(ref. Project Syndicate September 2017)
This month, the European Commission's president called for an acceleration of the eurozone's eastward expansion. But his plan for doing so could recreate the conditions that fueled the EU-wide crisis stemming from Southern Europe just a few years ago.
A group of hikers has lost its way. They want to get to a castle on a hill in the distance, but the path they are on seems to be leading in a different direction, and their leader’s only advice is to hurry up.
Today, the eurozone is in the same situation as those hikers. It has become increasingly clear that establishing the euro was the wrong path to take. The single currency caused an inflationary credit bubble in Southern Europe. When the bubble burst, the region’s competitiveness was destroyed, and Northern Europe was called on to provide huge loan guarantees, public credit, and transfers. These measures have sustained the wrong relative prices that resulted from the bubble, and papered over the underlying problem.
Meanwhile, the Schengen Agreement, which eliminated most border checks between European Union member states, has facilitated the ability of immigrants from the poorer parts of Asia and Africa to flock to Northern European welfare states in recent years.
In response to these events, European Commission President Jean-Claude Juncker used his State of the Union address this month to call for even more countries to join the eurozone and the Schengen Area. Juncker is the charismatic but confused guide who is leading our metaphorical group of hikers astray.
All non-euro EU member states, except Denmark are already legally obligated to work toward adopting the euro, by satisfying various “convergence criteria.” But Juncker obviously wants to accelerate that process, by loosening the eurozone membership criteria and providing financial incentives for new members to join.
Given the eurozone’s past problems, this is an extremely dangerous proposition. If realized, it would probably fuel the same kind of destructive overheating that we have seen in Southern Europe. In fact, Bulgarian, Croatian, and Romanian households have already loaded up on excessive debt in foreign currencies – primarily euros – in anticipation of joining the monetary union, and this has created substantial financial difficulties.
Of course, it is understandable that Western banks that recklessly extended euro loans to these countries now want to give them euro printing presses. That way, the debtor countries can reassure their creditors and repay their loans with self-printed cash if necessary, as Southern European countries have done for the last decade.2
Providing Bulgaria, Croatia, and Romania with national euro printing presses would keep private credit flowing and enable foreign-currency loans to be rolled over. But so much artificially cheap credit would also bloat state pensions, government wages, and social transfers. And this, in turn, would lead to overheating real-estate markets and domestic-wage increases, thus undermining international competitiveness.
Normally, a country that finds itself in such a position would urgently devalue its currency. But, because euro membership precludes that option, financially sound Northern European countries would once again be called upon to help with European Central Bank loan guarantees and financial transfers, while tolerating the newly added eurozone members’ self-service with the printing press.
In short, Juncker’s plan to accelerate eurozone accession threatens to recreate in spades the chaos of the past decade, which started with a bubble in Southern Europe, and culminated in the Greek sovereign-debt crisis.
Juncker’s proposal to extend the Schengen Area to the east is similarly misguided, and seems to ignore the lessons of recent history. The unmanageable wave of immigration in 2015 showed that Europe has too few internal and external border controls. Juncker might like to think that immigration has since slowed, owing to the agreement that the EU reached with Turkey in early 2016. But data from the European border-control authority Frontex indicate that the migration flows stalled once a fence was erected in Macedonia, at the behest of Austria and the Visegrád countries (the Czech Republic, Hungary, Poland, and Slovakia).
Moreover, the Hungarian-Serbian border fence and Hungary’s ever-tightening controls at its border with Romania have also contributed to European stability. But migrants are now crossing the Black Sea from Turkey to Bulgaria, and might come in even larger numbers if the EU membership negotiations with Turkey stall. As a result, the rest of the EU should oppose any bid to eliminate existing border controls, which is exactly what would happen if Bulgaria and Romania were included in the Schengen Area.
One can only wonder what is driving Juncker’s proposals. To be sure, the European Commission cannot neglect the interests of financial institutions in Paris, Luxembourg, and Frankfurt. No one wants the ill-advised loans extended to Eastern European countries to fuel another bank crisis.
But the result of Juncker having his way would be even worse. An inflationary bubble in Eastern Europe, coupled with the dismantling of border controls, could destabilize the entire EU and create a fresh wave of economic migrants into Central Europe. It is time for Europe’s trail guide to see reason, consult a compass, and get back on track.
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