Article Type : Research Article
Authors : Szentpáli-Gavallér Pál
Keywords : Hungary; Joining the eurozone; Advantages and disadvantages; Neighbouring states
Hungary joined the European Union about
two decades ago, but the parallel accession to the eurozone has not yet taken
place, so it is worth outlining the arguments for and against possible
accession, as well as its advantages and disadvantages. Would it be beneficial
for Hungary to join? Depending on the amount of available resources, the
conclusions that can be drawn for countries that joined the eurozone years ago
(for example: our northern neighbour, Slovakia) have been the subject of
research. The eventual accession will also result in changes in national
regulations, namely regulatory needs, the manner and outcome of which will be
decisively influenced by several factors, among which the COVID epidemic has
stood out. The research had both macroeconomic and EU law aspects.
Hungary joined the European Union (EU) more than about
twenty years ago [1], but has not yet joined the eurozone. The purpose of this article is to outline the
arguments for and against possible accession, taking the available resources
and scope of the article into account. From a future perspective, given that
the entire EU (and indeed the entire globe) has been battling with the COVID-19
epidemic for years, the pros and cons of joining the eurozone could become an
important issue. Would Hungary benefit from joining in the near future or in
the further future? The research will
also consider, depending on the sources available, the possible perspectives
that might be open on the basis of the experiences so far. The research has
both macroeconomic and legal aspects.
Historical background;
reasons for integration
The period of the 19th and 20th centuries [2] allowed
the emergence of international monopolies in the international economic arena,
which led to the advance of power interests and the emergence of international
colonialism and conflicts of similar dimensions (revolutions, several regional
and proxy wars and, as a consequence, the First and Second World Wars) [3]. Given the disintegration of the colonial
system after 1945, the international economy was also significantly
restructured, with the emergence of a bipolar world order in the political
sphere. These processes logically implied the need for integration [4]. These
developments led to the neoclassical economic philosophy being replaced by the
Keynesian model [5] and opened the way to the Bretton Woods system (see below).
Integration began with the BENELUX cooperation between
Belgium, the Netherlands and Luxembourg in the mid-1940s, which grew into the
European Union (hereinafter: EU) over the years.
Hungary’s accession to
the EU
The countries of the Central European region [6] had a
long-standing desire to catch up with Western Europe. Hungary began to open up
to the European Communities through trade and agricultural agreements as early
as the late 1960s, and sectoral agreements were established from the following
decade. The whole process of regime change was driven by the desire to join the
EU. In the Central European – Hungarian –
context, this was also due to the fact that, compared to the more
industrially developed countries of the Western European centre (e.g. France
and other countries) [7], which had been established since the end of the
Middle Ages, the Central European region was an underdeveloped, and
predominantly agricultural periphery [8]. By the time of accession [9], Hungary
had established a functioning market economy, and this was complemented by a
profound harmonisation of legislation. The successful referendum was held on 12
April 2003. Subsequently, the biggest enlargement in the history of the EU took
place in Athens on 1 May 2004, when Hungary signed the Accession Treaty with
nine other countries. This act opened up opportunities for the new Member
States to develop and catch up, open up borders and, within a few years,
allowed them to work in Western Europe and to move goods, services and capital
freely.
