Long-Term Sustainability and the Euro

Long-term sustainability and the euro - How to rethink the Maastricht criteria? Long-term sustainability and the euro - How to rethink the Maastricht criteria? Long-term sustainability and the euro - How to rethink the Maastricht criteria? Long-term sustainability and the euro - How to rethink the Maastricht criteria? © Magyar Nemzeti Bank, 2020 Contributors: Directorate for Fiscal and Competitiveness Analysis Directorate Economic Forecast and Analysis Directorate Monetary Policy and Financial Market Analysis Directorate for International Monetary Policy Analysis and Training of Economic Sciences Directorate Financial System Analysis Edited by: Barnabás Virág The editors would like to express their gratitude to the Governor György Matolcsy, Deputy Governors Csaba Kandrács, Márton Nagy and Mihály Patai for their professional comments during editing. Published by: Magyar Nemzeti Bank Szabadság tér 9. 1054 Budapest, Hungary www.mnb.hu All rights reserved. Prepress and printing: Prospektus Kft. ISBN 978-615-5318-33-7 2020 Contents Introduction 7 Key statements 11 1 From birth to the present – the first twenty years of the Euro 17 1.1 The Maastricht criteria – conditions and assumptions 19 1.2 Performance of the euro area in light of the Maastricht criteria and beyond 39 2 Lessons from the Global Financial Crisis of 2007-2009 89 2.1 The shortcomings of the Maastricht Criteria 91 2.2 What’s next for the euro area: directions of institutional development 121 3 Country experiences 147 3.1 Balance of the benefits and costs ofintroducing the euro before and since the 2008-2009 crisis 149 3.2 The experiences of the new accession countries: the pros and cons 193 4 Successful euro area – the criteria needed for accession in the 21st century 235 4.1 Maastricht 2.0 237 4.2 Hungary’s euro maturity in light of Maastricht 1.0 and 2.0 285 5 Acknowledgements 301 — 5 — Introduction The euro is the grandest project in the economic history of Europe. An instrument and an underlying set of institutions, whose success or shortcomings are fundamental to determining the progress of an entire continent. The euro is thus Europe’s great common cause, and only honest assessments, well-intentioned debate and ongoing innovation can shape it into an instrument that can meet the economic, social and geopolitical challenges of the 21st century in the long term as well. The euro is a subject we must talk about! 2019 has been the year of the 20th anniversary of the introduction of the euro. Two decades are a sufficiently long period to interpret in economic history terms and to arrive at a deeper understanding and assessment of the lessons from the use of the single currency. In the early 1990s, surrounded by the euphoria over the collapse of the Berlin Wall and the dismantling of the Iron Curtain, the fathers of the Maastricht Treaty, which permanently sealed the decision to establish the euro area, held the belief that the single currency could become the next step in European integration. An evolutionary jump that deepens integration among the participating economies and, at the same time, repositions Europe within the global space. Although the number of countries using the euro has risen from the initial 12 to 19 in the past 20 years, there remains much cause for debate due to the region’s results in terms of progress, competitiveness and cohesion. The facts indicate that the euro area is still lagging behind in the global competition of economic regions. The weight of the European countries using the euro has fallen within the global economy. The 12 founding countries achieved an average annual GDP growth of 1.5 per cent in the last 20 years, less than the over 2 per cent figure achieved by the — 7 — United States of America, which is at a similar level of development, or the 2 per cent figure in the United Kingdom, which has had to grapple with the consequences of Brexit in the mean- time. Meanwhile, China is growing dynamically, approximating or even surpassing the economic results on the two sides of the Atlantic. Beyond the developments in the real economy, attempts to pose a major challenge to the US dollar in its global leading role have failed even in the case of financial transactions. In a crisis environment, moreover, the euro area has been characterised by deepening rifts, escalating debates and worsening damage to the real economy rather than cohesion. It is especially urgent to understand the reasons for the latter at a time when greater tur- bulence could return to the world economy. We must talk about the euro in our country, Hungary as well. It is in our joint interest to be active participants of the debates about the euro. The Hungarian economy is interconnected with the euro area in countless ways. Hungary’s convergence and sustainable growth in the next few years will be possible only if the euro area functions successfully. As a member of the European Union, Hungary has made a commitment to introduce the euro in the future. In this respect, it