The Impact of the Financial Crisis on Euro-Adoption Strategies in Central Europe

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The Impact of the Financial Crisis on Euro-Adoption Strategies in Central Europe - Zuzana Svetlosakova

Abstract

The global financial crisis has a significant impact on euro adoption strategies in the Czech Republic, Hungary, Poland and Slovakia, as national governments use the crisis strategically in national debates about economic policies and future choices. The turmoil in Hungary was a wake-up call exposing the vulnerabilities of emerging economies as Central Europe did not prove resistant to liquidity deterioration, exchange rate volatility and direct and indirect effects of the crisis. The policy implications of the crisis on the euro adoption strategies reveal that these developments only intensified the already existing position on the euro rather than dramatically changed the attitude of the governments currently in power. Analyzing the effects of the financial crisis on Central Europe, exemplified in the issue of euro adoption, helps us to understand policy choices that politicians make and the extent to which these are being influenced by international organizations. The global financial crisis has a significant impact on euro adoption strategies in the Czech Republic, Hungary, Poland and Slovakia, as national governments use the crisis strategically in national debates about economic policies and future choices. The turmoil in Hungary was a wake-up call exposing the vulnerabilities of emerging economies as Central Europe did not prove resistant to liquidity deterioration, exchange rate volatility and direct and indirect effects of the crisis. The policy implications of the crisis on the euro adoption strategies reveal that these developments only intensified the already existing position on the euro rather than dramatically changed the attitude of the governments currently in power. Analyzing the effects of the financial crisis on Central Europe, exemplified in the issue of euro adoption, helps us to understand policy choices that politicians make and the extent to which these are being influenced by international organizations.

Introduction

The global financial crisis has had a significant impact on euro adoption strategies in Central Europe, as governments in the Czech Republic, Hungary, Poland and Slovakia use the crisis strategically in national debates to determine economic policies and future paths of  their respective countries.

The euro has traditionally been linked to the question of  timing for a country’s entry into the euro area and its commitment to the convergence criteria set by the European Union (EU) in the Maastricht Treaty. With the next European parliamentary elections set for 2010 in all four of  the countries mentioned above, euro area membership is hotly debated because it represents the governments’ strategies in fighting the effects of  the crisis as well as the countries’ economic and political priorities.

Over the last few months financial turmoil has led to various political outcomes.1 In Hungary, the crisis has pressured the minority government to adopt necessary economic changes that move the country closer to the fulfillment of  the convergence criteria. In Poland, the crisis and the government’s recently announced euro adoption plan have become powerful weapons in domestic political battles, while in the Czech and Slovak Republics, these two issues have provided justifications for the respective governments’ pre-existing euro-skeptic or eurofriendly positions. 

This analysis seeks to explain the current euro area attitudes of  the Visegrad countries2 in two steps by considering the impact of  the crisis and the response from politicians and central bankers. The fact that the economic and financial impact of  the crisis is still unfolding naturally creates methodological problems.  However, although the full scope of  the crisis cannot yet be assessed, general trends and patterns in domestic politics evolving from the crisis can be identified. Our knowledge of  the trends and patterns allows us to consider the way governments in Central Europe perceive the limitations and opportunities derived from the current economic situation.

Financial Crisis Hits Central Europe

The international financial crisis hit Central Europe in October 2008, with Hungary being the first and the worst affected.3 As the bond market froze, the Hungarian forint depreciated sharply in October and the stock market plunged. Consequently, the Hungarian National Bank (NBH) had to respond with a 3% ‘panic interest rate hike’4 in order to defend the currency from speculation. Only a few weeks later, an international US$16bn loan from the IMF, the EU and the World Bank was negotiated.5

At the same time, the Polish zloty and stock market plummeted, and liquidity dried up in the inter-bank market.6 Meanwhile, in Prague, the Czech National Bank (NBC) cut rates to 2.75%, at that time the lowest in the EU,7 and created a new facility ‘aimed at providing more liquidity by extending two-week loans in exchange for state bonds as collateral.’8 As the crisis spilled over into the region, Slovakia was the only Visegrad country which experienced only a “limited” direct impact of  the crisis throughout October and November. With the crown-euro convergence rate firmly set in July 2008, Slovakia was able to avoid the exchange rate fluctuations that plagued the national currencies of  all its neighbors.