After the Second World War, the slowly emerging
regularisation of currencies and the progress made in the integration of trade
in goods and currencies towards unitying them, and the very significant
progress towards convertibility, increased external trade flows [10]. The
gradual dismantling of restrictions made greater integration of foreign trade
between capitalist countries and in the world market possible, which meant that
it became possible to buy and sell at the most favourable place. This process
led to price equalisation and these price levels helped to stabilise exchange
rates. The integration of the world market and the equalisation of price levels
was also facilitated by the relaxation of quotas and the reduction of tariffs,
which reduced the resulting distortions in market price levels and, in
contrast, increased competition in national markets. The conclusion of the
Treaty of Rome (hereinafter: EEC Treaty) [11] in 1957 by France, the Federal
Republic of Germany, Italy and the Benelux countries and the implementation of
the customs union of the six states, which created the EEC, were significant
steps towards integration, as they allowed the impact of tariffs to be reduced
and, at the same time, increased competition within the single customs area,
while excluding some external competition. The Bretton Woods system [12] was a
further result of the integration processes of the mid-20th century, and the
need for monetary integration was only later concretised thanks to the stable
monetary market backing provided by the Bretton Woods system, which was based
on gold reserves. However, monetary integration was not regulated when the EEC
was set up [13]; only mutual monetary and financial cooperation and the
harmonisation of economic policies were provided for in the Treaty establishing
the EEC. In the light of these considerations, and as a logical consequence,
monetary integration was subsequently required. The benefits of this
integration include the emergence of more stable exchange rates and the
development of convertibility, factors that facilitate and strengthen external
trade.
In parallel with the foregoing, the oil crisis of 1973
increasingly justified the development of a common monetary policy. However,
the intensively changing international environment made it more difficult to
align the planned Community currencies, but the need for a common monetary
policy remained. The European Monetary
System (EMS) [14], launched in 1979 on the Giscard-Schmidt proposal, was the
practical expression of this desire, the core element of which was the ECU
(also known as the European Currency Unit), a basket of Community currencies,
which laid the foundations for the common European currency that was to be
created. The Delors Plan was published in 1989 and implemented through the
Maastricht Treaty of 1992, thus institutionalising the system and laying the
foundations for the Economic and Monetary Union programme. In 1994, the European
Monetary Institute (EMI) was created. In 1999, following the establishment of
the European Central Bank ((hereinafter:
ECB)) [15], the euro was introduced, as provided for in the Maastricht
Treaty, and was then only used as account money, but has been in circulation as
cash since 2002 [16]. It is also necessary to define the concept of the
eurozone, which is the subject of this study: it is made up of the Member
States of the European Union that have adopted the euro as their currency.
Nineteen Member States are currently in this zone or ’area’, [17] seven of
which are outside the eurozone, including Hungary, and two of which have opted
out, one of which has left the EU. It is also worth pointing out that European
growth slowed down in the mid-1990s, and, within a decade of the introduction
of the euro (in 2008-2009) an economic crisis emerged, [18] despite which, and
a slow and protracted recovery, the single currency was maintained.
There are two sides to every coin, and perhaps this is
a metaphorical way of describing the EU and the monetary union within the EU.
There are several disadvantages and several advantages for our country from
joining the eurozone, which are worth discussing in this chapter, but not in a
taxative way.
The conditions for the possible adoption of the euro are the convergence criteria: [19]
It should be borne in mind that eventual accession
also implies a need for regulation, so Member States wishing to join the
eurozone must also ensure that their national laws and regulations are in line
with those of other eurozone Member States.
Advantages and disadvantages
The EU is made up of many different nations and countries, and is therefore bound together by a complex administrative system, which can make it more fragile. A good example [20] of this is that the economic recession [21] of the early 1990s did not benefit integration because of the foregoing, as the recession took its toll on the monetary system, making it more difficult to meet the conditions for financial union, and as a consequence there was strong opposition to the introduction of a single currency at the time. Judit Nemenyi and Gabor Oblath [22] argue that the biggest benefit of the euro is the improvement in the business environment. One of the most important arguments in favour of Hungary joining the euro was that the path to the euro and future membership would provide some protection against potentially irresponsible fiscal policies. The following aspects can be considered decisive in this respect:
In the light of the foregoing, [23] there is a need to
strengthen institutions and mechanisms in the eventual introduction of the euro
that can promote a better match between productivity and wage developments at
the national economy level, especially in a country without a decades-long
tradition of low inflation. At the same time, as a country gives up forever the
possibility of correcting its macroeconomic imbalances by changing its exchange
rate - in fact, it gives up this possibility by adopting the euro - it must
develop mechanisms and institutions to prevent the emergence of domestic
processes that would require exchange rate changes. Among these mechanisms, the
system of wage agreements at the national economy level, for example, could
play a prominent role [24]. The importance of disinflation is increased by the
fact that, in the current global economic environment, the economic strength of
Western European countries seems to be in a state of collapse, which was
fostered and strengthened by the COVID epidemic situation, so that the
stability of the Hungarian financial market and economy may become a positional
advantage compared to the current status quo in Western countries. Of course,
the possible positional advantage can only be considered temporary, as the
trend is always towards equilibrium [25]. The same temporary advantage requires
a higher degree of flexibility at both macro- and micro-economic level. On the
other hand, as leading economists have already warned, disinflation also comes
at a price. The preservation of the potential locational advantage mentioned
above is ensured by the development of a work- and knowledge-based society,
whereby individuals acquire competitive knowledge and income. Of course, this
requires a high degree of flexibility in both monetary and fiscal policy and
regulation. Flexibility is also needed at the societal level to ensure and
further develop the knowledge based education and the background in these
priority areas.
