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Last update: 28 05 2010

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Euro versus national currencies in Visegrad countries

Slovakia was the first country in Visegrad which adopted euro as a national currency in January 2009. Due to financial and economic crisis and consequent problems with fulfilling convergence criteria, the Czech Republic, Hungary and also Poland postponed their plans for entering eurozone.

Background

Before joining the euro every applicant must satisfy Maastricht convergence criteria of fiscal stability, ensure independence of its Central Bank, achieve low inflation and long-term interest rates and prove monetary stability of national currency by participating  the Exchange Rate Mechanism II (ERM II) for a minimum period of two years.

The main euro convergence criteria (Maastricht criteria) are:

  • Inflation can not be higher more than 1,5 % than the average of the inflation in three member states with lowest inflation.
  • The ratio of the annual government deficit to GDP must not exceed 3 %.
  • The ratio of state debt to GDP must not exceed 60 %.
  • Joining the ERM II for two consecutive years, national currency can not be devalued during this period.

In Visegrad only Slovakia adopted euro as a national currency in January 2009. According to the last report on fulfilling convergence criteria published by European Commision, except Estonia, none of the nine member states wanting to enter the eurozone was able to meet the required goals.

Due to Greek crisis and imbalances posed by economic crisis the countries are increasingly hesitant about adopting euro. Entering the eurozone is no longer absolute priority in Poland. According the Czech president Václav Klaus the whole project of common european currency failed long time ago.

Estonia is the only new member state willing to join eurozone soon. It has already received the blessing from European Commision to adopt euro in 2011. The rest of the countries will not be ready before 2014 and 2015.

CZECH REPUBLIC

Plans for the Czech eurozone accession are vague at the moment because of poor fiscal situation. The debate about this topic is “rather theoretic” as outgoing president of the central bank of the Czech Republic Zdeněk Tůma recently stated.

In 2009 Czech public finance deficit reached 5.9% of GDP which is almost the double of maximum 3 % set by Maastricht Criteria. The European Commission launched an excessive deficit procedure against the Czech Republic on 2nd December 2009. “In order to bring the deficit below 3 % of GDP in 2013, an average annual fiscal effort of 1% of GDP over the period 2010-2013 has to be ensured,” the Commission suggested.

Czech minister of finance Eduard Janota expects (in line with the Commission's recommendation) that savings could cut the deficit under 3% of GDP in 2013. He suggests 5.3% deficit for this year, 4.8% for 2011 and 4.2% for 2012. The eurozone entry is possible in 2016 at the earliest, Janota claims.

Nevertheless, Janota takes part in the present non-political government which will be replaced after the parliamentary election held on 28th and 29th of May 2010. Thus, one must focus on eurozone accession perspectives in political parties' programs.

Both major parties: left wing social democrats (ČSSD) and right wing conservatives (ODS) declare that the Czech Republic should be prepared to enter eurozone not later than in 2016. However, while ODS states that “we will be technically ready in 2015” but we must compare “pros and cons” before entering ERM II, ČSSD is unambiguous proponent of the entry in 2015 or 2016 if “economic development allows us to do so”. 

Plans for the eurozone accession among other parties (smaller but still necessary to form coalition government) are rather vague. Most of them just mentions need to access eurozone without giving further details. On the other hand, in the program of Communist Party (still influential in the Czech Republic) there is no reference to euro.

Besides the fiscal deficit Maastricht criterion, the Czech Republic fulfills all the others. It has  relatively low debt (36,5% GDP in 2009), persistently low inflation (0,9% in 2009) and interest rates (4,9% in 2009). Technically, the preparations for the eurozone entry have been proceeding very well so far.

However, the fiscal stability of Czech public finance could pose a threat to the euro accession although the politicians promise to cut deficit. Their other promises often go in the opposite direction, the economists argue.

According to the latest survey from April 2009, 55% Czechs (27% absolutely, 28% rather) reject the eurozone entry and only 38% support it. Seniors, low-educated and the voters of the Left could be mainly found among the opponents. On the other hand, well-educated people in productive age and voters of the Right usually support the accession.

