27 January 2022

EURACTIV: Central and Eastern Europe needs a different type of eurozone

EU countries such as Czechia, Croatia and Bulgaria should have the courage to distinguish between the political realities of the European integration process and their own long term economic interests. They should leverage their future membership of the eurozone for significant structural change, writes Eoin Drea.

Eoin Drea is a senior research officer for the Martens Centre in Brussels.

The recent eulogizing of the euro to mark its twentieth anniversary was a case study in positive projection. For European Central Bank (ECB) President Christine Lagarde the Euro represents “a beacon of stability and solidity around the world”.

A coterie of current European Commissioners and decision-makers were no less effusive, viewing the single currency as  “an unprecedented collective endeavour, and a testament to the unity that underpins our union”.

In many ways, the euro’s success is undeniable. Public support remains high and it has evolved into a truly global currency, second only in importance to the U.S. dollar. For many smaller member states, stretching from Ireland to Greece, a common currency reduces transactions costs and increases mobility.

But, for EU members in Central and Eastern Europe, the devil really is in the detail, not the soaring political vistas.

Because beneath the rhetoric of unity and identity, there is a worrying reluctance to acknowledge the costs of further eurozone integration. Indeed, the fuzzy focus on adding more states to euro coinage highlights the forgotten reality of Europe’s single currency endeavours.

Namely, that the euro remains a political project, not an economic one.

And therein lies the peril of eurozone reform for Central and Eastern Europe.

In the short term, necessary economic measures to ensure the euro’s stability – like finishing banking unions and improving financial flows across national borders – are essential to all EU members. Paschal Donohoe, and his Eurogroup predecessors, have spent years attempting to finalize these key elements of successful monetary unions.

Unfortunately, the gritty politics of eurozone development is far removed from the rousing rhetoric of shared economic values.

Yet, it is really only when the banking union is finally completed that the economics will really diverge from the politics. Then, the EU will double down on further economic integration – joint EU borrowing, more fiscal centralization, EU level taxes – as being essential to safeguarding the future prosperity of the eurozone.  To protect all that has gone before.

Completing a banking union is one thing, but a full fiscal union will spark a whole different conversation in Central and Eastern Europe.

This continued economic deepening will likely have a detrimental long-term impact on overall support for the wider European integration process. It will be seen as another Brussels led attempt to override domestic prerogatives.

And we’ve already seen too many “east versus west” EU battles in recent years.

It could also end in political disaster. The EU’s inability to complete a banking union (after a decade) hardly bodes well for the much more fundamental reforms required to make a deeper eurozone actually work.

Because such a eurozone would leave these members states in Central and Eastern Europe bereft of domestic tools to manage economic shocks.

The inability to use interest rates to stabilise the economy (a don’t ask, don’t tell the cost of current Euro membership) will be magnified by the inability to use fiscal policy (or corporate tax rates) to smooth the economic cycle.

As with interest rates, these states will be dependent on overall eurozone policies, not domestic ones. It will increase their dependence on the largest eurozone economies.

However, having EU member states that are not, yet, members of the euro creates possibilities for Central and Eastern Europe.

Because instead of singing meekly from the Brussels hymn sheet, states such as Czechia, Croatia and Bulgaria should have the courage to distinguish between the political realities of the European integration process and their own long term economic interests.

They should leverage their future membership of the eurozone for significant structural change.

These states should build partnerships with other smaller, net contributor EU member states in the West to advocate for a return to a decentralised vision of eurozone governance.

A model where the existing system of monetary control (via the ECB) is complemented by a fiscal governance model predicated on a much larger role for independent fiscal councils and greater room for qualitative assessments based on national circumstances.  This is a fiscal standard model, not a hopelessly divisive fiscal rules-based one.

This model would end the constantly fruitless debates about fiscal rules and reduce popular anger towards the European Commission as the ultimate eurozone policeman (as was viscerally demonstrated in Greece over the past decade).

Such an approach would reinstate the no-bailout rule contained in the EU Treaties and place the burden of fiscal responsibility on national governments, not Brussels administrators.  It would force governments to match their lofty pro-Euro rhetoric with actual fiscal responsibility.

The potential future benefits to Central and Eastern Europe would be enormous. A positive role in eurozone governance combined with fiscal flexibility at the national level would be worth more than a thousand political speeches about the Euro as a symbol of our success....

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