Prior to the economic crisis of the late 2000s, EU regulation did not address the range of tensions that could arise from the disadvantages of a single currency area. The rules and procedures of the Stability and Growth Pact have been repeatedly examined from the point of view of efficiency. The 2005 review already sought to take into account country-specific features and to support the feasibility of reforms. However, crisis prevention and forecasting has not yet been addressed in the country reviews, nor has it been considered for the currency union as a whole. These features are both a handicap and a factor of uncertainty for monetary union. The main disadvantage of the eurozone as a unit may be that it may form a consistent unit, with the consequence that the consistent unit may have little or no flexibility to respond to any economic downturn that may occur in the near future. In the author's view, the following uncertainties could have been decisive in the pandemic situation from an economic-financial, interventionist (fiscal and monetary policy) and regulatory aspect:
In Judit Nemenyi's view, [26] an important question for the future is whether there is an EU-level regulation that provides an appropriate framework for balanced development for all members, with their very different characteristics. Sharing this view, it also highlights the primacy of the evolution of the regulatory framework. At a conference held in 2017, Gabor Regos [27] identified the central question regarding the euro as the timing of its introduction, namely when the euro will be introduced? In his presentation at the event, he described the benefits of joining the eurozone as:
International aspects
In order to obtain a more detailed overview of the
topic under discussion, some international perspective is necessary. On the one
hand, it is worth looking at the neighbouring Member States that have joined
the eurozone and, on the other hand, at other Member States.
Our neighbours
Croatia [28] submitted its application to join the
European Exchange Rate Mechanism (ERM-II) in 2019, which was supported by the
eurozone and outlined the conditions and timetable for accession, and Croatia
adopted the euro [29].
In Romania, due to internal political tensions,
joining the eurozone was not yet on the agenda, but, according to press
reports, Romania wants to push for euro adoption by 2026 [30].
Slovakia [31] adopted the euro in a particular
context, during the 2009 recession, due to the conduct of sound monetary policy
in the run-up period, meeting the Maastricht inflation criteria while the
currency appreciated (but avoiding significant overvaluation) and pursuing
fiscal stability. The latter has prevented in Slovakia excessive credit
expansion and the proliferation of foreign currency (no-euro) lending - as is
well known, foreign currency borrowing in Hungary pushed a wide range of people
into a desperate situation... Nevertheless, the crisis has highlighted the
extreme vulnerability of our northern neighbour's budget, irrespective of its
eurozone accession, as the structural fiscal problems that the rapid economic
growth had masked have become evident.
