EMU is still a distant vision for CEECs

Date: 25/09/1997

By David Thomas

MEMBERSHIP of Europe's single currency zone remains a distant goal for most of the central and eastern European candidates for EU accession.

But unlike in most of the Union member states aspiring to join the first wave of economic and monetary union, popular opinion in the applicant countries feels no emotional attachment to existing national currencies.

It is hard to imagine Polish newspapers imitating the example of Germany with headlines like “Hands off our Zloty”. But those CEECs with which the Union starts entry talks early next year have a lot of hard work to do to get their economies and banking systems ready to face the cold wind of competition in the

EU internal market, let alone the more intense competitive pressures likely inside the single currency bloc.

Most analysts believe that euro-zone membership is not even on the minds of CEEC leaders. Their primary motivation is the challenge of Union membership, with EMU just a nice but far-off afterthought.

The European Commission's recent economic assessment of the eastern countries' chances of entering the single currency bloc noted the basic failure of most to ease exchange and capital controls - a sine qua non for EMU.

Indeed, few eastern European currencies are fully convertible, although exchange rate stability is gradually taking hold.

Most have already adopted currency regimes which involve pegging their economic policies to the West.

Some, like Bulgaria, have introduced a currency board system, which essentially means unilaterally surrendering monetary and exchange rate policy to a foreign central bank - in this case the German Bundesbank.

Poland has selected a so-called 'crawling peg' against a basket of currencies dominated by the US dollar and deutschemark, the Czechs a 'managed float' against the mark and Hungary a crawling peg against a mark-dominated basket of currencies.

The expectation is that these countries will have to continue to rely on periodic devaluations to maintain competitiveness for years to come.

While this currency vulnerability could disqualify them from EMU in the near future, one strong possibility is that they could enter ERM II quite soon after they join the Union.

As things stand, only two of the EU's existing members - Denmark and Greece - look likely to belong to the revamped Exchange Rate Mechanism, designed by France and the Commission as the successor to the current ERM which would link the euro with Union currencies outside the single currency zone.

Current market speculation is that the bulk of present Union members will succeed in joining the first wave of EMU, while outsiders like the UK and Sweden do not seem keen to join ERM II.

In the period leading up to Union membership, it is likely that the CEECs will continue with policies of unilaterally pegging their currencies to marks or dollars, although most will probably switch to euro after the start of EMU.

Unlike western Europe, the main concern over the suitability of eastern European economies for membership of EMU is doubt about their basic financial stability, not their ability to meet the financial convergence criteria which are set out in the Maastricht Treaty.

Inflation remains the main problem in most of these countries. While the rate of price rises is expected to fall sharply in coming years as their economies become more open to competition and privatisation and deregulation increases economic efficiency, it will still remain significantly above Union levels.

Inflation in the Czech Republic, for instance, is forecast by the Commission to fall from 10&percent; in 1994 to 6.8&percent; this year, compared with levels well under 2&percent; in the core ERM states. In Hungary it should drop from 28&percent; in 1995 to 19&percent; in 1997; and in Poland from more than 30&percent; in 1994 to under 17&percent; this year. In Bulgaria and Romania, which are only just emerging from near-total economic breakdown, inflation this year is put at 1500&percent; and 100&percent; respectively by the Commission.

The need for higher growth to close the wealth gap with the West will make it tough to bring inflation down to monetary union levels in the early part of the next century. As a result, economists suggest that membership of EMU - even for the more advanced CEECs - may happen closer to 2010 than 2005.