Countries seeking to join the euro must learn from Greece’s mistakes and maintain austerity after gaining membership, according to the finance minister who steered the country into the single currency in 1999.
Former Greek finance minister Yannos Papantoniou told Emerging Markets that countries would have to maintain tough budget controls even after they won entry into the euro.
His warning was echoed by senior policymakers and academics in Estonia, which won provisional approval for euro entry this week, and its aspiring neighbours Latvia and Lithuania.
Papantoniou admitted that part of the reason for the Greek financial crisis was that the country let its fiscal deficit get “out of control” after it gained entry to the euro.
He advised countries in central and eastern Europe to look at Greece’s experience. “I don’t think that there’s any need to revise the decision if such a decision has been taken,” he said.
“However I would advise them to consolidate their public finances as much as possible and be prepared to accept the discipline of being a eurozone member in a consistent way because that is exactly what did not happen with Greece.”
He said Greece showed “great discipline” in the 1990s by embarking on reforms to cut inflation and current account deficits. “Once it entered it relaxed too much with the consequences that the deficit got out of control,” he said.
“So the new countries aspiring to join the eurozone must accept they have to continue with that discipline even after they have joined.”
Lithuania and Latvia have both indicated they wish to join the euro in 2014. Lithuania’s prime minister Andrius Kubilius told Emerging Markets: “The lessons other countries in Europe can learn from our example is the need to build a coalition of support to cut spending and do it quickly.”
But Morten Hansen, of the Stockholm School of Economics in the Latvian capital Riga, said: “I don’t know if the Baltics can teach Greece anything – the lesson should start by not getting into these imbalances in the first place.”
Valdis Dombrovskis, Latvia’s prime minister, this week said that his government was determined to meet the Maastricht criteria in 2012 in order to meet its target of joining the eurozone on 1 January 2014.
David Oxley at Capital Economics in London said Estonia would be under “intense scrutiny” to ensure that its fiscal position remained under control.
“As in most countries in the euro-zone - particularly in its periphery - further fiscal tightening is likely to be needed over the coming years,” he said.
Dombrovskis warned against any temptation to water down the Maastricht criteria. “The Maastricht criteria as they are now are just fine, also the budget deficit criteria is just fine,” he said.
“The problem is not that the Maastricht criteria were improperly designed – the problem is the most of the eurozone countries consistently do not fulfil the criteria. That is the problem that needs to be addressed,” he said.phil