Since the beginning of millennium, the number of opponents has been steadily rising while the share of supporters has been falling. In 2001, 52 % respondents of the survey supported euro and  23% opposed. However, analysts say that current lowest support since 2001 could be related to the problems of Greece which are shaking with the whole eurozone at the moment.

HUNGARY

According to the Convergence Report published by the European Central Bank (ECB) on 12 May 2010, the Commission declared Hungary as ’not ready’ for the adoption of the euro. Hungary does not match the criteria needed for the adoption. The Hungarian budget deficit for 2010 is expected to be 4.1% of the GDP, while the figure for public debt will be 78.9%. Inflation rate in March was 4.8%.

According to the Commission’s 2009 Sustainability Report, further fiscal consolidation is required for Hungary to comply with the medium-term budgetary objective specified in the Stability and Growth Pact as regards the sustainability of its public finances.

Hungary does not participate yet in ERM II. The forint depreciated strongly between mid-2008 and March 2009, then partially recovered due to the financial assistance led by the EU, the World Bank and the IMF.

Long-term interest rates were 8.4% on average from April 2009 to March 2010, but gradually declined, standing at 7.2% at the end of the reference period.

According to the ECB report, “achieving an environment conducive to sustainable convergence in Hungary requires, inter alia, stability-oriented monetary policy and the continued strict implementation of the fiscal consolidation plans.

Hungarian law also does not comply fully with the requirements for central bank independence, the prohibition on monetary financing, single spelling of the euro, and legal integration into the Eurosystem.

  • ERM

Hungary already experimented with a period similar to keeping the currency in the waiting room of the single currency which ended in failure. The euro got farther away. Hungary is likely to wait with the ERM II accession negotiations until the financial markets calm down, when it will be less difficult to keep the forint between the margins specified in the system according to Jacqueline Madu, the London analyst of Credit Suisse.

According to London-based market analysts, Nomura International, the new government will join the ERM II once the budgetary situation calmed down around 2012, and could set the target of joining the eurozone for 2015. In their opinion, the new government should keep up the previous Bajnai government’s ‘economic policy momentum’.

  • Euro

The newly elected Fidesz government’s plan is to set a deadline for joining the euro at the end of 2010.

Péter Oszkó, finance minister of the previous government said this government did not set a deadline for the euro on purpose, but the goal was to create the necessary macroeconomic conditions for its adoption. The international opinion and analysts appreciate the steps taken in stabilising the Hungarian economy.

Previous Prime Minister Gordon Bajnai mentioned 2014 as a possible date of the accession to the eurozone, however he declined to declare this as an official date on the same purpose like mentioned before.

  • Public opinion

Nevertheless the financial crisis and the example of Greece has raised doubts in the public opinion that the euro would do good to the economy. The biggest arguments in favour of the country’s euro-accession have become non valid. First of all, Hungarian public opinion often mentioned the regulatory side of the euro: people hoped for a clean monetary policy where no secrets are allowed. The example of Greece has shown that also in the eurozone, a government can tamper with economic data.

At the same time, public opinion has also changed in the eurozone. New member states are not so welcomed anymore as they have been before. According to a Reuters analysis, newcomers will have to wait one year more in general to become mebers of the euro family.

The public opinion has raised several scenario for the euro’s future, including also ideas for a small eurozone with the oldest member states and a new common currency in the South and in the Visegrad-CEE region. Hungarian conservative economist Péter Ákos Bod told journalists that such speculation has no realistic base. “There are 500 million people living in the eurozone, which is a huge economic power. Member states will not let this bond to break up. 

POLAND

Polish leaders are not in a hurry to join the eurozone due to economic crisis still ravaging the EU. Polish Finance Minister, Jacek Rostowski, compared the EMU with the house that “needs some work, repainting and refurbishing”, so according to him it is better to stay “in our own little house till noise and dust are cleaned and move there in a few years.”

