EU reform effort reopens eurozone divide in Central Europe

As Germany and France push for reform in the European Union, Central European countries say joining the eurozone will limit their autonomy, while supporters of European integration say they risk being left behind.

First Look

On the eurozone's eastern flank, some Slovaks in the border town of Štúrovo, Slovakia, wish their country had never opted for the common currency and now head over the Danube River to Hungary for the cheaper shopping.

Unlike Slovakia, Hungary has stayed out of the currency club, but on its side of the river people in the historic town of Esztergom feel they might be better off with the euro – although not yet.

With Germany and France stepping up efforts to reform the European Union and make the eurozone more crisis-proof, supporters of European integration say the post-communist countries which are holding on to their national currencies should change their minds.

These countries, they argue, will otherwise be stranded on the EU's eastern periphery as the eurozone becomes the bloc's inner core, pushing the pace of integration.

Esztergom and Štúrovo lie a short distance upstream from the castle town of Visegrád, Hungary, where Central European leaders formed a loose alliance in 1991, shortly after the fall of communism. The four members of the Visegrád Group – the Czech Republic, Hungary, Poland, and Slovakia – joined the EU in 2004 but so far only Slovakia has adopted the euro.

European officials play down any possibility of Hungary, Poland, and the Czech Republic adopting the euro before the middle of the next decade, assuming they want to.

Nationalist governments in Budapest, Hungary, and Warsaw say euro membership would curb their autonomy in running their economies which are growing nicely without the common currency. Prague, Czech Republic, has also shelved the idea.

But this month a group of Polish economists, including former central bank governor Marek Belka and ex-Warsaw stock exchange chief Wiesław Rozłucki, urged the government to restart preparations for the euro as European integration advances.

"Poland should take part in this process if it wants to have a real impact on the future of the continent. And also if it wants to permanently anchor itself in Western Europe," they wrote in an open letter published in the newspaper Rzeczpospolita.

Raising memories of Poland's cold war past in the Soviet bloc, the economists offered stark alternatives. "Either we will be in the eurozone in the future or in Russia's sphere of influence."

French President Emmanuel Macron and German Chancellor Angela Merkel laid out their ambitions at the weekend. "We want to consolidate and renew our cooperation with a view to moving ahead with a prosperous and competitive Europe, more sovereign, united, and democratic," they said.

Political conflicts

Poland and Hungary are embroiled in political conflicts with Brussels over a variety of issues but argue their rejection of the euro on economic grounds. They say having the flexibility of a national currency helps to overcome tough times and warn against adopting the euro before the wealth and wage gap between the poorer East and more developed West narrows.

Some economists share this view and public support for the euro has also waned in parts of Central Europe.

Polish Prime Minister Mateusz Morawiecki told the website Money.pl that euro adoption was not on the agenda. "We have not changed our rhetoric with regard to this. This is not an issue today," he said.

Hungary, run by right-wing Prime Minister Viktor Orbán – Poland's closest ally in its battle with Brussels over judicial reforms and EU migrant quotas – has been similarly skeptical.

The issue of the pay gap with the Western euro members remains highly charged.

Earlier this month National Bank of Hungary Governor György Matolcsy expressed doubt that joining the monetary union would solve the problem. "The introduction of the euro is no guarantee of a successful catching up," he told the weekly Figyelő.

The Hungarian economy ministry takes a similar line. "As autonomous monetary policy has helped overcome the [financial] crisis, Hungary does not wish to enter the fixed exchange rate mechanism for now," it said in a reply to Reuters questions.

Two sides of the bridge

So far 5 of the EU's 11 ex-communist members – Slovakia, Slovenia, Estonia, Latvia, and Lithuania – use the euro.

According to an EU survey, Slovaks are content with this. Eighty percent of Slovaks are in favor of the euro, which replaced the Slovak crown in 2009, according to the May 2017 Eurobarometer.

But in Štúrovo, where many residents are members of Slovakia's Hungarian minority, not everybody is so happy.

"Wages here are a disaster," said Zsuzsanna Konozsi, as she took her baby in a pushchair through the town. Ms. Konozsi works as a waitress in neighboring Austria, where she earns one and a half times more than she would at home.

"If I could turn back time, I would say let the Slovak crown stay, and not have the euro," she told Reuters.

Eurobarometer shows living costs are Slovaks' chief concern, along with health and social security.

"Since we've had the euro, everything is more expensive. The economy may have got a boost ... but not ordinary people," said Pal Varga, a security guard. "Hungary, Poland, and the Czech Republic are on a good path, they defend themselves. I think it is France and Germany dictating the pace in the EU," he added.

The Eurobarometer also showed 55 percent of Poles and 70 percent of Czechs oppose introducing the euro. In Hungary, by contrast, 57 percent want it despite the government's stand.

EU data suggest Slovaks are better off with the euro. While prices rose a cumulative 10.3 percent between 2009 and 2016, average gross wages gained 22.5 percent.

Life changed for local people when Slovakia introduced the euro. While it was mostly Hungarians going to Sturovo to shop before, now Slovaks come to Esztergom as it is cheaper for them following a fall in the forint's value.

Across the bridge over the Danube, reopened only in 2001 after it was blown up in World War II, Hungarians in Esztergom are more favorable to the euro.

"The euro would be good for us and also bad for us," said Amadeusz Sziklai, dressed in a Russian-style fur hat as he sold shawls and hats from a stall one wintry morning. "There is lots to do before Hungary could join the euro in a way that it would be able to compete with Western countries."

Maja Abel, who runs a fashion boutique, said Slovaks could now easily afford clothes that her Hungarian customers struggled to pay for. She noted her mother lived on a pension of just 72,000 forints ($285.12) a month. "It would be very good if the euro were introduced in Hungary, but at this moment the country is not up to it," said Ms. Abel.

Inside or outside

In Brussels, a European Commission spokesman said a two-yearly report assessing countries' progress towards qualifying for the euro will be published in May.

Most member states are required to join once they have met the entry criteria, following a two-year wait in the European Exchange Rate Mechanism. But as Hungary and Poland are not even trying to join, early adoption remains highly unlikely if their eurosceptic governments win re-election this year and next.

European officials are worried about issues such as central bank independence, especially in Hungary. In its latest annual report, the European Central Bank (ECB) repeated long-standing concerns about some National Bank of Hungary programs, which might conflict with a ban on central banks directly funding their governments. "The ECB will continue to closely monitor these operations," it said.

So Central Europeans may be observers of the next wave of EU integration, unable to slow it.

"It is highly probable that we might witness the development of a two-speed EU," said Hendrik Hansen, a political science professor at Budapest's Andrassy University. "If France and Germany are opting for deepening EU integration, they will probably anticipate an 'opt-out' for Poland and Hungary in order to have more chances to realize the reforms."

Zoltan Torok, an economist at Raiffeisen Bank, said that only after Hungary and the ECB have ended unorthodox monetary policies implemented to tackle the financial crisis could Budapest or its peers consider joining the euro.

"As far as the economy is concerned ... eventually every one of the Visegrád countries will be part of the eurozone but it is not going to happen in the next four to five years," Torok said. 

This story was reported by Reuters.