence criteria. This should be the case in the forthcoming, reformed EU framework for macroeconomic supervision.

10. Nowadays, there are only four NMS with floating exchange rates: Poland, Hungary, Czech Republic and Romania. All the other NMS have a formal link to the euro or are – like Slovenia and Slovakia – already members of the EMU. Sure, countries with floating rates can sometimes come under appreciation pressure, like in the past quarters. Is that really bad?

11. There are also two advantages in healthy, appreciating countries. Inflation can be combated, and there is – ceteris paribus – some negative impact on competitiveness if the appreciation process is more sustained. However, hardening competition can exactly give the structural progress in products and production that is needed to perform better on exports markets in the longer run. Productivity has to be improved. New attractive and competitive products have to be developed. Germany benefited highly from this kind of exogenous pressure until the introduction of the euro.

12. It is understandable that the decision of staying outside the may give mixed feelings to many people in the new EU-member countries. But there is no doubt that joining EMU should happen from a position of structural strength – and not as a rescue anchor for future emergencies! And there will be more NMS that will join the euro. But this should not happen any time soon. Before joining the euro, a structurally healthier current account balance has to be achieved. Getting there, takes time.