Wolfgang Munchau Backs Euro Membership For The East

Once more the forces are marshalling. Today it is the turn of the East. Wolfgang Munchau in the Financial Times this morning:

But Ireland is not the biggest danger for the eurozone. If the country goes down, the eurozone will bail it out. Even the Germans accept this now. A far more imminent danger lurks in central and eastern Europe. The possibility of a financial collapse there is the most urgent policy issue the European Union must confront at this point. If mishandled, it could bring down the eurozone……..

In my view, the smartest answer to the prospect of meltdown is the adoption of the euro as quickly as possible. There is no need to switch over tomorrow. All we need tomorrow is a credible and firm accession strategy – one for each country – which would include a firm membership date and a conversion rate, backed up by credible policies.

Me on Saturday morning (here):

This is not a view I have arrived at lightly, but looking at the extent of the problem we now have before us, a problem which is growing by the day, and taking into account the fact that the origins of the economic crisis in the East must surely rest (at least in part) in the decision to make euro participation a condition for EU membership for these countries (a possibility which was subsequently withdrawn in the critical moment, when the going started to turn rough), and then assessing the risk to the Western European banking system which would be posed by simply sitting back and watching it all happen, I think this move is not only the least damaging of the policies we can now follow, it is the in effect the only viable path left to us if we are to keep the eurozone as an integral entity together.

If this proposal were accepted a new set of membership criteria would need to be drawn up, of course, but the underlying principle would have to be one of offering the certainty of entry as guaranteed forthwith, for those who chose to accept. Rules were made to be broken, and nothing should be so inflexible – not even the Maastricht eurozone membership criteria – that it cannot be ammended as circumstances dictate. And at this point even the undertaking that this – like the long awaited US Stimulus programme – was on the table, would be sufficient to provide immediate, and much needed relief. Flirting with doing nothing here is, in my opinion, flirting with disaster, both in the East and in the West.

I think we have substantive agreement. C’mon Dominique, now its your turn to push.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

6 thoughts on “Wolfgang Munchau Backs Euro Membership For The East

  1. I think it had not been a month that you though I was out of my mind when I made the same argument in a comment to your earlier post. Indeed, I agree, this is the only solution that will not paralyze the European Union for years to come.

  2. Hi Anton,

    “I think it had not been a month that you though I was out of my mind when I made the same argument in a comment to your earlier post.”

    I do indeed remember. Events have been moving quickly, and I for one have changed my mind on this. Not because I think it will be problem free, far from it. Simply I now think we have two alternatives, let the whole thing disintegrate before our eyes, or consolidate. I prefer the latter.

  3. I don’t know..
    Fact is that banks and other financial institutes of the Euro zone countries have given giant loans to the Eastern countries. When the eastern countries are going bankrupt, many of those institutes are likely to follow these countries in their bankruptcy. But on the other hand; can the eurozone bear the burden of the collapsing eastern economies? For instance in January in the Ukraine there was a record drop in the production volumes: in comparison with the last year’s level, the decrease was 34,1%. And compared with December 2008 it was a 16.1% decrease. Apart from financial reasons, there is also a important politic one. To offer the East euro membership will be a big contribution for European unity.
    Ron.

  4. @Ron Hulscher: I think you are wrong here. These banks have not lent money to spend-thrift governments but to their daughter banks which gave the money to fast growing and stable companies. The fact that they have withdrawn the money from their daughter banks caused the deep recession in Central and Eastern Europe, and made these, otherwise good function companies (that had overperformed Western European ones) into bankruptcy. Indeed, the Eastern member states have a huge problem with financing their fiscal deficit. But there is a more severe problem, the financing of the companies that used to get bank loans from Western European banks. These are very separate problems.

  5. Hi Ron and Daniel,

    I have to side with Daniel here, Ron, in the sense that, in general, we haven’t seen spendrift governments at work in the East, and public debt to GDP has been pretty low (although Daniel’s own country – Hungary – prior to 2006, was an example of a government which simply handed out money, until the markets made them correct).

    The problem was much more banks in Austria, Sweden, Italy etc that carried out reckless lending policies to private consumers (see Economist quote below), dangling before them the prosect of West European living standards soon, and easy access Euro and CHF loans based on imminent membership of the eurozone. How was the average citizen, faced with the avalanche of bank analysis telling them there was no problem, able to know better.

    The problem is, that as these loans have now been cut domestic consumption has fallen while the sharp economic contraction in the West hits their export industries very hard.

    Now of course, as the government have to bail out the banks, debt to GDP shoots up as it is doing elsewhere. This can become unmanageable in the East, due to the fact that their economies are much weaker than those in the West.

    “But on the other hand; can the eurozone bear the burden of the collapsing eastern economies?”

    Well this is the big question, but we can also ask can they afford not to offer membership? Banking systems in Austria, Sweden and Italy will be in deep, deep trouble if we simply let the defaults rise in the East (rising possibly to the level of sovereign default in some cases as bail-outs are attempted. Remember what are being offered at the moment are loans, and these normally end up on the governemnt balance sheet, and as external debt.

    Now for The Economist quote:

    AMID the wreckage of Latvia’s retailing industry, which has declined 17% year on year according to the latest figures, one item is selling well: T-shirts with seemingly mysterious slogans such as “Nasing spesal”. Latvians are glad to have something to laugh about, even if it is only their finance minister, Atis Slakteris. In an ill-judged foreign television interview, using heavily accented and idiosyncratic English worthy of the film character Borat, he described his country’s economic problems as “nothing special”.

    Put mildly, that was an original interpretation. Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20% of GDP. Conventional wisdom would have suggested applying the brakes hard, by tightening the budget and curbing borrowing. But the country’s rulers, a lightweight lot with close ties to business, rejected that. Fast economic growth made voters feel that European Union membership was at last producing practical benefits, after a disappointing start when tens of thousands of Latvians went abroad in search of work, leaving rural villages and small towns depopulated.

    The central assumption, in Latvia and many other countries in or near the EU, was that convergence with rich Europe’s living standards and other comforts was inevitable. Lending in foreign currency went from 60% of the total in 2004 to 90% in 2008. Why pay high interest rates in the local currency, the lat, when the cost of a euro loan was so much cheaper? In a few years Latvia would surely join the euro anyway. Similarly, worries about financing the inflows were dismissed: Swedish banks would no more abandon their subsidiaries in Latvia than they would pull out of, say, southern Sweden.

    Last year tested those assumptions nearly to breaking point. First, Latvia’s housing bubble popped. Then the main locally owned bank, Parex, went bust and had to be nationalised, amid fears that it could not pay two syndicated loans due this year. In December Latvia accepted a humiliating €7.5 billion ($9.56 billion) bail-out led by the IMF.

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