From the point of view of Central and Eastern European (CEE) EU Member States, the attractiveness of the euro has declined significantly in recent years. If the eurozone were to move towards greater fiscal centralisation and solidarity, this would probably increase the scepticism of these countries about joining the single currency. Only a well-balanced reform package that credibly prevents the collectivisation of government debt could pave the way for an eastward expansion of the eurozone. These are the findings of a study conducted by the ZEW – Leibniz Centre for European Economic Research with support of the Brigitte Strube Stiftung.

The eurozone needs a reform package
Study conducted by the ZEW: A well-balanced reform package could pave the way for an eastward expansion of the eurozone.

The ZEW team has made an extensive screening of the economic situation of CEE Member States. Some of these countries are already in the process of overtaking Southern European countries in GDP per capita. In addition, most CEE members of the EU have comparatively low national debt levels and have been able to meet most of Europe’s deficit limits in recent years.


The analysis was complemented by a survey in which more than 1,800 economists in CEE Member States as well as in Germany, France and Italy were asked about their reform preferences. With regard to the policy areas of defence, immigration and taxation, CEE respondents are more reluctant to grant the EU new competencies than those from Western Europe.


With regard to euro reform ideas, in some areas there is more agreement with the German respondents than with those in Italy and France. Survey participants of the economically wealthier CEE countries (such as the Czech Republic and Poland) agree with the Germans in rejecting a relaxation of the Stability Pact. There is also broader consensus with Germany than with France and Italy on the question of dealing with highly indebted euro states. Both German and CEE respondents support the implementation of an insolvency procedure for eurozone countries with a debt overhang. Stabilisation tools like a European unemployment insurance scheme for protecting the euro area against strong economic fluctuations are finding favour in CEE states.


“From the perspective of CEE countries, the disadvantages of introducing the euro could outweigh the advantages. Given the much higher level of government debt in Western and Southern Europe, there seems to be great concern that joining the eurozone would entail incalculable financial risks. At least the wealthier CEE states will not join a union of joint liabilities and transfers,” says Professor Friedrich Heinemann, head of the ZEW team carrying out the study, interpreting the results. “This makes well-balanced euro reforms that provide credible ways of dealing with heavily indebted Member States all the more important and necessarily includes an insolvency system for euro countries. A unilateral expansion of new transfer instruments without better debt rules will permanently prevent countries such as Poland, the Czech Republic and Hungary from introducing the euro and only allow the poorer EU states to join the eurozone.”

Broader consensus with Germany than with France and Italy

With regard to euro reform ideas, in some areas there is more agreement with the German respondents than with those in Italy and France. Survey participants of the economically wealthier CEE countries (such as the Czech Republic and Poland) agree with the Germans in rejecting a relaxation of the Stability Pact. There is also broader consensus with Germany than with France and Italy on the question of dealing with highly indebted euro states.

Both German and CEE respondents support the implementation of an insolvency procedure for eurozone countries with a debt overhang. Stabilisation tools like a European unemployment insurance scheme for protecting the euro area against strong economic fluctuations are finding favour in CEE states.

“From the perspective of CEE countries, the disadvantages of introducing the euro could outweigh the advantages. Given the much higher level of government debt in Western and Southern Europe, there seems to be great concern that joining the eurozone would entail incalculable financial risks. At least the wealthier CEE states will not join a union of joint liabilities and transfers,” says Professor Friedrich Heinemann, head of the ZEW team carrying out the study, interpreting the results. “This makes well-balanced euro reforms that provide credible ways of dealing with heavily indebted Member States all the more important and necessarily includes an insolvency system for euro countries. A unilateral expansion of new transfer instruments without better debt rules will permanently prevent countries such as Poland, the Czech Republic and Hungary from introducing the euro and only allow the poorer EU states to join the eurozone.”

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Date

05.06.2019

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