The Political Economy of the Eurozone in Central and Eastern Europe

Why In, Why Out?

Krisztina Arató, Boglarka Koller, Anita Pelle, Krisztina Arató, Boglarka Koller, Anita Pelle

• Publisher: Routledge
• Year: 2021
• ISBN:
  9780429537004
• Edition: 1
• Topic: Politica e relazioni internazionali
• Subtopic: Organizzazioni intergovernative

The ideafor this volume came from the enigma that some Central and Eastern European (CEE) European Union (EU) member states have been keen to join the Eurozone while others have shown persistent reluctance. Moreover, the attitudes towards joining have seemingly not correlated with either the level of economic development or the time spent as part of the EU, nor with any other rational reason such as the level of integration into the EU real economy, or the level of trust in the EU on the part of the public. Therefore, at first sight, the answer to the question 'why in, why out?' remains rather unclear.

The attractiveness of the currency union has nevertheless not disappeared for the CEE countries. Despite the Eurozone crisis of 2010–13, it was during that time that the Baltic states introduced the euro. Then, after a few years of inactivity, Croatia and Bulgaria successfully applied for membership of the exchange rate mechanism in July 2020, amid the economic crisis caused by the coronavirus (COVID-19) pandemic. At the same time, the three Visegrad countries still using their national currencies – Poland, Czechia and Hungary – no longer have a target date to join the monetary union. This volume aims to discuss these issues from horizontal aspects and through country studies, with contributions from expert authors from, or closely related to, the CEE region.

Part I
Horizontal issues

1 Seventeen years in the European Union

The questions of monetary integration in Central and Eastern Europe

Krisztina Arató, Boglárka Koller and Anita Pelle

Introduction

The European Union (EU), as many times before, appears to be at a crossroads. During its multiple crises – in the areas of monetary cooperation, Brexit, immigration, leadership, legitimacy, populism, etc. – there seems to be a moment when important decisions have to be made. The deepening of economic integration through the common market and then the single market might well have triggered monetary integration and then monetary union for the Eurozone; however, the peak years of the Eurozone crisis (2010/11) resulted in the lowest level of popular trust ever in the EU (EC 2017). While it is obvious that the ‘old’ member states (the United Kingdom, Denmark and Sweden) have stayed away from the common currency project for political reasons, the ‘new’ member states exhibit a pattern of joining or staying away that still needs to be understood although, according to their Accession Treaties, all of them are obliged to become full members of the European Economic and Monetary Union (EMU) as soon as they meet the convergence criteria.

Therefore, the subject of our investigation is the Eurozone membership or non-membership of the group of EU member states referred to as Central and Eastern Europe, and the timely evolution of views about and attitudes towards the euro in these countries since their accession to the EU. The expression Central and Eastern Europe (CEE) – and thus our book – covers the post-socialist new members of the EU that joined the integration process in the three subsequent rounds of the Eastern enlargement: eight of them in 2004 (together with Cyprus and Malta that are not discussed in this book owing to the fact that they are not post-socialist countries), two in 2007, and Croatia, the newest member of the EU, in 2013. Our aim with this volume is to explore the political as well as the economic background of the CEE countries as regards their joining or abstaining from the common currency zone. As the Eurozone crisis hit Europe precisely when CEE member countries were in the process of joining, special focus is given to the analysis of the effects of the crisis on these choices.