Past policy choices and a vulnerable banking sector explain the speed and force with which the crisis affected Hungary.9 Outsized government debt, which in 2007 increased to 66% of  Hungary’s GDP, more than double the debt of  the Czech and Slovak Republics,10 together with a ‘maturity and currency mismatch in the banking sector’11 meant that with the global liquidity shortage, investors started to worry. Liquidity dried up in the bonds market and the forint depreciated some 13% against the euro. Because of  high domestic inflation levels, loans in forint were charged at a higher rate. This encouraged Hungarian consumers and businesses to take loans denominated in foreign currencies, particularly in the Swiss Franc.12 Whereas in the Czech and Slovak Republics only 2% of  new mortgage loans are made in foreign currency, in Hungary, foreign loans account for 90% of  the total. 

In comparison to Hungary, the Czech and Slovak money and currency markets were ‘barely affected by the crisis.’13 As risk aversion to the region intensified,14 yields increased and the bond markets in the Czech Republic and Poland experienced some liquidity problems. The NBC repeatedly claimed that the Czech financial system was less vulnerable than that of  Poland or Hungary;15 however interest rates were cut drastically.

Although the Polish economy is regarded as being in better shape than Hungary’s,16 it faces many similar problems. The government net external debt is 40%,17and much of  its domestic mortgage lending is denominated in Swiss Francs.18 Instability in the Hungarian financial and banking markets has caused foreign withdrawals from Poland, affecting the value of  its national currency, which has dropped some 30% against the dollar and slightly less against the euro.19 The Polish National Bank (NBP) did not hike interest rates to save the currency, although this could happen given further speculation. 

In Slovakia, the fixed exchange rate between the crown and the euro protected the national currency from exchange rate volatility.20 The banking system was cushioned from a shortage of  capital by the “over-liquidity”21 resulting from a January currency swap. However, the banking sector was not spared completely; for example, insurance sector profits shrank by 27%.22 Most worrying is the dramatic fall of  Slovakia’s industrial output from 5.4% in mid-2008 to practically zero in October of  the same year, which was the most dramatic change amongst the Visegrad countries.23

Despite differences in the way the global crisis affected these countries, all four countries experienced similar indirect effects. Integration into the global market, strong links with the eurozone, dependency on exports, and foreign bank ownership are all likely channels of  instability. 

As demand from the EU declines, exports will fall and the trade deficit in these four countries will increase. The decline in external demand will also coincide with a domestic decline in consumption that could depress wages and production and increase unemployment. Such increased unemployment may lead to depreciation and will generally cause slower economic growth.24 In terms of  industrial output, the industry affected most could be one of  Central Europe’s champions—the automobile industry—especially in the Czech and Slovak Republics.25 Slovakia might be better off, however, since its car production focuses on ecologically friendly cars for which demand is still strong. In addition, its marginal costs are lower than those of  its neighbors, so that further optimization and cost-cutting in Western Europe might actually create new investment opportunities.26

Similarly worrying is foreign bank funding and ownership. Traditionally, Central European economies, Hungary and Poland in particular,27 have funded a growing current account deficit with high FDI inflows. While in good times this funding method is not a problem, when liquidity abroad dries up in times of  crisis, this dependence becomes unsustainable and increases the risk potential in emerging economies.28 Although the loan from the IMF was certainly necessary, it has also aggravated Hungary’s reliance on foreign funding.

