Today, Hungary abandoned its quest to adopt the euro by 2010. As Bloomberg reported, economy Minister Janos Koka said that there was “no target date” for accession now, but only the target to push the budget deficit below 3 percent “as soon as we can”.
Hungary’s admission that it will fail to fulfil the convergence criteria anytime soon is another hint that EMU enlargement after 2007 will be rather rocky. EMU membership for Latvia, Estonia and Lithuania has already been postponed after these countries failed to meet the inflation criterion. Given their still booming economy, it is not clear at all whether they will be able to meet the criterion next year. In Poland and the Czech republic, political forces seem to push EMU membership further into the future even though both countries have made surprising progress in their budget consolidation.
The new trend towards a delayed EMU enlargement seems also to reflect growing unease among policy makers and economists with the functioning of adjustment mechanisms. The EU commission seems to be increasingly worried about external deficits of new EMU members as has been evident in the latest convergence report on Lithuania.
Last week, the economists from Allianz also cautioned against an early EMU membership of Central and Eastern European countries. They were argueing that without the possibility of nominal depreciation, Portugal has not been able to deal with the increased competition from low wage countries in Central an Eastern Europe. While I have some doubts whether really the increased competition from former communist countries are at the root of the Portuguese problems, I believe the small souther European country carries some important lessons for the new members.
When I moderated a panel in early May with an official from the Estonian central bank, we exactly discussed the parallel between the Baltic countries and Portugal. The Portuguese economy at the moment seems to suffer from a significant overvaluation, accumulated over several years by excessive wage increases which the government boosted by using its windfalls from falling interest rates after joining EMU to bolster up public sector wages. A similar development can be observed in the Baltics: Windfall tax receipt thanks to a booming economy and interest rate convergence with the eurozone have been used to increase public sector wages which has also led to strong economy-wide wage increases.
In fact, when travelling to the Baltics, prices do seem to point to some overvaluation: In early 2006, I paid almost 100 € for a dinner of four in an average Indian restaurant in Talinn without any alcoholic drinks. In Berlin, the bill for a comparable meal would only be half of that amount (probably both reflecting an overvaluation of the Estonian crown and a real undervaluation in Germany), already including a couple of drinks. While the Baltic economies are still clearly booming, there might a risk that they will soon find them in an overvaluation trap similar to that of Portugal. If they are EMU members by then, any depreciation is impossible.
The Estonian official as well as a Polish academic economist on the panel rejected the idea that there was a parallel between Portugal and Poland. Instead they pointed to the high flexibility of the Baltic’s labour and product markets. However, downward real wage flexibility is a very rare thing in any economy and I am not sure whether the people in the Baltics would really accept declining standards of living should there be a need for adjustment anytime soon. And I too well remember that Portugal once was also hailed as a “Tiger State” and praised for its flexible labour markets.
– wie geht das? Ich würde gerne einmal den Text testen – wie geht das? Ich würde gerne einmal den Text testen – wie geht das