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Non-euro countries in the EU after Brexit: between fear of losing of political influence and Euro accession Tokarski, Pawel; Funk, Serafina

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Empfohlene Zitierung / Suggested Citation: Tokarski, P., & Funk, S. (2019). Non-euro countries in the EU after Brexit: between fear of losing of political influence and Euro accession. (SWP Comment, 3/2019). Berlin: Stiftung Wissenschaft und Politik -SWP- Deutsches Institut für Internationale Politik und Sicherheit. https://doi.org/10.18449/2019C03

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NO. 3 JANUARY 2019 Introduction

Non-euro Countries in the EU after Brexit Between Fear of Losing of Political Influence and Euro Accession Paweł Tokarski and Serafina Funk

Despite the never having adopted the euro, the upcoming Brexit will have consequences not only for the as a whole but also for monetary integration. The UK’s withdrawal from the EU will heighten fears among the ‘euro- outs’, the eight Member States that have not adopted the euro, that their influence over the Union’s decision-making processes will diminish in the future. Their concern has led to the formation of a new coalition of states uniting the interests of the north- ern euro members and some countries outside the eurozone. Although the debate over enlarging the eurozone is now subsiding, the ‘Brexit moment’ could trigger a new dynamic and act as a driver for expanding the eurozone or strengthening some non-euro states’ links to the banking union.

The eight euro-outs (Bulgaria, , petitiveness on low wages. The size and Croatia, Poland, Romania, , the importance of their financial sectors to and Hungary) are a hetero- their economies also vary widely within geneous group of countries that follow very the group. The share of banking sector different economic models and are at dif- assets to GDP is three times higher in Den- ferent stages of economic development. For mark than it is in Poland. Central and example, Denmark’s gross domestic prod- Eastern European countries faced immense uct (GDP) per capita is seven times higher challenges during the global financial crisis than that of Bulgaria. There is also a con- as their banking sectors were largely owned siderable gap in the competitiveness of the by foreign banking groups. This meant that non-euro states. According to the Global national banking authorities were only able Competitiveness Report 2018, Sweden and to perform their supervisory tasks to a lim- Denmark are among the most competitive ited extent. All these differences mean that countries in the world. They occupy the non-euro countries have quite different ninth and tenth places in the ranking. The priorities when it comes to EU legislation other non-euro states, which are currently in the field of financial regulation. plagued by political instability and insti- The dynamics of economic growth in tutional weaknesses, still base their com- these euro-out countries are affected by

their different stages of economic develop- politically with one another within the EU. ment. The less developed among them This increases their risk of losing influence often achieve higher growth rates due to within the Union after Brexit. the catch-up effect. With the exception of Sweden and Denmark, whose economic growth in 2017 was slightly below the euro Superior numbers of eurozone area average of 2.4 percent, the economies members in the EU of those EU Member States outside the euro area that are less economically developed For the euro-outs, the UK’s withdrawal grew much faster. represents a political power shift within The individual relationships of the euro- the EU. The exit from the EU of one of the outs to the euro and the eurozone are also largest member countries will also mean very different. Most of them pursue inde- the departure of a major non-euro state pendent monetary policies. Denmark has from European decision-making processes. been a member of the Exchange Rate Mecha- For some states and groups of states, this nism 2 (ERM 2) since 1999 and conducts a will increase their voting power in the Coun- fixed exchange rate policy against the euro. cil of the European Union. This fundamen- Before that, from 1982, the Danish krone tal change will be due to the disappearance was pegged to the deutschmark. After of around 13 percent of the total popula- Brexit, Denmark will be the only state with tion of the EU. Around 80 percent of the an opt-out clause from the third stage of legislation that the Council has to ratify the Economic and Monetary Union. All is subject to a system of double qualified other EU countries are contractually obliged majority voting. Accordingly, in order for a to adopt the euro as soon as they meet the bill to be adopted, it requires the support of convergence criteria. In the case of Den- at least 55 percent of Council members who mark, the op-out clause was agreed after must also represent at least 65 percent of a referendum in 1992 failed to secure a ma- the EU’s citizens. The removal of the UK jority in favour of ratifying the Maastricht and its population from the double quali- Treaty and the introduction of the euro was fied majority calculation will increase the rejected in another referendum in 2000. population share of eurozone members The Bulgarian lev is pegged to the euro compared to the EU as a whole. After Brexit, at a fixed rate as part of a currency board the EU-19 will represent 70.4 percent of arrangement. Romania and Croatia main- Member States and 76.5 percent of the total tain exchange rate regimes with a managed EU population (see figure). The ‘blocking floating exchange rate against the euro. minority’, which can block a bill that has Croatia’s relationship to the single currency to be passed by a double qualified majority, is very special. The country’s economy is will be more difficult for the euro-outs to largely ‘euroised’. Around 75 percent of achieve. Article 238(3)a TFEU stipulates that assets and 67 percent of liabilities are de- a coalition of four states together represent- nominated in euros. ing at least 35 percent of the EU population All countries in the group are open may reject a bill. It was already very com- economies interested in deepening the plicated to achieve this blocking minority single market. Furthermore, they are all in before Brexit; after Brexit, it is likely to be favour of the euro area being open to new impossible to overrule a united eurozone members. At the same time, they support in the Council. euro area integrity, even though they are The impact of the superior numbers of unwilling to bear the necessary stabilisation euro area countries on voting procedures costs. The economic diversity of the non- in the Council will be limited if the body euro countries and their different relation- maintains its tendency to take decisions by ships to the euro and the euro area make consensus. Brexit will be less significant in it difficult for the euro-outs to cooperate those areas of the single market where

