Political Crises Threaten Eurozone Expansion

Source: Why Reform Fatigue Has Hit the East - FT.com

Following a forty percent rise in living standards, Central Europe’s standard of living is barely one-half of Western Europe’s standard despite seventeen years of post-Communist reform. Despite the social pains of reform, Central European politicians were able to keep turmoil in check and build political consensus to ensure their nations’ accession to the EU.

After accession in May 2004, that incentive disappeared, and dissatisfaction with the reform process has created internal strife that threatens fiscal and economic policies and the expansion of the eurozone. Hungary, the Czech Republic, Slovakia, and Poland all face varying degrees of “reform fatigue”—backlash against the difficult reforms. It is evident, for example, in the recent election of Slovakian Prime Minister Robert Fico, who ran on an anti-reform platform. It is also partly to blame for the riots in Hungary, which broke out after Hungary’s reform-minded president admitted he lied about the state of the economy to win re-election.

These difficulties, in turn, threaten the EU’s original timetable to expand the single-currency eurozone quickly, including to Hungary this year and to Slovakia in 2009. But politics in Hungary prevented the country from reducing its budget deficit below the EU ceiling (the deficit is more than triple the ceiling). Similarly, Mr. Fico’s anti-reform promises in Slovakia seem incompatible with EU fiscal policy, and it is not clear whether he will follow the timetable established by the prior administration.

Ultimately, delaying compliance with eurozone policies postpones critical economic and fiscal reforms. Economists suggest that these reforms should be done now, in the backdrop of a strong economy, rather than later, when the conditions for change might be more difficult.

Questions

1. What can Western European nations do to incentive Central European nations to maintain the difficult course of restructuring and qualify for entry into the eurozone?

2. Is it in the Central European nations’ interest to continue to reforms despite their short-term social costs? Is it better to postpone difficult restructuring until the nations are politically stable?