Euro and the Candidate Countries
As we know, not all UE Member Countries decided to joint the EURO sphere. Thus we could ask how should then the Candidate Countries behave towards the EMU and the EURO? They accede now to the SEM (Single European Market), what already results in a considerable effort on their part. The negotiations have only started and only in the few areas. The problem of structural and functional adjustments is the immediate area of concern for Poland, the Czech Republic, Hungary, Slovenia and Estonia. The next years have to be the years of price stabilisation, economic growth, but struggle against poverty as well. In this situation those countries need stabilisation of their exchange rates, but cannot resign from the autonomy of their monetary policy. Anyhow, the need for devaluation may appear, like it was the case with the Czech Republic.
1. PREPARATION FOR EU ACCESSION
As economists say, the pre-accession period should be used by the Candidate Countries to finalise the most important economic changes, to complete construction of the bases of the market oriented economy. The most important ones are the efficient operation of the financial markets and strengthening of financial institutions in the Candidate Countries. The Candidate Countries should gradually eliminate currency exchange limitations, so that the scope of convertibility of their currencies becomes wider. Full elimination of those controls should, however, not be required from those countries. As we remember, the member states of the Union were applying those limitations until quite recently (e.g. France prior to 1990, Greece, Spain prior to 1994).
Most probably even after the accession to the UE the Candidate Countries will be able to apply certain limitations concerning the flows of short-term capital, which often has a speculative character.
The Candidate Countries should, however, be aware of the fact that after the transition period they will have to adjust to the Maastricht Treaty requirements concerning the currency trading. It concerns the liberalisation of trade with the third countries as well.
The introduction of further convertibility of currencies of the subject countries will not remain without influence on the possibility of stabilisation of their exchange rates. It is now difficult to predict, whether the Union will be interested in providing assistance to the stabilisation of currencies of the Candidate Countries in relation to the EURO. Even if since January 1999 the ERM II (the successor of the ERM I) system will be in operation, the Candidate Countries cannot count on their automatic and quick admission to that system. The ERM II system is intended to stabilise the exchange rates between the EURO and the currencies of the member countries of the Union which do not adhere to the EMU in the first round.
The Council of the Union has, however, the right to conclude similar agreements with other countries (including the Candidate Countries), but it is not known, whether it will use that option. Anyhow, no one is convinced, whether a conclusion of such agreement is fully justified and whether the stabilisation of exchange rates of the Candidate Countries is not a premature idea. The limitation of freedom of manoeuvre in the monetary and credit policy may happen only at the stage of relative "catching up" the countries being the members of the EMU. The results of liberalisation of foreign capital trading implemented now are also difficult to predict.
It is possible, that in future some negative phenomena could happen, that would entail the necessity of devaluation (the recent financial crisis in the Czech Republic is a proof in kind).
The weight of this argument may be, however, weakened if we take into account the 30% scope of admissible variations of exchange rates adopted in the ERM II. It has to be stressed, however, that the share of each Candidate Countries in the ERM II means a unilateral obligation (unless the Council signs a suitable agreement) to maintain a constant parity in relation to the EURO. It undermines the credibility of those currencies. It has also to be borne in mind that in case of any speculative attack on any of the currencies of the Candidate Countries, the Union will have the obligation to intervene.
We had to do with such a case in 1991-1992, when the market forced the breach of the close relation of the ECU with the Swedish Krone and the Finnish Markaa. At that time these were also the countries aspiring to the membership in the Union.
The continuation of the process of disinflation in the subject countries will also require activities in the sphere of exchange rate policies and the participation in the ERM II will be recommended from this point of view.1 However, the time of entering the ERM II should be chosen bearing in mind the necessity to minimise the hazards that may be result from it. It is a paradox that the perspective of the EMU is a perspective of a fixed exchange rate. The experts think, whether it should or should not be preceded with a discretionary devaluation. I think that the market should determine it and the market should provide information about the optimal level of the exchange rate before fixing it.