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Council decisions can only be taken unani- the EU is, therefore, likely to weaken the mously (e.g., EU Multiannual Financial EU-8’s negotiating position inside the EBA. Framework or social security and social pro- Moreover, the double majority system in tection legislation). However, the expected the EBA will no longer be used once at predominance of the EU-19 over other least four of the euro-outs participate in the Member States due to their superior num- banking union’s Single Supervisory Mecha- bers reinforces concerns about a reduction nism (SSM). in their influence on decision-making in However, the UK’s strength in the EU the European Union. has not only been formally reflected in the Although there is currently little poten- weighting of its vote in legislative processes, tial for conflicts of interest between the EU- but has also made itself felt at an informal 19 and the EU-8, further integration, par- level. The UK has used many channels to ticularly in the field of financial markets, safeguard its economic and political inter- may lead to increasing dissent. The conflicts ests in the EU. It has always had a strong between the euro-ins and the euro-outs do influence on single market legislation, for occur, as demonstrated during the discus- example, by ensuring that UK experts filled sions on the creation of banking union in relevant key positions in EU institutions. In 2012. The UK, in particular, feared that the addition, London has strongly supported interests of the EU-19 would prevail at the the deepening of the single market in ser- European Banking Authority (EBA), which vices, digitisation and energy, an attitude is responsible for setting common super- that was in line with that of all EU mem- visory standards in the banking sector of bers outside the euro, in particular the Cen- the single market. Under pressure from tral and Eastern European countries. Then London, a special voting system was there- again, criticism of one of the foundations fore agreed for the EBA: a decision by of the single market, namely the free move- the Board of Supervisors requires a double ment of people, especially from new Mem- simple majority of EU states inside and ber States, was a key issue in the Brexit outside the euro area. The UK’s exit from debate in the UK.