Prime Minister, Donald Tusk, shifted perspective of concerns back towards Poland, saying that “Poland will enter eurozone, when it is ready for it”, since aggressive speculations against Polish currency from the last year have taught Poland a lesson. According to Mr. Tusk, Poland is close to meet convergence criteria, even closer than some EMU member states.

However, Finance Vice Minister, Dominik Radziwiłł, estimated Poland could enter the eurozone in 2014 at the earliest. Also the analysts agree that the safe accession date is 2015. Mr. Bronisław Komorowski, the acting president and a presidential candidate of the ruling party (PO – Civic Platform), shares the views of his party colleagues. He said that adopting the common currency should remain Polish priority, but when it happens is not the matter of prior concern at the moment.

The state of Polish public finances has radically deteriorated due to the economic crisis. As a result, the European Commission has opened excessive debt procedure against Poland in 2009, pushing its government to decrease the public finance deficit to 3% by 2012. Professor Anna Zielińska-Głębocka from the Monetary Policy Council (Rada Polityki Pieniężnej) estimates the fourth quarter of the year 2012 is the most probable date for entering ERM II. Now, the key challenge for Poland is to create a plausible strategy for decreasing public finances deficit under 3%.

The attitude of Poles towards the euro currency has altered significantly due to the Greek economic troubles and in view of similar difficulties threatening Spain and Portugal. According to the survey published by Rzeczpospolita daily in January 2009, 65% Poles opted for entering the eurozone. Recent survey carried out by Center for Public Opinion Research (CBOS) shows that support for euro adoption has diminished by 24%. Only 41% supports entering the eurozone, while 49% prefers to keep the traditional currency – polish zloty.

SLOVAKIA

Slovakia made the first step of euro accession in December 2005 when it joined ERM II system. The most difficult inflation criterion was fulfilled in august 2007. Eurostat officially confirmed that Slovakia met all the Maastricht criteria in April 2008.

On 7 May 2008 European Commision in its regular Convergence Report on euro readiness gave Slovakia green light for adopting the single currency. Heads of EU states and governments gave their blessing on 19 June 2008. In July 2008 Economic and Financial Affairs Council (ECOFIN) set conversion rate at 30,126 Slovak koruna to one euro. As the euro celebrated its tenth anniversary, Slovakia joined eurozone on 1 January 2009.

According to opinion poll Slovaks were worried mainly about a spike in prices, but trusted euro to provide safe haven against consequences of deepening crisis. In fact, euro partially sheltered the economy against disturbances from the currency markets. Due to the fixed exchange rate since July 2008 Slovak koruna was the only currency in the region that has not rapidly weakened against euro. It also made trade much freer.

On the other hand weak currencies strengthened exporters of non-eurozone countries. Also due to euro adoption in combination with economic crisis and weak currencies Slovakia had to face consequences of “shopping tourism” for its retail sector. Especially during the first half of 2009 Poland, Czech Republic and also Hungary experienced huge waves of Slovaks seeking much cheaper goods in shops and supermarkets abroad. 

A year later, the situation is quite different. Greek debt crisis has become a euro crisis. Fears that Greek problems with maintaining debts may spread to other countries knocked euro to historical lows. But weaker euro now benefits Slovak exporters.

Helping Greece to solve its debt problems is primal responsibility of eurozone countries. Thus Slovakia is obliged to participate on Greek aid package but due to coming election it has become a campaign issue. Providing such aid requires changes to laws on the state budget and budgetary principles. At the meantime Slovak Parliament already finished its ordinary schedule.

Socialist Prime Minister Robert Fico who is seeking re-election on 12 June expressed doubt about Greece's ability to implement the required savings measures but stressed it was in Slovak interest to help to stabilize euro. Just two days after new package of austerity measures passed through the Greek Parliament Slovak government on its extraordinary meeting on 15 May gave a green like to unlock the mechanism of bilateral loans aimed at helping Greece to handle its debts.

Slovak bilateral loan of 816 million euro came under fire of media and opposition parties that rejected it and called for extraordinary parliamentary session, but repeatedly failed to do so. The final decision is now responsibility of new Parliament and government.