The consequence of establishment of the EURO should be the change of the currency basket being the base of currencies of the Candidate Countries. Independently from the future membership in the Union the creation of the EMU would bring about to the Candidate Countries - as I tried to prove- more benefits than risks.
The effectiveness in stabilising the exchange rates of those countries in relation to the EURO would be a practical test, whether they reached a level of maturity that is sufficient for full membership.
2. THE PERIOD AFTER GAINING EU FULL MEMBERSHIP
After gaining full membership in the EU the situation will be quite radically changed. Being the members of the EU the Candidate Countries will have the right to participate in the ERM II, although the participation will have a voluntary character.
The maintenance of a wide scope of fluctuations of the market exchange rates around the bilaterally established central exchange rates would provide those countries with a sufficient degree of freedom in their monetary policy.
Taking part in the ERM II the subject countries will have, however, to agree with the EU authorities the possible changes of central exchange rates in relation to the EURO. Independent actions, theoretically possible, would be badly perceived by other member states.
Within the ERM II it will not be possible to apply the current crawling peg mechanism. It means the limitation of the possibility of redressing competitiveness of exports of those countries. Under conditions of relatively high inflation such limitation would have an unfavourable effect on the balance of trade.
The participants of the ERM II would benefit from an increase in their credibility in the international markets. The experience with the ERM I system gives evidence to this. The need to limit the fluctuations in exchange rates forced the participants of the ERM to apply budgetary and monetary policies directed towards the stabilisation of internal prices2
Thus the economically weaker countries "imported" from the stronger countries the credibility for the directions of their own policy. Credible participation of currencies of the countries presently applying for membership in the Union would require the application of consistent anti-inflationary policies. It would have to assure the stability of prices at the level comparable to the one achieved in the countries of the Union.
Maintenance of suitable budgetary discipline and care for the state of public finance would be important after the period of accession to the Union because each member state is subject to supervision of the Commission and the Council. Even though that policy would remain in the hands of the national authorities, it would have to be effective and compatible with the aims of the Union. The Maastricht Treaty provides for a special procedure to be applied towards countries, which have allowed to exceed the budget deficit. Permanent avoidance of deficit reduction measures could even lead to the imposition of financial sanctions. These sanctions have been quantified in the Pact for Stability and Growth introduced in 1997. The penalty fee for excessive deficit may even exceed 0.5% of the GDP.
The Candidate Countries should be aware of the fact, that the Pact for Stability, determining the guidelines for budgetary policies of the member states goes beyond the stipulations of the Treaty of Maastricht. While determining the guidelines of budgetary policies of the member states it adopts a decidedly more restrictive approach than the approach adopted by individual Member States of the EU in their budgetary policies until now.
The Candidate Countries should, however, perceive the Pact of Stability as an instrument that obliges the fiscal policy to increase the level of welfare. It is an argument "against" from the point of view of countries acceding to the Union. This is because the Pact of Stability leads towards a much more restrictive definition of convergence and defines DECIDEDLY HIGHER REQUIREMENTS to the countries applying for membership in the EMU. The Candidate Countries will then have to meet the criteria of convergence in an extended and deepened formula. Summing up the problem of future membership may be synthetically put in the following conditions3:
· the Candidate Countries will have to "voluntarily" enter the ERM II and prove, that their membership proceeds without disturbances,
· those countries would have to conduct the exchange rate policy according to the suggestions of the Commission of the European Central Bank and the Council of the Union. It will be an asymmetric co-decision making.
· they will have to prove their credibility, maintaining the exchange rates of their currencies in relation to the EURO within the limits of a narrowing band of permissible fluctuations,
· those countries will have to prove the ability to defend their currencies using a unilateral currency intervention. It is possible, that the ECB (European Central Bank) will not intervene because of the convergence situation of the member country.
· the Candidate Countries will have to prove their low long term interest rates and low inflation.