Finally, regarding foreign bank ownership, there are both advantages and disadvantages. The banking sector in Central Europe is mostly composed of  universal banks with some specialized banks.29 Foreign presence is high at 96% in the Czech Republic, 83% in Hungary, and 96% in Slovakia.30 On the one hand, the foreign element provides the domestic sector with valuable knowledge and management skills. On the other hand, even though the domestic branches function as separate subsidiaries, there is the risk that, given liquidity problems in the parent banks, foreign interests might influence the choices of  domestic banks.31 Although this risk channel is far from negligible, for now there is no evidence of  foreign banks withdrawing from Central Europe during either the financial crisis or an economic downturn, so that the impact of  foreign bank ownership remains to be assessed.32

Overall, the impact of  the financial and economic crisis on Central Europe is sizeable. Hungary will most certainly slip into recession, with GDP growth for 2009 predicted to contract by 1.5%;33 some forecasts also predict that the Czech Republic might see a recession,34 while the Polish GDP growth will slow down from 5.8% in the Q2 of  2008 to 3.7% in 2009,35 while in Slovakia, the GDP growth predicted from December 2009 lies at 4.7%, down from 10.7% in 2007.36

Political Response and Euro Adoption Strategies

In November and December, the Visegrad governments presented packages aimed at stabilizing the banking sector and stimulating the real economy. As in other European countries, the response to the financial crisis focused on liquidity, recapitalization of  the market, greater international cooperation and domestic deposits guarantees. However, in addition to these points, countries’ responses were very much shaped by a re-evaluation of  euro area entry, and attempts of  national governments to use the crisis in bargaining with the opposition and justifying their euro position regarding the wider public.

Upon the fulfillment of  the four convergence criteria laid down in the Maastricht Treaty, all EU members (except for Denmark and the UK) are obliged to adopt the euro. The convergence criteria require low inflation, a stable exchange rate within the Exchange Rate Mechanism (ERM 2) band, a sustainable budget position, and a low long-term interest rate.37 For the price of  independent monetary policy, the euro can provide a shelter from external shocks. The substitution of  the euro for national currency eradicates exchange rate volatility and speculation, which means that a banking crisis is less likely to turn into an exchange rate crisis.38 The euro eliminates exchange costs for businesses and households, fosters trade and integrates financial markets. In the long-term, use of  the euro secures steady economic growth,39 as adherence to the convergence criteria is instrumental in the implementation of  economic, structural and banking reforms.

In Hungary, the crisis seems to have strengthened the minority government run by the Hungarian Socialist Party (MSZP) with external support from the SZDSZ-Hungarian Liberal Party (SZDSZ).40 The MSZP was previously criticised by its ex-coalition partner SZDSZ, as well as by the opposition led by the FideszHungarian Civic Union, for not implementing reforms promised in the April 2006 elections. Thanks to the rapid management of  the IMF loan and equally quick drafting of  stimulus packages that hope to provide more funds to business, create new jobs, save some 100.000 current ones and boost the construction industry,41the popularity of  the Prime Minister, Ferenc Gyurcsány of  the MSZP, has increased over the last two months.

The ascendancy of  Gyurcsány could change however, as the government is under pressure from the IMF loan to adopt long-delayed unpopular policies. The IMF loan, which exceeds the country quota by a factor of  ten, requires Hungary to decrease government deficit (currently the largest in the EU42) to 2.6% in 2009 and cut down public expenditure. In November, the Hungarian parliament passed legislation imposing a cap on budget spending and establishing ‘a three-person budgetary council to oversee budget performance.’43 The announced cancellation of  the 2009 bonuses for public sector employees faced severe criticism from trade unions, which are said to be planning a large-scale strike for January. Furthermore, none of  the commercial banks have yet accepted help from the proposed bank rescue package.44 With approaching parliamentary elections in 2010, the government will be careful about pushing through drastic reforms. The elections for the European Parliament in summer 2009 will, in this way, be a test round for MSZP and a sign as to whether or not Gyurcsány will remain as the head of the party.

