Getting Ready to Join the Eurozone Club
IMF Blog, February 1, 2010
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- Getting Ready to Join the Eurozone Club
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Bibliographic details
- Authors: Marek Belka
- Published: February 1, 2010
Context and framing
- Author: Marek Belka
- Date: February 1, 2010
- The piece builds on an earlier blog posted January 21 and examines whether new EU member states in the East should accelerate or delay EMU membership and what conditions are required for success after entry.
- Central premise: sound policy frameworks and the ability to adjust matter more than formal convergence tests (Maastricht criteria) for long-term success in EMU.
Fixers and floaters: currency-regime–dependent tradeoffs
- Fixed-exchange-rate countries ("peggers")
- Examples: the three Baltic republics and Bulgaria.
- Argument: for small and very open countries with fixed exchange rates there is "no alternative" to seeking EMU membership as fast as possible.
- Crisis impact: particularly hard hit; e.g., Latvia had to rely on massive external support.
- Policy implication: euro adoption would remove residual currency and liquidity risks that increased borrowing costs, dented confidence, and contributed to sharp output contractions.
- Net assessment: "for the peggers, joining the club is all gain and no (additional) pain."
- Flexible-exchange-rate countries ("floaters")
- Examples: larger new member states, notably Poland, Romania, Hungary.
- Boom-period benefits: currency appreciation and monetary tightening helped prevent overheating; depreciation during the crisis temporarily boosted exports (Poland).
- Crisis vulnerabilities: sudden drying up of foreign capital inflows led to shortages of euro liquidity for banks, households, and enterprises indebted in foreign currency.
- Responses:
- Romania and Hungary drew on balance of payments support from the IMF and the European Union.
- Poland used the IMF’s new Flexible Credit Line to top up foreign currency resources.
- Policy implication: experience of sudden euro shortages and currency volatility may lead floaters to weigh more cautiously the timing of euro adoption.
Institutional readiness and political economy: "the euro is for the agile"
- Readiness beyond Maastricht criteria
- The author emphasizes readiness in terms of institutions and society's capacity to make sometimes painful fiscal and structural adjustments after joining EMU.
- Political feasibility of fiscal and structural reforms (as demanded of Greece and Ireland) is a core concern.
- Positive attributes of many new member states
- Proven nimbleness in adjusting trade and production structures.
- Increasing integration with EMU members and other new member states.
- Productivity increases.
- Flexible job markets and high labor mobility, including cross-border mobility.
- Notable example: Estonia
- Plan: hoping to introduce the euro in January 2011.
- Crisis toll: "losing almost one-fifth of its output."
- Fiscal performance: kept its public deficit below the required 3 percent of GDP.
- Sources cited: IMF’s recent Article IV report.
- Explanation: swift adjustment when the crisis hit, sound institutions, and prudent policies during the boom years.
- Political economy observation
- Baltic countries were able to implement tax hikes and spending cuts "worth some 10 percent of GDP in a single year" without mass protests.
- Interpretation: willingness to endure economic and political pain reflects recent historical experience of transition from planned to market economy and a strong preference for stability and sustainability.
- Cautionary note
- Not all new member states share the same determination or experience (e.g., long-standing currency boards).
- Policymakers must communicate that euro adoption is not an end in itself and that sacrifices will be required to fully reap benefits.
- Core test: a country’s ability to adjust in the face of new challenges determines fitness for life in the eurozone.
Key takeaways and policy implications
- Currency regime strongly shapes the optimal timing of EMU entry:
- Peggers: strong case for rapid entry to eliminate currency and liquidity risks.
- Floaters: more ambiguous case, given benefits of exchange-rate flexibility but vulnerabilities to sudden euro liquidity shortages.
- Institutional and societal agility matters more than formal Maastricht compliance for long-term success in EMU.
- Fiscal discipline and willingness to implement large adjustments (examples: Estonia) are critical credentials for safe euro adoption.
- Policymakers should:
- Assess readiness in terms of political feasibility of fiscal and structural reforms.
- Prepare to explain the trade-offs and necessary sacrifices involved in euro adoption to maintain public support.
Source: Getting Ready to Join the Eurozone Club — Marek Belka, February 1, 2010.