Sunday, April 26, 2009

Maastricht criteria: all about politics, not economics

Paul de Grauwe in a brilliant post in argues the following: "Thus, the Maastricht convergence criteria are instruments that are used in arbitrary ways to pursue political objectives. In the past, they were set aside to achieve the political objective of monetary unification. Today, they are strictly applied to pursue a political objective of slowing down the enlargement of the Eurozone".

Couldn't agree more: Western Europeans simply don't want New Europeans to join the euro and they are using the Maastricht euro criteria as their excuse.

Why do they do it? It is probably a mixture of (i) reluctance to share power in the euro zone, (ii) concern about increasing competitive pressure, particularly if New European countries join the euro zone at competitive rates (Slovakia, however, didn't), (iii) dogmatism, (iv) and (deeply secreted) view that New Europeans are just still too barbarian to be trusted to be let into the exclusive euro club (here, alas, some of new EU member states are not helping).

As to the crisis, euro zone authorities seem to share a view that New Europe "had it coming" and they have themselves to blame for being so exposed to the crisis. New Europeans, like me, would argue instead that ECB and EC are partly to blame for the crisis in New Europe: rejecting Lithuania's application for entry in 2006 over a trivial rounding error in inflation was a clear signal that Eastern Europeans are simply not welcome. This removed the euro reform anchor for the whole region, contributing to more relaxed macroeconomic policies and later a bigger crisis (particularly in the Baltic States). One wonders how things would have been different if ECB/EC let Lithuanians in (I don't buy the argument that EC was right that inflation in Lithuania would rise because it did rise not only in Lithuania but in most euro zone countries. and so what? Even with higher inflation, Lihuania's contribution to euro zone inflation would be something around 0.05 pp. Really scary!!!!:-)). By now, Estonia would probably also be in, joining together with Slovakia in Jan 2009. Poland and other countries in the region would be pretty close too. The whole region would have been much more insulated from the crisis, saving thousands of jobs and strengthening the only region of the EU that ever has chances of growing at Asian rates (which supposedly is the goal of all these EU programs, starting from the Lisbon agenda). Instead the whole region is deeply mired in crisis, on the brink of this what Western Europeans had in mind???

BTW, here is my op-ed in Financial Times (December 2008) on the need to change euro entry criteria.

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