Joining Euro(pe)

Anyone visiting Prague, Warsaw, or Budapest in recent weeks would have found beautiful old cities in a rather depressed mood. Despite the arrival of spring, the political and economic news across the region is gloomy at best. Eastern Europe’s emerging economies have been some of the worst hit by the current economic crisis—making unemployment rise, threatening their ability to roll over foreign debt, and toppling governments. As a recent International Monetary Fund paper proposes, the best way forward may be a European answer to an Eastern European problem: early adoption of the euro.

Of course, not all Eastern European economies are the same. If we consider the Czech Republic, Poland, and Hungary, it becomes clear that the last has taken much more debt from foreign markets—in a way that may have been problematic even without a global economic crisis. But, in the current scenario, investors that had previously been attracted to the generous interest rates of the region have fled as fast as possible. And very few remain, making it very hard for these countries to roll over debt or put in place counter-cyclical measures to ease the effects of the global crisis. In a way, it has been like the Tequila Effect in Mexico or the Asian financial crisis in the 1990s, in which confidence crises presented potentially catastrophic problems without a clear way out for governments that did not command trust from international markets.

Ultimately, as the G20 recognized, the largest irony is that the countries worst hit by the current crisis are not the places in which it originated. But, across Eastern Europe, few people have time to be ponder such facts. The Polish zloty has lost a third of its value against the euro in just a few months, but that has not made its exports more competitive, since they have plunged along with global economic trade. The Czech Republic, arguably one of the most respectable governments in the region, has seen its prime minister resign right in the middle of its European Union presidency—what was a time to shine internationally has become a time for embarrassment as the Parliament looks for a new coalition leader.

And, yet, when it comes to chaotic situations, Hungary has seen the worst: The stark depreciation of the florint in international markets means that over half of the mortgages in the country (denominated in euros, just like everything aimed to tourists in Budapest) have become unpayable. Macroeconomically, the state has faced a similar constraint: Therefore, the World Bank, the EU, and—most notably—the IMF have agreed to provide funding to avoid disaster. On Thursday, it was announced the country would receive over $25 billion of international bailout funds to last through the year. As David Hechlam, a director of the rating agency Fitch, commented: “They could probably get access to the markets, but the price they would have to pay would be very high”—given the situation, prohibitively high.

This is where the euro should come in. Europe’s currency is a true financial miracle—when it was created just over a decade ago, everyone thought it would fail. Milton Friedman famously predicted it would be a disaster, and the Bank of England had stress scenarios that foresaw a similar end to the monetary experiment. Yet, over ten years later and despite the fact that it was created with a political rather than economic agenda, the currency remains alive and arguably very strong. As with most things in life, adopting it involves a trade-off. A country gives up monetary freedom (to devalue, for instance) in exchange for increased trade with the rest of Europe, coordinated monetary policy, and a confidence seal in terms of foreign indebtedness. Basically, through the European Central Bank, countries less reputable than Germany get access to German interest-rate levels in regular market conditions.

The Czech Republic, Hungary, and Poland are all scheduled to go ahead with a rather long process of monetary convergence in order to join the euro, overseen by the ECB. But, as it turns out, the current crisis renders impossible many of the conditions implicit in the plan, particularly when it comes to fiscal balance (which everyone is throwing by the wayside) and indebtedness (which has been a problem for a long time in the region). The problem is significant because, if things continue deteriorating, it may pull the region farther and farther away from Europe, in a way that could hurt these countries in the long run. And given the many problems they are now facing, the trade-off inherent in the adoption of the euro makes a lot of sense.

The key, as in most monetary matters, is long-term credibility. But for Europe, it is also about honoring standing promises. After all, the EU was part of the “value proposition” offered by the West after the communist grip on the region collapsed. It has arguably brought strengthened institutions, representative democracy, and better respect for human rights. Even though these countries may not be technically ready for the euro just yet, the ECB should push for its adoption in order to further integrate nations like Hungary and Poland. Only Europe can deliver them from a potentially catastrophic confidence crisis that would set them back years, if not decades.


Pierpaolo Barbieri ’09, a former Crimson associate editorial chair, is a history concentrator in Eliot House. His column appears on alternate Fridays.