SWP Comment 3 January 2019

3 The UK’s exit from the EU may have tries in the second group met in a new other consequences. It might strengthen format. The alliance consisted of eight the Franco-German duo. Such a develop- countries and included the euro states ment could be a problem for certain smaller , , Ireland, , , states, as the major euro countries already the and the two euro-outs Den- have a greater impact on decision-making mark and Sweden. It later named itself the and agenda-setting with their representa- New and in a statement tives filling key EU positions. on 6 March 2018 declared it was in favour of maintaining monetary union as an in- clusive format that was also open to non- Euro-outs and EU coalitions euro states. The group stands for compli- ance with the common rules and economic The shift in voting rights in the overall self-responsibility among eurozone mem- structure of the EU Council will not affect bers. The banking union project should be dynamics among the euro-ins. Whether the fully implemented, provided there is suf- superior number of eurozone countries pre- ficient risk reduction in the banking sector, dominance in the Council leads to them and the European Stability Mechanism dominating the EU’s legislative and agenda- (ESM) strengthened and expanded to a Euro- setting processes will depend very much on pean Monetary Fund. However, this insti- how united the euro countries are in de- tution should retain its intergovernmental fending their interests. Although members character. The new alliance, which is be- of the monetary union are closely linked in coming increasingly formalised, could take many respects, their positions and weight effect at Council level, not only attempting in European politics vary widely. to block proposals from other euro states, Different divisions can be identified in but also working towards curbing Franco- groups of states within the eurozone. One German dominance. In June 2018, the camp includes those countries that focus on Netherlands, an informal spokesman for making budgetary policy more flexible, on the group, protested against the Franco- risk sharing and on more fiscal transfers in German proposal to set up a separate euro- the euro area. This group mainly includes zone budget. the southern members of the euro area, Deepening the single market and, in such as France, Italy, Greece, Spain, Portu- particular, further integrating the capital gal, Cyprus and Malta. Representatives of markets (Capital Markets Union, CMU) is these countries meet regularly at informal another important objective of the New Southern EU Summits. Hanseatic League. The initiative to create a Then there is the group of states whose Capital Markets Union was launched by the economic policy is primarily based on in- European Commission in 2015. The pur- dividual responsibility for economic poli- pose of the CMU is to address the lack of cies and who insist on compliance with diversified sources of capital in the finan- fiscal rules. Germany, the Netherlands, cial sector which leads to overdependence Finland, and a few other countries on the banking sector. Brexit will make it such as and the Baltic countries more difficult to implement the Capital are in this camp. These groups have been Markets Union project since the main spon- focusing their political efforts on maintain- sor of this project, the UK, which also has ing budgetary discipline, reducing risk, the most developed financial market in the stricter implementation of rules and pro- EU, will be missing. In a joint declaration moting structural reforms. The two camps from July 2018, the eight members of the hold opposing views on the future direction New Hanseatic League pledged to continue of eurozone reforms. implementing the Capital Markets Union. At the end of 2017, at the initiative of On 2 November, the finance ministers of the Netherlands and Ireland, some coun- the new cooperation alliance, which now

SWP Comment 3 January 2019

4 comprises ten countries following the acces- fore concluded outside the EU legal frame- sion of the Czech Republic and Slovakia, work. However, the UK’s exit from the EU made a statement about the ESM reforms. will not make the implementation of euro- In it, they reaffirmed the importance of zone reforms any easier because of the ESM reforms for the EU as a whole, stress- enormous number of conflicting interests ing the need to keep the banking union among the EU-19. open to non-euro countries. However, Brexit will make it easier for The Hanseatic Group is an example of euro area members to make exclusive use how successful joint representation of euro- of instruments designed for the EU as a ins and euro-outs can be on the issue of whole. The exit of the largest non-euro state eurozone reforms. The fact that only two and one of the largest net contributors to Visegrád countries are members of the co- the EU budget will allow the EU-19 to use operation raises doubts about the ability of some budget lines for sole purposes. After Poland, Slovakia, the Czech Republic and Brexit, the only euro outs that are net con- Hungary to jointly pursue their objectives tributors to the EU budget will be Sweden on euro area reform. The Visegrád Group and Denmark. With the UK gone, there will (V4) was able to defend its interests quite also be a statistical shift in wealth within well in negotiations on the current EU Multi- the EU. The new EU Member States will be annual Financial Framework 2014–2020. statistically richer, which could lead them Although the increased integration of the to facing lower financial flows from the EU euro area may lead to fragmentation of the budget and, in particular, from Cohesion single market, the V4 appear neither to be Policy allocations. In turn, this could lead united nor interested in the current debate to EU budget transfers being redirected to on Economic and Monetary Union. Euro- southern eurozone members. zone reforms are only a marginal topic at Other major reform projects in the euro- V4 meetings. The capability of other non- zone include completing the banking union euro states such as Bulgaria, Romania and and expanding the tasks of the ESM. These Croatia to form alliances is negligible due projects are important for stabilising the to their low shares of EU-27 population and eurozone and increasing its resilience to economic weakness. crises. Contrary to non-euro countries’ fears, they do not risk forming a “Hard-core” Europe. The banking union was initiated in From euro-outs to euro-ins? 2012. While the measures associated with it are primarily aimed at the euro states, for The UK’s departure from the EU throws up whom membership is mandatory, partici- questions as to how the balance of power pation in the Single Supervisory Mechanism in a post-Brexit Union and the further inte- of the banking union is also possible for non- gration of the euro area might affect the euro countries. However, SSM members propensity of non-euro states to adopt the outside the euro area do not have access to single currency. The first step is to deter- the European Central Bank (ECB) and the mine whether Brexit will influence the con- ESM facilities. The influence of a euro-out figuration of the eurozone and accelerate state on the decision-making process in its enlargement. the banking union is also very limited. Most During the euro crisis, the UK govern- EU countries outside the euro area will, ment’s positions on many issues made crisis therefore, have a rather cautious approach management more difficult. Although it towards the banking union. On the other granted Ireland a bilateral loan in 2011, it hand, after exposing corruption scandals rejected any further use of the EFSM which at the Slovenian and Latvian central banks, used the EU budget as collateral for bailout the ECB and some members of the euro- packages. London also opposed adoption of zone are very reluctant to admit new Mem- the European Fiscal Pact which was there- ber States with weak national institutions.