Since the crisis brought to the surface an economic and more and more visibly a social-political core-periphery divide (Celi et al. 2018), the developments in the CEE region seem to have gone almost unnoticed while four of these countries (Slovakia and the three Baltic states) joined the Eurozone following the unfolding of the crisis. Even more strikingly, almost no attention has been paid to the reasons for the other CEE countries staying out of the Eurozone so far. It is clear that the issue of the CEE states and the Eurozone have substantially affected the enlargement of the EU (De Grauwe and Schnabl 2004; Frankel 2004; Dabrowski and Rostowski 2006); however, most of the research in the field has covered more general issues such as Europeanization (Börzel and Risse 2000; Howell 2002; Schimmelfennig and Sedelmeyer 2005). Recent literature covers the peripheries of the EU in a more general way, including both the Southern and Eastern peripheries (e.g. Magone et al. 2016; Díaz-Mora and López 2018), or discusses the CEE region but omits the Eurozone membership issue (Schweiger and Visvizi 2018). Therefore, we seek to fill this definite gap by providing a comprehensive political economic analysis of why and how certain CEE countries have joined the Eurozone and why others have not, how the crisis or other developments have affected these processes, and what the state of affairs is 17 years after the major round of Eastern enlargement.

The main argument of this volume is that the monetary integration of the CEE states into the Eurozone cannot be understood purely from the point of view of economics, since the decision to either join or abstain is also dependent on other factors such as the political gains and losses, the identity of the citizens, the status of democracy and the attitudes of other stakeholders such as private companies.

In the course of studying this topic, we have identified some vital features of CEE-EMU relations. These make up the theoretical and horizontal aspects that are discussed in the first part of the book where we apply methods of political economy and area studies, while other chapters mainly use political science methods. We continue to apply the multidisciplinary approach in the second part of the book which focuses on individual countries as well as country groups.

Theoretical background and horizontal issues

With regard to the international political economy of the CEE countries’ membership or non-membership of the Eurozone, two more-or-less parallel processes appear to be decisive in terms of the outcomes: post-socialist transition and Europeanization. The former term refers to the historically unique, fundamental system change from socialism to capitalism. The latter expression, for the CEE countries and for the period from 1989–90 until EU accession, covers the advancements that these countries made under the aegis of the aspiration for meeting the criteria of EU membership, set by the EU, most expressively at the Copenhagen Summit in June 1993 and in the course of the accession negotiations. As we are discussing countries’ membership of a currency zone, we must mention that, during this period of transition and Europeanization, the monetary policies of the CEE countries also showed particular characteristics that are worth studying in more detail. The exchange rate policies during transition, the ways of handling too-high inflation rates in certain cases, and then the efforts to meet the monetary policy conditions prescribed by the Accession Treaties (especially central bank independence and inflation targeting) all needed to be carried out with great care. As we will show, all of the countries had their own way of dealing with the process of post-socialist transition, Europeanization and monetary policy integration, including attitudes to ERM II and Eurozone membership (see Chapter 2 in this volume).

When thinking about the economic and political gains and losses of Eurozone membership, we need to take a closer look at the evolution of the Eurozone. Initially created as an exclusive core grouping comprising 11 Western and Southern EU member states on the basis of the ordoliberal Stability and Growth Pact (SGP) regulatory framework, it has changed significantly since that time. The last-minute acceptance of Greece’s membership in 2001, just in time for the introduction of the euro as a hard currency, reflected the fact that the provisions of the SGP were in practice not strictly implemented but operated under a soft and open approach. In contrast, the new EU member states in CEE faced strict conditionality in their applications to join the single currency. Moreover, Eurozone governance reform under Germany’s hegemonial leadership in response to the sovereign debt crisis has moved the Eurozone closer towards becoming a fiscal and ultimately also a political union. This partly explains why, despite substantial progress being made between 2007 and 2015, the Eastern enlargement of the Eurozone has recently stalled, as formerly keen applicants such as Hungary and Poland have become reluctant to join what they increasingly perceive as a liability union. In order to fully understand why certain EU member states join or stay out of the Eurozone, it is worth comparing the economic and political perspectives of current CEE member countries with those that remain on the outside under the changing internal setting of the Eurozone in the wake of the sovereign debt crisis (see Chapter 3 in this volume).

When the CEE countries joined the EU, it was expected that membership of the Union would result in the stabilization of democratic institutions and democracy in the region. However, in recent years the quality of democracy in two CEE countries – Hungary and Poland – seems to be falling backwards. If we look at the process of Eurozone accession of the CEE region, we see that it is preci...