By Adam Jasser
WARSAW, Oct 24 (Reuters) - Central European governments are
finally waking up to the value of the euro as an insurance
against hard times after investors dumped their currencies and
credit dried up in the last month.
Polish Prime Minister Donald Tusk stated just that on
Thursday, saying Poland would be more immune to global financial
turmoil if it had been in the euro zone [].
That might seem obvious, but such arguments have been few
and far between in what was until now a muted public debate
about the single currency across the former communist region.
"The financial crisis seems to have lifted support for
eurozone membership among several EU countries that are still
outside," the London-based Centre for European Reform (CER) said
in their latest paper on the impact of the crisis on the EU.
Since joining the EU in 2004, the Poles and Czechs have done
little to pursue euro zone membership, lulled by improved
growth, appreciation of their currencies and sinking costs of
borrowing on world markets.
Taking growth and easy access to cash for granted, central
Europeans assumed their risk profile was permanently raised
above emerging market status, reducing the incentive to adopt
the euro quickly.
Hence original plans to adopt the single currency in
2008-2009 were pushed back or dropped altogether, with the
exception of tiny Slovenia and Slovakia. Slovenia joined this
year, while Slovakia will swap crowns for euros in January.
"Some central Europeans missed the bus," said Witold
Orlowski, chief economist at PriceWaterhouseCoopers in Warsaw.
"They can now sit and cry that they will not be joining with
Slovakia on January 1, 2009."
Some countries, notably the Baltics and Hungary, allowed
huge imbalances to creep into their economies, financed by
generous foreign exchange lending by Western banks. Their euro
adoption plans lacked credibility and had to be abandoned.
Poland, by far the largest economy in the region, has been
in better shape.
But its previous conservative administration approached the
euro from a nationalist point of view, seeing the common
currency as a further erosion of sovereignty.
Cautious attitudes prevailed also in the Czech Republic -- a
country which has long met all entry criteria. The centre-right
government in Prague even now sounds cool the single currency.
TOO ABSTRACT
For long, investors ignored the slipping euro zone
timetables, believing just like the region's governments that
the growth story was good enough.
The benefits of being protected by the European Central
Bank, having lower borrowing costs and wielding influence on the
Ecofin council of EU finance ministers seemed too abstract.
Even when the financial crisis started to bite hard in the
United States and Europe, the region was considered a safe haven
among more exposed emerging markets.
The last few weeks saw a dramatic turnaround in that view.
Over-exposed Hungary wobbled and its currency, the forint, sank
to all time lows, forcing the central bank to hike interest
rates by a huge three percentage points.
It became clear to investors and policymakers that without
the capital reserves and central bank protection enjoyed by euro
zone members the "new Europe" economies were after all not that
far from plain emerging markets.
Tusk's euro-friendly government had acted even before the
crisis hit, declaring in September that it aimed to adopt the
euro in 2012. Hungary has since followed suit, saying it wanted
to join "as soon as possible".
HARD TO DELIVER
Having wasted earlier opportunities when the economic cycle
was favourable, both countries will find it hard to deliver.
"Some Central and Eastern European countries may want to
accelerate their timetables for joining the euro, though the
impact of the downturn on their budget deficits will make that
difficult," CER said.
In Poland, Tusk must win over the opposition conservatives
to push through constitutional changes required to introduce the
euro. He meets the head of the opposition, former prime minister
Jaroslaw Kaczynski, next Monday.
In Hungary, political consensus is also elusive and the
country's economy is in a precarious state.
But regardless of the difficulties, the two nations and the
entire region have to push on with the euro because it will be
their determination to adopt it that will once again be the
gauge of credibility, creditworthiness and risk.
Debt spreads make the benefits clear. Polish yields stand
about 4 percentage points over their German equivalents,
Slovakia's are just one percentage point higher on the threshold
of the euro zone.
"The credibility of euro adoption plans will be crucial for
investors," said Ryszard Petru, a leading Polish economist.
"Whether it is going to be 2012 or 2013 is less important than
whether it goes in the right direction."