In this way, the euro and the fulfillment of  the euro-convergence criteria, which coincide with the conditions set out by the IMF loan, could prove to be a useful tool for the government to justify unpopular policy choices. While Hungary was at no point openly against euro adoption, and prior to October 2008 actually aimed to draw up a euro adoption plan, the government never committed itself sufficiently to the necessary changes. With the IMF loan, there is a chance that Hungary could meet the Maastricht conditions sooner than originally intended.45 In this light, it is not surprising that Gyurcsány confirmed in December 2008 that Hungary intends to join ERM-2 in 2010 so as to allow for a possible 2012 adoption of  the euro.46 

Regarding the dynamics of  Polish domestic politics, there is much evidence that the government, especially the leading party Civic Platform (PO) has every intention of  using ‘the global economic crisis to build up momentum for [...] Poland to join the euro in 2012.’47 Already in September 2008, Donald Tusk, Poland’s PM since 2007, unexpectedly announced ‘the government would try to ensure that Poland became a member of the eurozone in 2011.’48 As the financial crisis unfolded, the government and the NBP were busy not only with handling the currency and stock market, but also with creating a timetable for Polish adoption of  the euro.49 Having seen the effects of  exchange rate speculation in Hungary and given that the zloty has been considered as one of  the most vulnerable currencies in the region, Polish policy makers were re-reading the positive PNB recommendation for a fast-track euro-entry from 2004.50 In fact, by the end of  October the government published a “road map” ‘setting out the measures needed to allow adoption of  the euro in Poland in January 2012.’51

Tusk’s euro-friendly stance is a powerful weapon in the domestic battle against the Kaczynski brothers and the conservative Law and Justice (PiS) party. As in Hungary, in the face of  an upcoming presidential election in 2010, in which Tuskhopes to defeat the current President Lech Kaczynski, the government has had to take care to avoid alienating public support while carrying out drastic reforms. The euro offers a good opportunity to rally against the euro-skeptic Law and Justice by brightening up Poland’s economic path (EIU 2000d:9–10). The “EUcredentials” were a useful force in electoral victories in Slovakia in the 1998 and 2002 parliamentary elections. However, the current political battle in Poland will not be easy. Adoption of  the European currency requires a change in the constitution, but the government currently does hold enough seats and has to rely on defecting opposition votes. 

Political struggle is also characteristic of  the Czech political scene. After the electoral fiasco in regional and Senate elections for the governing right-wing Civic Democratic Party (ODS), in which the ODS lost seats to the opposition Czech Social Democratic Party (CSSD), the Czech Republic had to face a financial and economic crisis at a time of  political instability.52 A general attitude towards the EU as well as the euro is an important issue in domestic politics, as both President Klaus and the PM Topolánek of  the ODS are euro-skeptic while the opposition CSSD chairman Paroubek is in favor of  better relations with the EU and of  euro adoption. With general elections due in 2010, these views are becoming increasingly more explicit in political debates.

Together with the NBC, headed by pragmatic Governor Tuma, President Klaus and PM Topolánek have repeatedly advocated the benefits of  staying out of  the euro area.53 As mentioned earlier, the Czech ‘banking sector appears sounder than other countries in the region.’54 The Czechs were not as badly hit as Hungary, which means that so far the government has not had to resort to “emergency responses” such as a bank bail-out or a business stimulus package. Therefore, the relatively moderate direct impact of  the financial crises has thus far allowed the Czech government to justify its anti-euro position by juxtaposing the flexibility of  the NBC with the restrictive nature of  the convergence criteria.

However, while a temporarily weaker Czech crown is certainly useful for exports, exchange rate volatility has negative connotations for foreign investors. The Czech ‘currency has a strengthening tendency against the euro, growing by 6% in nominal terms from January to May.’55 Despite recent depreciation the Czech crown is expected to strengthen again by a further 10% in 2008.56 The ODS government is increasingly under pressure by business to adopt the euro, as in 2008, when Czech Škoda VW saw its profit decline by 24.7% even though in the last nine months Škoda sold 11.3% more cars.57

The Czech Republic has traditionally been viewed as an apt candidate for euro adoption and it seems it is only a matter political commitment that is problematic.Nowadays, the NBC’s intervention of  cutting down interest rates fully agrees with the ECB’s monetary policy. Also, considering the planned expenditure cuts and tight budget deficit,58 the Czechs seem to be in fact pursuing policies similar to those outlined by the EU convergence criteria. Depending on the results of  the next EU convergence report, and supposing that Poland and Hungary seriously commit themselves to adopting the euro in January 2012, the current Czech government, which is most probably not going to remain in power much longer, may have to reconsider the costs and benefits of  the euro.