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5 The recent case of massive money laun- zone. Budapest, on the other hand, is keep- dering at Danske Bank shows that banking ing this question open. supervision needs to be strengthened and more centralised, not only in the euro area but throughout the single market as a whole. Outlook: consequences and This could intensify pressure on Copen- recommendations hagen to join the SSM. Sweden, whose banking sector is dominant in the Baltic To date, knowledge of the upcoming Brexit States, should also be encouraged to join has not significantly changed the euro- the SSM for the same reasons. adoption plans of the euro-outs. However, Although all EU countries, except Den- the new realities of life in the EU after mark and the UK, have a legal obligation Brexit are likely to persuade these countries to participate in the monetary union, this to revise their cost-benefit calculations for obligation is not linked to any timetable. joining the euro, or at least to have closer It has also never been an object of political links with the euro area. All the euro-outs pressure. The most likely candidates to in- are already becoming concerned about troduce the euro are the EU’s three poorest losing influence over EU decision-making countries: Romania, Bulgaria and Croatia. after Brexit. These concerns are not only Theoretically, Bulgaria currently meets due to the lack of an effective blocking mi- almost all convergence criteria, but the nority but also due to the inability of non- country’s structural problems, corruption euro states, with their differing interests, to and weak institutions are standing in the act as a coherent group in the EU. The euro- way of Sofia’s path to membership. There outs are not subject to the same degree of is also an urgent need for measures to im- risk from marginalisation: Sweden, Den- prove the institutional environments and mark and the Czech Republic are in a better economic conditions in Romania and Croa- position to articulate their interests through tia. Croatia currently has the most difficult the New Hanseatic League. On the other economic situation. It is battling excessive hand, there are countries like Poland, macroeconomic imbalances and facing a whose isolation in EU politics is mostly due high public debt to GDP ratio (78 percent to domestic developments and which is in 2017). Private and public debt, which is likely deepen further as a result of Brexit. largely held in foreign currencies, remains The first test of the political weight of a source of vulnerability for the Croatian the euro-outs will be who fills which key economy. positions at the EU institutions after the An important factor in adopting the euro European parliamentary elections in May is public support for the single currency. 2019. These important functions include According to Eurobarometer surveys con- the President of the European Council and ducted in May 2018, the majority of respon- Euro Summit, certain portfolios in the Euro- dents in Romania (69 percent), Hungary pean Commission and cabinet member (59 percent) and Bulgaria (51 percent) sup- posts. The appointment of some candidates port the introduction of the euro. In Po- from eurozone countries such as Slovakia, land, 48 percent are in favour and in Croa- Slovenia or the to key EU posi- tia the figure is 47 percent. Sweden (40 per- tions could convey the message that the po- cent) and the Czech Republic (33 percent) litical and financial risk of joining the euro are the least willing to adopt the euro. is one worth taking. However, the main These sentiments influence the policy strat- obstacle to pushing through this idea is the egies of the euro-outs. In Poland, the Czech relatively small number of experienced Republic and Hungary, the national cur- politicians in the new Member States who rency is considered a symbol of state inde- would be suitable for these posts. pendence. It is, therefore, unlikely that The UK’s withdrawal from the EU could Prague and Warsaw will accede to the euro- be used to build up new momentum among

