Ben Aris in Astana -
The global economic crisis has made joining the Eurozone a lot less appealing, but most countries in Europe still have no choice but to join the club, said Marek Belka, president of the National Bank of Poland, speaking at the EBRD's annual general meeting in Astana Friday, May 20.
Prior to the crisis, all the new EU member and candidate states were striving to one degree or another to join the common currency, believing it would bring them major economic benefits. However, the crisis has shown the three main assumptions to be a chimera.
The first was joining the Eurozone would give access to "abundant and inexpensive capital," as member countries benefit from the "euro halo" effect that brings down interest rates. "Even countries like Greece with 'doubtful' position could enjoy spreads only a little less than the solid countries like Germany," Belka said.
Second, this inflow of capital would become a "powerful' stimulus for growth and the modernisation of the economy. And finally, even if the inflows of capital became excessive and began to threaten the internal stability of the economy, "effective measures like strict fiscal policies" could contain any damage.
But, Belka concluded, the crisis has shown that "most of these assumptions are invalid." The "euro halo" effect has faded and international capital markets have re-rated the strength of the EU to the point where some countries, especially those on the periphery, are now being charged full price on their credit risk, whereas before they were enjoying something of a discount. The change means joining the Eurozone has suddenly got a lot less attractive. "Even if Poland were to embrace [the Eurozone] today, the rates wouldn't fall to the level of the German bunds. There would be some reduction in the cost of borrowing, but not as much as in the run-up to the crisis," said Belka, adding that this is probably a good thing.
The failure of the second assumption - that capital would lead to modernisation - is a lot clearer, he said. Massive inflows of capital mostly ended up in consumption or non-tradable sectors like construction or financial services; they didn't go into sectors that made the countries more competitive in the international market. The Baltic countries, which had fixed their exchange rates to the euro, were especially prone to these problems. "The lesson is you need to do more than attract capital if you want to modernise your country," said Belka.
Finally, those countries that did run strict fiscal policies to compensate for the large inflows of capital ironically found that doing so only attracted even more capital, "as these countries seemed to be a lot safer places," said Belka.
"You need some sort of prudential controls, but capital controls are not available to EU member states and there is a debate going on over their usefulness," said Belka, leaving the questions of what countries should do to protect themselves from large inflows dangling. Indeed, in the last quarter Turkey has experimented with cutting interest rates despite rising inflation, in an effort to discourage the large inflows of capital, which the central bank has controversially identified as the bigger of the two dangers to economic health.
"The crisis has changed the cost-benefit equation of Eurozone accession. However, it is impossible for Poland to stay outside the zone forever - the cost of foreign exchange trading and capital associated with having a separate currency is unsustainable," said Belka. "We need to set conditions to deal with these problems. There is a lot of talk about the Maastricht conditions, but they are not as important as the changes needed to make the Eurozone attractive. We need to put our house in order [in the aftermath of the crisis], but so does the EU and we are still a few years away from that."
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