My interview in Belgian "Forward" business magazine on euro entry criteria

Forward, a Belgian business magazine, published an interview with me on the need to change euro entry criteria. The original text in English is available below ("Forward" is in French and Dutch only).

“It should not be the case that some countries are more equal than others”

Some plead for the softening of Maastricht criteria. What is your position on this matter?
“I am convinced that Maastricht criteria should be made more flexible. The crisis has shown that the criteria do not fully fit the current circumstances. Fiscal policy is a case in point: euro zone members will substantially exceed the 3 percent budget deficit limit this year, which - at least in the short-term - will strengthen, not weaken their economies. Maastricht criteria also need to be applied even-handedly: it should not be the case that some countries are more equal than others. While euro zone members have flexibility in meeting the criteria, new EU member states are made to follow the strict interpretation of the rules. This weakens confidence in the rules.”

Eastern European countries awaiting their adhesion to the Euro argue that current conditions are neither fair nor practicable. What are the problems?
“Maastricht criteria were developed in the early 1990s, when Eastern enlargement was only a fanciful idea. As a result, the criteria do not fit the fast growing new EU member states. What should be done? The inflation criterion should be relaxed, while budget deficit and public debt limits could be tightened. In addition, the requirement to stay at least two years in the ERM2 (the exchange rate mechanism of the Economic and Monetary Union) should be eliminated or made more flexible. This is because exchange rates, nowadays primarily driven by global speculation, can hardly be used as a test of a quality of a country’s economic policies. In addition, it is almost impossible for any country to ensure stability of its exchange rate. Given that the euro itself would not pass the stability test against the US dollar, why demand it from euro zone candidates?”

An accelerated adhesion of Eastern European countries to monetary union might also reduce the effects of global crisis in these countries…
“I agree that putting new EU members states on a fast track to euro accession would limit the impact of the global crisis on their economies by increasing investors’ confidence and providing a reform anchor for policymakers. Strenghtened confidence would have multiple positive implications, from easier refinancing of external debts to increased consumer spending and business investment.”

The benefits of an accession are according to you larger than the costs?
“Yes, since many CEE countries are better prepared to join the euro zone than some founding euro zone members: their trade, financial sector, and labour markets are more integrated with the euro zone, their labour and product markets are more flexible, and their business cycles are fully synchronized with the euro zone, as the crisis has unfortunately shown. In addition, their fiscal policy is more responsible: budget deficits and public debt levels are much lower than in the euro zone. Finally, inflation is projected to be only one percentage point higher. The crisis has made the distinction between benefits and costs even sharper: benefits are higher, while costs such as higher inflation or risks of asset bubbles are lower. That said, new EU member states will have to ensure that such costs are contained in the future.”

In a leaked recent internal report of IMF it has been proposed that Eastern European countries should use Euro as national currency without participating in Euro zone. What was your reaction?
“That’s a good idea for some countries in the region, particularly those that fixed their currencies to the euro, but bad for countries like Poland or the Czech Republic with flexible exchange rates. In general, however, unilateral euroisation should be contemplated only when entering the euro zone on normal terms would prove impossible. New EU members still believe that Western Europe truly wants them to enter the euro zone soon. But they have increasing doubts, which are undermining not only their euro adoption plans, but - more importantly - their faith in the whole European Union project.”