This anniversary guest post is written by the clever and wittty P O’Neill.
For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country. The last major convulsion was Black Wednesday in 1992. Yet the only real long term impact of Black Wednesday was on the electoral fortunes of the Conservatives, as the legacy of mismanagement proved very difficult to shake. But there was little other damage: the UK economy managed to shed an exchange rate straitjacket that it had never particularly liked and growth recovered quite quickly, and the Eurozone project, then its in infancy, shed its most reluctant large member, setting the stage for monetary union 7 years later. Furthermore, the crisis itself was limited in scope, as it never concerned the ability of the UK government or the country as a whole to pay its bills.
However, the risk of the latter type of crisis in a member country is now quite high. The most relevant period of comparison is the 1980s, when a number of mostly smaller EU countries had very high public debt and international trade deficits, often in the context of weak coalition governments unable to tackle the problems. Luckily, no country ever actually hit the crisis point where the Union might have had to consider what kind of support to provide. But consider that as late as 1989, the eminent economist Rudi Dornbusch (R.I.P.) could publish an article titled Ireland’s Failed Stabilization (link may require subs.) — reflecting what was then a growing consensus that the Republic was on the brink of chronic basket case status. Could the Irish government have defaulted on debt, or could the country have faced a shutoff in the ability to borrow abroad? We’ll never know, because 1989 is exactly when the turnaround was beginning, and therefore the other countries never had to hash out their exact obligations to a member in distress.
The warning lights are flashing again â€“ this time in eastern Europe, and especially in the recent or imminent member countries of Hungary, Romania, and Bulgaria. Poland is also a source of concern. Some combination of profligate governments, political uncertainty, EU spending booms, and capital inflows have created precarious economic positions for these countries. So far itâ€™s all worked out OK, as foreign investors are looking for good returns anywhere with global interest rates so low and willing to take the bet. EU membership or the prospect thereof makes the long-term outlook seem safe and has driven big capital inflows (for Irish investors, especially for property â€“ check the ads in any of the Irish newspapers). But the numbers are getting to the point where analysts worry. In Hungary, the budget deficit and current account deficit are getting close to 10 percent of GDP. The fiscal problems are not so evident in Bulgaria and Romania but current account deficits are large. If it was Latin America or Asia with these numbers, the panic would be there already.
A combined crisis in all three would be a rather larger affair than a 1980s Irish crisis would have been — with additional complications given that the countries on the other side of the bets on prospects in these countries would also be in the EU. And so a set of questions: Does the EU have the will or the means to tell countries that they are the wrong track? Should the countries seemingly most intent on joining the Eurozone be politely told to forget about it? Should the investors tripping over themselves to get a piece of the action be told that they’re on their own if anything goes wrong? And perhaps the biggest question of all: given the huge western migration that has already occurred even with relatively healthy economies in eastern Europe, what would be the political backlash from even greater flows of workers fleeing a severe recession there? One gets the sense that the EU top brass were counting on a nice quiet period to get the public used to the idea of the constitution again. One fears that events could derail this benign scenario.