Of  all the Visegrad countries, Slovakia has felt the direct effects of  the economic crisis the least. Given the set date for euro adoption, for which Slovakia has been preparing meticulously throughout 2008, Slovakia’s response was the most predictable and path-dependent. The National Bank of  Slovakia (NBS) has been closely following the interest rate policy of  the European Central Bank (ECB), with rates in December at 2.5%. As in the Czech Republic and Poland, there has been no bank bailout. In fact, similar to the Czech banks, the Slovak banking sector has, in the last ten months, made net profits and a 14% increase relative to 2007. 59

In Slovakia, although the euro is no longer a political issue, governmental policies are closely followed. After the 2006 elections when SMER, headed by Robert Fico, formed a government with Meciar’s Hnutie za Demokratické Slovensko (HZDS) and Slota’s Slovenská Národná Strana (SNS), the government’s firm commitment to euro adoption in 2004 came as a positive surprise given its populist electoral rhetoric. Prime Minister Fico has frequently voiced his wish to adapt Slovakia’s laissez-faire economic legislature to SMER’s social democratic electoral promises. The PM also frequently threatened to nationalize uncooperative energy companies or force them to curb their profits.

However, the convergence criteria and special interests of  businesses have imposed a limit on PM Fico’s government’s plans. In the last three months, the government has promised to keep strict fiscal policies and cut expenditure if  necessary. The government also seems determined to sustain Slovakia’s competitive conditions by encouraging investment in infrastructure and nuclear energy. Considering daily news about job and production cuts, this could indeed prove to be the most challenging credibility test for the government in the coming months. 

The current crisis has greatly strengthened PM Fico’s and his party’s position. The opposition, represented by three main parties (the Slovak Democratic and Christian Union-Democratic Party (SDKU-DS), the Christian Democratic Movement (KDH) and the Hungarian Coalition Party (SMK), have not been able to cash in on the economic crisis. Although it was the government formed by theseopposition parties between 1998 and 2007 that made all the necessary changes to enable Slovakia’s euro adoption, criticism of  the euro during 2008 from the KDH severely damaged the opposition’s political credibility and weakened their chances in the 2010 elections. According to monthly opinion polls, the coming parliamentary elections should secure a landslide victory for SMER and allow Fico to abandon his clumsy HZDS coalition partner. The upcoming presidential elections in March will test the population’s satisfaction with the government’s handling of  the impact of  the financial crisis.

Conclusion

The turmoil in Hungary was in many ways a wake-up call for Europe and the world, exposing the vulnerabilities of  emerging economies.60 Countries in Central Europe did not prove resistant to liquidity deterioration, exchange rate volatility or to other direct and indirect effects of  the global financial crisis. The region’s potential risk grew in the eyes of  foreign investors, and this risk has already had and will continue to have a negative impact on their trade-dependent economies.61

At the moment, it is difficult to measure the full impact of  the crisis as new data is being re-evaluated on a daily-basis. However, certain trends are clearly identifiable. The policy implication of  the crisis on euro adoption strategies in Hungary, Poland, the Czech Republic and Slovakia reveal that these developments only served to intensify pre-existing positions on the euro rather than dramatically change the attitude of  the governments currently in power. In each of  the Visegrad countries, the government has tried to exploit the situation to its advantage.

