Euro crisis raises questions over future expansion

By Marius Zaharia – Analysis

BUCHAREST (BestGrowthStock) – The crisis raging in the euro zone’s fringe could delay European Union newcomers’ entry into the single currency for years, but is not likely to derail their obligation to join.

Deadly riots in Greece, a spike in bond yields in southern European states and arguments across the bloc over whether budget offenders deserve aid has clouded preparations for countries whose EU membership pacts require that they adopt the euro.

One side is simple maths. Huge budget deficits and bigger public debt piles accrued during the global recession mean most candidates will not meet the Maastricht criteria for four or five more years.

Of the eight candidates only Estonia is ready. Its 2011 euro bid is expected to get a go-ahead from the EU executive on May 12. But other candidates are questioning whether locking themselves into developed Europe’s policy straightjacket, surrendering their own interest rates and flexible currencies, is a good idea for now.

On the other side, intensifying speculation over whether the euro zone can itself hold together as its weakest members struggle has fueled resistance among policymakers to admitting another country capable of a Greece-style fiscal meltdown.

“For obvious reasons the central authorities in Brussels and Frankfurt will become less keen on further euro zone expansion,” said Neil Shearing of Capital Economics in London.

“But there is also a reason to say if you were the Czech Republic or Poland and you look at the recent events in Greece you think you’re probably going to be better off on your own.”

A Reuters poll shows economists see most candidates — the Czech Republic, Poland, Hungary, Romania, Bulgaria and Latvia — joining in 2015 at the earliest and Lithuania a year earlier.

The results were little changed from the last poll, although for the first time a handful of analysts pushed forecasts a long way back for some countries, including predictions that Romania and Bulgaria could join in 2018 or later and the Czechs in 2019.


That outlook has been gaining ground among some policymakers across the EU’s former-communist East.

“I can guarantee you that the demand for new members in the euro zone … is falling,” Czech central bank Vice Governor Mojmir Hampl said last week.

“The discussion has three levels: firstly whether we should enter; secondly whether we can enter, whether we are meeting the Maastricht criteria; and thirdly whether anybody wants us.”

Poland’s government has also said it is impossible to see a new euro entry target for the time being and that 2015 would be the earliest possible date. On Thursday Central Bank Deputy Governor Witold Kozinski attributed part of the delay to Greece.

“Certainly Poland’s euro adoption will be delayed,” he told Polish television. “However, it will happen.”

Hungary’s Prime Minister-designate Viktor Orban has said the country should not rush into setting a date.

Bulgaria suffered a blow to convergence hopes last month after it said it had hidden the truth about the size of its 2009 budget deficit in Greek-style misreporting and scrapped plans to apply to enter the pre-euro ERM-2 waiting room this year.

There is also the example of Slovakia. After it joined in 2009 businesses cheered that currency risk had been banished.

But when the crisis hit, its neighbors let their currencies slide against the euro by 20-30 percent and some producers moved to Hungary or Poland, favoring their cheaper labor costs.

Now Slovaks complain Prague and Budapest are cheaper in many ways than Bratislava and ask why their country, with living standards at 70 percent of Greece’s, should send aid to Athens.

Another advantage of the euro, low borrowing costs, is no longer a sure thing. On Thursday, Greece’s 10-year bond yields hit 9.235 percent; Portugal’s were 5.592. That compared to 3.899 percent for the Czechs, and 5.81 percent for Poland.

Those levels also show investors have largely abandoned more than a decade of trades based on the idea that non-euro EU member bond yields would converge with the euro zone’s because most of that has happened. Now they mostly target assets according to each country’s economic fundamentals.


All of the countries that joined the EU in 2004 and 2007 are required to take on the euro, but no deadline is specified, and doubts over the zone’s future could, in an extreme scenario, lead to some countries delaying adoption indefinitely.

That could potentially lead to a Sweden- or Denmark-like situation. They are not obliged to adopt the euro and policymakers have put any plan of doing so on hold, at least until they see a reason for it and public support rises.

Analysts said the European Commission’s Estonia report could show a shift on willingness to accept new members, and European Monetary Affairs Commissioner Olli Rehn said on Wednesday Tallinn’s bid was “certainly not a done deal yet.”

A final green light, if it comes, is expected on July 13.

“We think that they will accept them, but they will give some signal, a kind of a change will occur,” said Barclays Capital’s Daniel Hewitt.

Besides winning back confidence from euro zone politicians, the main challenge is cutting budget deficits that, in the cases of Poland, Romania and the Czech Republic, are around twice the required level of 3 percent of GDP.

Debt levels among candidates are far lower than in euro members Greece or Italy, but a weak growth outlook in the next few years may complicate efforts in some countries to adhere to the euro zone’s 60 percent of gross domestic product ceiling.

Elisabeth Gruie, an economist at BNP Paribas, is not waiting for the Estonia report and says the euro zone will shut its doors to the larger aspirants for a while after Estonia gets in.

“With problems afflicting the euro zone policymakers will certainly move to a zero-tolerance attitude,” she said.

“We saw all countries joining around 2015. This is not possible any longer. It is not going to happen.”


(Additional reporting by Jana Mlcochova; Editing by Michael Winfrey)

Euro crisis raises questions over future expansion