Other eurozone member
states
A German article entitled "Lithuania benefited
from euro adoption" was published in August 2019, [32] stating that
Lithuania has benefited from the adoption of the euro. According to this
article, the accession to the eurozone has led to an improvement in Lithuania's
credit rating according to credit rating agencies, which has resulted in lower
interest rates for financial market participants. Moreover, exchange rate
conversion costs have also fallen and cross-border transactions in euro have
become cheaper. The above is confirmed by the analysis and data evaluation of
the National Bank of Lithuania. For Estonia, [33] the adoption of the euro is
unlikely to entail significant changes. In fact, with its exchange rate regime
firmly anchored outside the eurozone, the country has not only experienced but
has also managed the macroeconomic tensions that are considered unmanageable by
abandoning its own currency (and thus its pegged exchange rate) by means of
'internal devaluation', i.e. significant nominal wage cuts, in a more robust
way than is common in other currency-area countries. Bulgaria [34] signalled
its intention to join the eurozone in summer 2018, which was considered
premature by the eurozone and ECB leadership, and further conditions were
attached to its accession. Like our country, Hungary, Poland and the Czech
Republic are not participating in ERM-II, the European Exchange Rate Mechanism,
which is a 'precursor' to joining the eurozone.
The question in the title of this chapter can be answered
with an unequivocal "yes", as described above.
Regulation – codification – is a necessary part of
state existence, whether decision-makers decide to join or remain outside the
eurozone. The need for regulation is also supported by the fact that the world
is changing extremely rapidly, characterised by an increase in the number of
uncertainties (discussed above - non-exhaustively). With regard to the
eurozone, the European Central Bank has normative regulatory and legislative
powers within the EU, similar to those of the National Bank of Hungary [35]. An
example of the rapid regulation necessitated by COVID can also be found in
relation to the eurozone, as in March 2020 the European Central Bank adopted
Decision (EU) 2020/440 (hereinafter: Decision 2020/440) [36] to promote the
transmission of monetary policy, facilitate lending to the eurozone economy,
ease borrowing conditions for households and firms and support the sustained
convergence of inflation rates to below 2% over the medium term; and the
foreseeable decline in economic activity in the eurozone as a consequence of
the pandemic, as well as the inevitable prospect of a major recession,
especially as more and more countries are faced with the need to step up
contagion containment measures, which put an acute strain on the cash flows of
businesses and workers and threatened the survival of businesses and jobs. In
addition to the previous reasons, Decision 2020/440 indicates that the
Eurosystem does not tolerate any risk to the smooth transmission of its
monetary policy in all eurozone countries. As a further example of swift
regulation, in April 2020 the Governing Council, by Regulation (EU) 2020/533 of
the European Central Bank, conferred on the Executive Board the power to extend
the deadlines for providing statistical information required under regulations
of the European Central Bank, and this Regulation sets out in detail the
procedure for providing statistical information [37]. The preceding factors
have or may have an impact on fiscal and monetary areas, as well as on trade
flows [38]. A change in the latter may not only lead to changes in the balance
between exports and imports and commodity group balances, but also, where
appropriate, a rapid need for regulation. A further similar need may arise from
the need for public intervention. As already mentioned regulation may require
speed and a high degree of flexibility. The necessary legal background for this
is provided in a worthy way by our excellent legislation, such as the provisions
of the Act on Public Finance on amending and transferring appropriations, and
the government decree on the implementation of the Act on Public Finance [39].
In connection with the topic outlined in the study, it
should be noted that it is extremely important and pertinent that, currently in
Hungary, the government is striving to build a work- and learning-based
society, intending to create a sustainable economy and society in which
citizens of working age either study or work. In this economic environment,
which is fraught with uncertainties, increased supports for families, which are
a basic element of society, promotes the improvement of demographic indicators
on the one hand, and increases demand within the national economy on the other.
In the latter respect, support for future generations also plays an important
role, which, in the author's view, should also affect the development of
knowledge based on education. Will the eurozone survive in its current form?
Will the euro remain the currency? Simple questions, but future answers can no
longer be called simple... The reason for this is that it is not possible to
foresee what consequences the global economic downturn are likely to develop as
a result of the COVID pandemic, the war in Ukraine and in Gaza with Israel will
have in the coming years, so – despite all its positive implications – it seems
more prudent and wiser to wait for the introduction of the euro...
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