In Slovakia, SMER has so far been able to increase its economic credibility, although it is questionable to what extent the government really could have shaped the events given the path-dependency of  the January euro adoption. Throughout October and November, Slovakia found itself  in a relatively lucky position in contrast to its neighbors. Despite growing concerns about the indirect effects of  the crisis, especially in industrial production and exports, the euro area entry should place Slovakia in a good position in Europe’s post-crisis economic recovery. 

The Hungarian government also seems to have successfully enhanced its position, showing that a minority government can handle a financial crisis. With parliamentary elections coming up in 2010, it remains however unclear how willing Gyurcsány will be to implement the IMF conditions. Whether fully or only partly implemented, the reform policies will move Hungary closer to fulfilling the Maastricht criteria. Joining the ERM-2 before 2010 could bring the euro to Hungary by 2013.62

In Poland, the Tusk government has been flirting with the idea of  joining the euro ever since the 2007 parliamentary elections. The crisis has become a strategic tool to push through with fiscal and monetary policies that have long been on the Civic Platform’s economic agenda. While the euro adoption and Slovakia’s example might prove to be a powerful weapon against the euro-skeptic President and the conservative Law and Justice party, the fight over economic choices will be eventful. Only once the constitution is changed and Poland joins the ERM-2, can we say that euro adoption in 2012 seems viable. 

Likewise, the Czech Republic gives an excellent example of  how a previously held attitude strongly dominates the debates on the financial crisis and euro adoption. Despite the fact that the country shares many economic characteristics with Slovakia, being a small, relatively open economy with significant EU-trade, the Czechs seem to have a much more pragmatic attitude towards the euro. Once the turmoil is over and European economies start to recover, and given a very likely change of  government, it is possible that the Czechs will join the ERM-2 in 2010 in order to coordinate timing with Poland and Hungary. If  Poland and Hungary are in a position to adopt the euro simultaneously, the Czech government will have to seriously re-evaluate the costs and benefits of  remaining the only Visegrad country without the single currency.

Analyzing the effects of  the financial crisis on Central Europe, exemplified in the issue of  euro adoption, helps us to understand policy choices that politicians make and the extent to which these are being influenced by international organizations. This paper sought to demonstrate that euro adoption is not just a matter of  cost-benefit analysis and optimal timing determination but is directly linked to the adoption of  an EU-specific package of  economic and political reforms such as sound public finance and structural reforms. The European single currency offers good soil for further research into the power of  supranational organizations to influence domestic politics, analyzing how the euro becomes part of  the strategic bargaining and calculations of  domestic actors.

This analysis furthermore implies that policy choices matter and that there is no easy way to a successful transition from a socialist to a market economy.63 The impact of  the crisis has shown that slow reformers, like Hungary, were severely punished64 while some, like Slovakia, have found themselves (so far) in a relatively lucky position. However, the impact of  the global financial crisis on Central Europe also highlights the necessity of  scrutiny of  the way capitalist markets function, the rules and regulations (or their lack) that guide them as well as the political intentions that come along with them. In this way, a close analysis of  the interaction between the world of  politics and economics is a useful starting point.

