Deutsche Bundesbank president Axel Weber urged Poland, Hungary and other countries queuing to join the euro to learn lessons from their eurozone peers and get their economies into shape before trying to adopt the common currency.
Weber’s comments emphasise the resolve of top policy makers in the 12 country group not to allow rules to be bent for the European Union’s newer adherents as they have been for the club’s more senior members.
“The German experience shows that adjustment within a monetary union is possible, but that the process may take longer. Economic policy-makers need to be aware from the outset that national policies – be they fiscal, wage structural or competition policies – must be in tune with the basic principals of monetary union,” Weber told Emerging Markets.
“Ill-advised moves cannot be corrected by short-term nominal exchange-rate adjustments, but require more gradual and sometimes more painful real adjustments in relative prices,” he warned.
Standard & Poor’s has said the tough stance taken by the EU authorities towards euro adoption threatens to constrain improvements in credit worthiness among the 10 countries that joined the union in 2004. The European commission last month rejected Lithuania’s euro application on the grounds that the country had missed an inflation goal by the narrowest of margins. The decision to apply the criterion so strictly “clouds the prospects far all three Baltic states, as well as for any other fast-growing catch-up economies looking to join further down the line,” the ratings agency wrote in a report published on the 22nd June.
The decision to reject Lithuania was attacked by eastern European politicians as well as international analysts and investors. The structure of the rules and the refusal to take into account the excellent growth and fiscal performance of Lithuania both came in for fierce criticism.
Weber, however, is adamant that the strictures of a shared currency can turn what might initially appear minor deficiencies into major flaws:
“Without the ‘sweet poison’ of nominal depreciation, the rules of the monetary union expose the depth of the economic problems, for example, too high wages or inflexible labour markets,” he said. He also stressed the primacy of price stability in building a successful currency bloc.
While Weber’s comments emphasise some of the mistakes which have been made in the seven-year history of the euro, he is adamant that the project has been a success. The capping of inflation, despite exploding oil prices, and the benefits for exporters have been particularly significant, he argues.
It looks some time before the citizens of eastern Europe will be able to enjoy these rewards. Only tiny Slovenia has so far eared the green light to ditch its national currency while other nations are slipping behind schedule. Latvian finance minister Oskars Spurdzins told Emerging Markets last month that the decision on Lithuania was likely to ensure his country’s own euro bid is knocked off track. Analysts warn that a new Czech government may abandon a 2009 joining target and the Polish government has refused to set any date.