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6 non-euro countries to adopt the euro. This man proposals on further eurozone reforms. could encourage the countries concerned Further initiatives on deeper economic in- to strengthen their links with the euro area tegration must ensure they do not exclude by participating in the SSM. Both Berlin smaller EU Member States. Germany should, and Brussels should support this dynamic. therefore, intensify its political contacts More generous financial support for those with countries in this group, in particular countries about to adopt the euro would Denmark and Sweden, and encourage them strengthen the institutional convergence of to forge closer links to the economic gov- the euro-outs with the EU-19. It is essential ernance of the euro area by participating to further promote the creation of a con- in the SSM. vergence facility within the EU Multiannual Further eurozone enlargement is in the © Stiftung Wissenschaft Financial Framework 2021-2027, an instru- interests of both Germany and the EU. This und Politik, 2019 ment proposed by the Commission to pro- could reduce both the problems associated All rights reserved vide targeted support to Member States with the dual nature of economic govern- This Comment reflects wishing to adopt the euro. This facility ance in the EU and the risk of fragmenta- the authors’ views. must be substantial enough to tackle huge tion of the internal market, which is a fac- structural challenges in the most likely tor in the further development of the bank- The online version of euro candidate countries (Bulgaria, Roma- ing union. However, the most important this publication contains nia, Croatia). It is questionable whether the condition for further accessions to the euro functioning links to other 2.16 billion euros currently proposed for is the lasting stabilisation of the eurozone SWP texts and other relevant sources. the seven-year financial framework will be itself. Nevertheless, the remaining question sufficient to force structural changes and concerning fiscal stability in Italy does not SWP Comments are subject act as an incentive. currently offer favourable conditions for a to internal peer review, fact- In addition, the European Commission discussion on reforms and enlargement of checking and copy-editing. should also articulate more clearly the ad- the euro area (see SWP-Aktuell 52/2018). For further information on our quality control pro- vantages of membership of the eurozone cedures, please visit the SWP compared to the risks. Belonging to the website: https://www.swp- euro area can increase financial stability, berlin.org/en/about-swp/ reduce financing costs and provide access quality-management-for- to the ECB and ESM facilities. Full partici- swp-publications/ pation in the SSM would be particularly SWP advantageous to those euro-outs whose Stiftung Wissenschaft und banking sectors are dominated by foreign Politik ownership (Croatia, Romania and the Czech German Institute for Republic). International and The Franco-German tandem could emerge Security Affairs stronger from Brexit because of the power Ludwigkirchplatz 3–4 gained by Berlin and Paris. However, there 10719 Berlin are doubts as to whether both countries Telephone +49 30 880 07-0 will be able to make effective use of this Fax +49 30 880 07-100 potentially more influential position against www.swp-berlin.org a backdrop of growing domestic challenges [email protected] and the ongoing reform process in the euro- ISSN 1861-1761 zone. doi: 10.18449/2019C03 The fear of euro-outs being marginalised could jeopardise new integration projects Translation by Martin Haynes in the euro area. The group of ten northern (English version of states has been mistrustful of Franco-Ger- SWP-Aktuell 68/2018)

Dr Paweł Tokarski is a Senior Associate in the EU / Europe Division at SWP. Serafina Funk was an intern in the EU / Europe Division at SWP. She is currently a scholarship holder at the French National Assembly.

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