· it will be necessary to avoid excessive deficits, in line with the principle adopted in the Treaty of Maastricht and the Stabilisation Pact. In case of a decrease in the growth of the GDP (Gross Domestic Product), the government budget deficit over 3% of the GDP will always be considered as excessive, and would result in sanctions of the EMU authorities,
· it will be indispensable to conduct tax policies compatible with the guidelines of the Council and of the Commission.
It is obvious, that even if any preferences are applied, the criteria of convergence applied in the future towards the present Candidate Countries would be much stricter and restrictive than the criteria applied to the present members of the EU. Besides that those countries will have to apply the guidelines of economic policy which have not been determined so far as well as requirements related to, e.g., the harmonisation of tax rates.
It seems unjust, but this is the reality. Those countries can only be advised to expect a confrontation with those problems and prepare a suitable strategy of behaviour during the negotiations.
CONCLUSION
The introduction of EURO and benefits of the EMU are undeniable for the Candidate Countries. It means a reduction in the exchange rate risk, a decrease in transaction costs, an increase in their foreign trade turnover, maintenance of a suitable regime concerning the macroeconomic indicators, stabilisation of exchange rates etc.
A positive aspect for the Candidate Countries is also the fact, that they will be able to confront the expectations in relation to the currency union with the first experiences of their functioning in practice. Thus new, at present unpredictable elements will appear. The following arguments are also in favour of the participation of the Candidate Countries in the EMU:
· the macroeconomic policy of the Member Countries to the EMU should assure a "healthy" state of economy, including the improvement of the health of the public finance,
· a single currency favours the development of financial markets and facilitates access to financial resources,
· the membership in the EMU allows those countries to influence the process of decision making, the EMU will have a tremendous influence on the Union, that is why it is not recommended to remain outside the main stream of integration.
The membership in the EMU will also entail costs. The basic cost is considerable limitation of national sovereignty in the monetary sphere. The member countries would lose the possibility of issuing their own currency, thus they will also lose the possibility of using the exchange rate as an instrument of economic policy.
This instrument has been recently used by a number of member states, with the intention of improvement of their competitiveness.
Such possibility will not exist in the EMU, and various economic disturbances may result in inflation, unemployment and deterioration of the budgetary situation. It may in turn mean a peripheralisation of the areas of the Candidate Countries. That is why the premature entering of the subject countries to the EMU could be unfavourable for themselves. They can only enter when they are well prepared, without counting on considerable assistance from the EU in the future. Thus the membership in the EMU should be seriously considered and it should be correspondingly taken into account while formulating economic policy.
The Candidate will probably have to face some serious difficulties in the preparation of the micro- and macro- spheres, because of the transition process.
13-01-1999
Annexes
Candidate Countries in the light of the Maastricht criteria:
Consumer Price Index (%) - Annual change over proceeding year
Source: Economic Bulletin for Europe 1998, No 1/1998.
General government balances (in per cent of GDP)
Source: Eastern Europe Monitor, 6/98
Interbank interest rate (in per cent per annum, end-year)
Source: EBRD, Transition Report 1997.
Exchange rates (annual averages, national currency units per USD)
Source: Economic Bulletin for Europe 1998, No 1/1998.
Exchange rates changes over proceeding year (annual averages, national currency units per USD)
Source: Economic Bulletin for Europe 1998, No 1/1998.
Exchange rates changes over proceeding year (annual averages, national currency units per USD)
Export (merchandise export) USD bln
Source: Economic Bulletin for Europe 1998, No 1/1998.
Import (merchandise import) USD bln
Source: Economic Bulletin for Europe 1998, No 1/1998
Table: Major commodities in the exports to western Europe, 1992, 1994 and 1996
Source: Economic Bulletin for Europe 1998, No 1/1998.
* Prof. dr hab, Research Centre on European Integration University of Gdańsk Poland umek@panda.bg.univ.gda.pl
1 Gazeta Bankowa 9/1998, Dezinflacja na kredyt.
2 Orcziak Leokadia, Uwarunkowania ... op. cit. p. 116
3 Klein Martin, Transformacja systemowa a kryteria konwergencji, Ekonomista No.1/1998
