Euro Fatigue Takes Hold. New Europe future is not bright.
Euro Fatigue Takes Hold
By PAUL HANNON
August 7, 2007
LONDON -- The early reform drive that led to European Union membership for Poland, Hungary, the Baltic states and the Czech and Slovak republics is in danger of running out of steam.
The prospect of becoming members of the European Union inspired a frenzy of reforms in the 1990s and earlier this decade that transformed economies in Central and Eastern Europe, creating one of Europe's great success stories of the past decade.
But membership in the euro zone has failed to generate the same level of popular enthusiasm. So for the first time since the anti-Communist revolutions in 1989, a number of countries in Central and Eastern Europe are without a compelling medium-term goal that attracts the support of a majority of voters.
The euro "is an uninspiring goal in itself," said Erik Berglof, chief economist of the European Bank for Reconstruction and Development. "The fact that it is becoming more distant makes it less relevant for policy makers. Europe needs to come up with something that will really engage people in these countries."
With the public largely apathetic about the prospect of having interest rates set by the European Central Bank and using the same currency as Germany, governments have set later and later targets for joining the currency area.
The Czech Republic, Hungary and Poland have abandoned their original entry dates for adopting the euro, and they no longer have an official target date. None has joined the European Exchange-Rate Mechanism, the antechamber to the euro zone.
"Growing skepticism about benefits from euro adoption and reform fatigue...contributed to a weakening of political support for euro adoption," the International Monetary Fund said in a report released last week.
According to a survey conducted on behalf of the EU in March and published in May, only 53% of voters in the countries that have joined the bloc since 2004 -- or the new member states as they are known -- believe adoption of the euro would be a positive development. Only 13% thought adopting the euro would have very positive consequences.
"The question of euro accession is definitely on the back burner in Hungary, Poland and the Czech Republic," said Raffaela Tenconi, an economist at Dresdner Kleinwort in London.
Polish central bank President Slawomir Skrzypek is an advocate of the go-slow approach. In a recent interview with a local business daily, he said the earliest possible date for adopting the euro was 2012 or 2013, and announced that he would set up a special office and a team within the bank to analyze costs and benefits of joining the euro zone.
"I would like for a complete report treating this issue to arise in Poland and to try and look at all aspects of this issue and to try to reconcile as much as possible the opposed sides," Mr. Skrzypek told the business daily. "I think in order to achieve that, the bank at this stage should avoid becoming engaged on any side of the argument."
But Poland may not be the most euro-skeptical of the region's larger economies.
"In my view the lack of desire in the euro adoption is more visible in the Czech Republic than in other countries in the region, such as Poland or Hungary," said Petr Zahradnik, the head and chief economist of retail bank Ceska Sporitelna's EU Office.
But without a unifying and inspiring goal, Mr. Berglof fears that reforms will stall and that domestic politics may become more backward looking. That's already happened in Poland, the region's largest country, where the question of what people did to their neighbors during the communist regime has become the dominant issue this year.
Polish Prime Minister Jaroslaw Kaczynski and President Lech Kaczynski -- identical twins who were involved in Solidarity's efforts to overthrow the Communist government in the 1980s -- are attempting to purge from public life all those people who collaborated with the hated secret police of the communist era. Eighteen years after Poland's first free elections, the twins sought to introduce a law, which was struck down by the Constitutional Tribunal, requiring many people with a public role -- including teachers, company owners and journalists -- to declare whether they cooperated with the secret police to keep their jobs.
"There is a backward-looking policy environment, where people are looking at past injustices, looking in the archives, and not much that attracts them to Europe," Mr. Berglof said.
Most of the new member states continue to record high levels of economic growth, boosted in part by strong inflows of foreign investment since 2004. The Organization for Economic Cooperation and Development expects the Polish economy to grow by 6.7% this year and 5.5% next, and expects the Czech economy to grow by 5.5% this year and 5% next. Even Hungary, where an austerity program designed to bring a ballooning budget deficit under control has hit growth, is expected to see its gross domestic product expand by 2.5% this year and 3.1% next.
But that strong performance may simply disguise some weaknesses, for example, in education systems, the European Bank for Reconstruction and Development warns.
In the Czech Republic and the Slovak Republic, fewer than 15% of people aged 25 to 34 have a university, or third-level, education. In Hungary, the proportion is less than 20%, while in Poland it stands at around 25%. But Slovakia stands out as an exception, keeping up its reform momentum and still on track to adopt the euro in 2009.
In Korea, by contrast, 50% of 25 to 34 year olds have had a third-level education, while in the U.S. the proportion is 40% and in Ireland -- whose economic surge over the past 15 years the new EU members want to emulate -- the proportion is also 40%.
Mr. Berglof's institution will soon cease to have a role in many of the new member states, with the EBRD's shareholders having agreed that from 2010, it will only invest in Romania and Bulgaria, and perhaps not for very long.
That's because they judge as complete the transition from centrally planned to market economies that the EBRD was set up to foster in 1991. But as with EU membership, the official recognition that they have made that transition may leave the new members with little to aim for.
--Edith Balazs in Budapest, Joel Sherwood in Stockholm, Leos Rousek in Prague and Marek Strzelecki in Warsaw contributed to this article.
Write to Paul Hannon at paul.hannon@dowjones.com |
