Tuesday, February 23, 2021

With or without euro? Even after the Covid crisis, only convergence can be the number one goal


The issue of the introduction of the euro

Péter Virovácz argues in his article “The price of the crisis: the introduction of the euro a decade later” that it is time to raise the issue of the euro introduction strategy again, as the global economic crisis caused by the corona virus epidemic can provide useful information on how much a country’s monetary independence is worth. In his view, even if there had been secret ambitions for an early introduction, these ambitions would have to be given up as a result of the crisis, joining the eurozone could not be a realistic goal for some time to come.

In any case, I agree with Péter Virovácz that the issue of the euro accession strategy must be raised from time to time, as life always provides new experiences in the light of which previous strategies may need to be reviewed. As a result of the last decade or so, for example, few now dispute that the Maastricht criteria alone are not sufficient to determine a country’s euro maturity. Nevertheless, the strategy must be defined with the aim of supporting the sustainable catching-up of the Hungarian economy.

It is therefore worthwhile to regularly update the cost-benefit balance of the introduction of the euro with the experience of the countries that have already joined the zone, as Péter Virovácz emphasizes. Where are those who have already adopted the euro? Were the benefits expected from the introduction enjoyed in catching up economically? Have we not lost much by staying out of the eurozone?

Let us first examine whether there have been benefits to monetary independence in the recent past and whether there may be in the near future. Virovácz cites the example of Slovakia, whose catching-up came to a halt after the introduction of the euro and the global financial crisis. However, Virovácz’s argument that no general conclusions can be drawn from the experience of a single country is justified. So let us broaden our horizons and look briefly at the experiences of all the countries in the region that have adopted the euro. To this end, compare the performance of Slovenia, Slovakia, Estonia, Latvia and Lithuania with the economic development of Hungary, the Czech Republic, Poland, Bulgaria, Romania and Croatia. Each country has adopted the euro at a different time, so the comparison is made for different countries.

Performance of each country

What does the most common characteristic, economic development, show in terms of GDP per capita? Slovenia’s relative economic development has stagnated since the introduction of the euro. When the euro was introduced in 2007, the country had an average development of 88.6 per cent of the EU average, and in 2019 it was at almost exactly the same level, at 88.8 per cent. With the introduction of the euro, Slovakia reached 72 percent of the EU average in 2009, falling to 70.2 percent by 2019. In contrast, countries in the CEE region that did not join the zone were able to catch up more significantly. Since Slovenia’s accession (2007), the relative development of countries in the non-euro area has increased by an average of 13.4 percentage points, and since Slovakia’s accession (2009) by 9.3 percentage points.

The economic catching-up of the Baltic countries adopting the euro is more favorable, not least due to the fact that public debt, which has been low since the change of regime, provides an adequate buffer to cushion asymmetric shocks, and digitization has helped to get through a crisis. Estonia’s relative development has increased by 12 percentage points since accession, slightly above the average 9 percentage point catch-up of non-euro area countries in the region, and the same can be said for Lithuania. In the case of Latvia, the change in development was almost the same as the average performance of the non-euro area member states in the region. Together, the fiscal space and the digitization strategy have made the Baltic States a success story for the past 20 years.

Overall, the picture emerges that the Baltic countries have been able to achieve significant convergence, while Slovenia and Slovakia have not been able to catch up substantially with the countries of the Union after their previous successful decade.

Adding to this the experience of the Mediterranean countries, we can conclude that the introduction of the euro alone is certainly not a guarantee of success. The euro does not automatically solve existing problems, but it can also increase them. Furthermore, the current system of Maastricht criteria alone is not sufficient to determine the maturity of the euro and therefore needs to be reviewed. Some of the criteria so far are worth keeping fine-tuned, but they need to be rethought, which do not seem to give good feedback to the candidate countries on the timing of the introduction of the euro and the state of preparedness. It is particularly important that the level of real economic development, which has so far been completely ignored, is kept to a minimum so that the inflationary surplus resulting from catching up is kept to a minimum and the common monetary policy results in a similar monetary orientation within the zone. The MNB’s book “Sustainable Catch-up with the Euro” published in 2020 discusses these aspects in detail.

Fiscal experience

There was also a debate in the economic public discourse on fiscal policy in 2020 in Hungary and almost all over the world. I believe that reducing public indebtedness has been an economic policy priority for the government since 2010, and it is precisely this that has created enough room for maneuver in 2020 to revitalize.

The current, extraordinary economic situation is exactly the moment when it is worth raising budget spending for jobs, families and companies. Failure to do so would wreak havoc on the economy, which could delay the catching-up process for years, which in turn could have a repercussion on budget revenues. That is, if the government had not acted quickly now by allowing a temporary jump in the debt stock, it would have had to face the debt-increasing effect of the stagnation of government revenues later on. This happened not only in Hungary, of course, but all over the world. There is good reason to be confident that this will also contribute to a faster recovery than after the 2009 crisis, when many countries started fiscal austerity too early and Hungary drifted into recession without room for budgetary maneuver.

The Covid crisis has provided many new experiences with the introduction of the euro, from which it is worth learning. In any case, it has become clear that domestic economic policy is not on a forced path, and we can continue to build on fiscal and monetary room for maneuver in the future. It is therefore appropriate to pursue a prudent accession strategy. What has not changed as a result of the epidemic is that Hungary should only enter the eurozone when its economy is properly prepared and the possibility of sustainable catching up is ensured within the zone.

Gábor Neszvada, employee of the MNB Institute of the Corvinus University of Budapest

This article reflects the views of the author and does not necessarily reflect the views of the Portfolio Editorial Board.

Cover image: Getty Images





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