cannot be overemphasised that the introduction of the euro is not an endpoint for this country but a key milestone on the long road towards convergence. The most important question for Hungary (and all other Central Eastern European countries still facing the introduction of the euro) is therefore under what conditions and with what timing they should introduce the European single currency so that our region can continue on its path of economic convergence after it joins the euro area. The last two decades offer significant lessons in this respect. Created in the early 1990s, the Maastricht criteria were, by them- selves, unable to guarantee either stable growth in the euro area or the economic convergence of the less advanced economies that joined subsequently. There is almost complete agreement — 8 — Introduction about the fact that a complete reconsideration of the Maastricht criteria is required. We have to create version 2.0 of the Maastri- cht criteria together. Two years from now, in 2022, we will celeb- rate 30 years of the Maastricht Treaty. By that date, it would be important to arrive at a set of joining criteria through productive technical discussions with the current members and the future accession countries that could genuinely serve as the founda- tions for Europe’s success in the next 20 to 30 years. Just emer- ging from a regime change, Central and Eastern Europe was a mere spectator to the developments in Maastricht in the early 1990s. If we are to create a strong Europe that builds on dialogue and internal cohesion, it is important to give the countries of this region the opportunity to explain their position regarding a decision as momentous for our shared future as the introduction of the euro. The Magyar Nemzeti Bank would like to contribute to this debate. It would be hard to find a better time in which to launch a technical dialogue. The European Union has entered a new political cycle, with new players, signalling the chance for renewed politics in Europe. Christine Lagarde, the new Governor of the European Central Bank and Ursula von der Leyen, the new President of the European Commission are both reformers committed to European integration. This is a perfect moment for directing attention to the issues marginalised within economic policy so far, to the recommendations held suppressed and to the debates on public policy. Successful renewal and the creation of appropriate new strategies, a more efficient institutional model and sets of criteria are our shared tasks and our common cause. We must do everything for the advancement of Europe and the success of future generations. György Matolcsy, Csaba Kandrács, Márton Nagy, Mihály Patai — 9 — Key statements Europe celebrated the 20th anniversary of the introduction of the euro in 2019. On the occasion of this anniversary, the issues defining the future of the single European currency shifted into the focus of attention both within and outside the euro area. Reviewing the experiences of the past two decades – the second ten years after the global crisis in particular –, there is widespread consensus that the euro is far from being a concluded project. Further profound reforms are needed. The- se reforms must, in part, ensure the development of the institutional framework behind the single European currency, while we must also again prepare for the successful future expansion of the euro area. The solutions for these issues must be put in place by the 19 member states currently forming the euro area, while the new accession criteria – that are more efficient than those preceding them – must be set up as part of a discussion between current members and countries facing accession. The analyses of this collection of studies wish to contribute to the latter. The key statements of the analyses are as follows: • In the past 20 years, compliance with the original Maastricht – no- minal – criteria in itself was able to ensure neither the stable ope- ration of the euro area, nor the sustainable convergence of less-de- veloped member states, and thereby the deepening integration. The macro-economic assumptions underlying budget-related criteria were ill-founded even at the start, while the permanent change of the world economic environment following the global crisis made compliance with these criteria impossible, and even counter-productive during recession. It is no coincidence that it is the criterion for government debt that has been violated by member states to the greatest extent and for the lengthiest periods. • Swift convergence was seen in respect of the criteria pertaining to long-term interest rates and inflation, however, in the first decade — 11 — of the euro this process greatly contributed to creating internal imbalances characterising the euro area – exaggerated increase in private debt, diverging current account positions –, which upon the eruption of the financial crisis of 2007/2009 resulted in the pro- longed poor performance of the euro area.

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