Notes & References

  1. This article was written in the first two weeks of December 2008.
  2. The term Visegrad countries refers to the Visegrad Group (or V4) formed in 1991 by Czechoslovakia, Hungary and Poland with the purpose to coordinate efforts to join the process of European integration. Since the 2004 EU accession, the Visegrad Group has been meeting regularly to coordinate positions vis-à-vis EU legislation and politics. 
  3. This went against the expectations raised in the September 2008 ZEW Financial Market Report CEE.and the December 2008 ZEW Financial Market Report CEE.,, also the “EU10 Regular Economic Report,” The World Bank, October 2008, http://www.worldbank.org, 5.
  4. “Hungary: A Panic Rate Hike and a Potential Contagion Effect,” Strat for, 22 October 2008..
  5. “Hungary,” The Economist Intelligence Unit, December 2008, http://www.eiu.com, 4. 
  6. “Poland,” The Economist Intelligence Unit, November 2008, http://www.eiu.com, 2. 
  7. “Czech Republic,” The Economist Intelligence Unit, December 2008, http://www.eiu.com, 5. 
  8. Ibid.
  9. Lázsló Andor, ‘Hungary’s boomerang effect,’ 29 October 2008,  http://guardian.co.uk.
  10. In the Q1 of 2008, Hungary’s gross debt was 100% of GDP and net debt was 54% of GDP—see World Bank, 6.
  11. World Bank, 7.  
  12. EIU Hungary Report, 11. World Bank, 7. 40% of Hungarian mortgages were affected by the Swiss currency trade along with 40% of consumer debt.
  13. Zsolt Darvas, “Should the crisis be the trigger for a reshaping of euro-area entry rules?” VOX, 11 November 2008,  http://www.voxeu.org/index.php?q=node/2547.
  14. World Bank, 7.
  15. Czech National Bank,‘The CNB’s statement regarding the global market crisis,’ 30 September 2008.
  16. Nicholas Kulish  ‘Credit Crisis Slows Economy in Once-Hot Poland,’ The New York Times  27 October 2008.
  17. According to Darvas, 45%.
  18. EIU Hungary Report, 11.
  19. Ibid.
  20. Darvas 
  21. National Bank of Slovakia. ‘Comparison of the current performance of NBS monetary policy with the performance after the euro adoption in Slovakia.’ Biatec 16:9, 2008, 17.
  22. “Slovakia,” The Economist Intelligence Unit, November 2008, http://www.eiu.com, 11. 
  23. Ibid., 13.
  24. World Bank, 7, 9. 
  25. Beata Balogová, ‘Slovakia braces for the storm. Politicians and economists are debating what steps the country should take,’ Slovak Spectator, 3 November 2008. and Radoslav Tomek, ‘Slovak Economy Is Vulnerable to Car Industry, Moody’s Says.’ Bloomberg , 27 November 2008.
  26. ‘Zahranicní investori sú coraz opatrnejší,’ Hospodárske Noviny HNOnline,  30 October 2008, and ‘Kríza potápa európske automobilky,’ Hospodárske Noviny HNOnline,  31 October 2008.World Bank, 10.
  27. World Bank, 10.
  28. EIU Poland Report, 15.
  29. “Banking structures in the new EU Member States,” European Central Bank, January 2005, http://www.ecb.int, 5.
  30. Ibid., 15.
  31. European Central Bank, 6 and ‘Who’s next?’ The Economist, 23 October 2008.
  32. De Hass R.T.A, Van Lelyveld I.P.P., ‘Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe,’ July 2002.
  33. See Darvas, and his article ‘The rise and fall of Hungary’, 29 October 2008, http://guardian.co.uk; EIU Hungary Report, 7.
  34. ‘Ceská a pol’ská ekonomika by mala rást’ pomalšie,’ SME, 28 November 2008.
  35. EIU Poland Report, 13.
  36. “NBS výrazne znízila odhad rastu ekonomiky na 4,7 %,” SME, 7 December 2008.
  37. Note that that advantages and disadvantages of the euro and of the ERM 2 in relation to transition economies will not be fully discussed in this essay. For criticism of the ERM 2, see for example, Anne-Marie ‘The challenges of EMU accession faced by catching-up countries: A Slovak Republic Case Study,’ OECD ECO/WKP 31:44, or Charles Wyplosz, ‘Who’s afraid of the Eurozone?’ VOX, 10 June 2004.
  38. Goldman Sachs, ‘The Euro at Ten: Performances and Challenges for the next decade,’ June 2008, 77. Darvas: A common monetary policy also allows commercial banks to turn directly to the ECB for extra liquidity.
  39. Elena Kohútiková, ‘Dva názory na euro a krízu. V poslednej chvíli,’ SME, 23 October 2008.
  40. EIU Poland Report, 3.
  41. EIU Hungary Report, 12.
  42. Darvas, “Should the crisis be the trigger for a reshaping of euro-area entry rules?”
  43. EIU Hungary Report, 2.
  44. EIU Hungary Report, 11.
  45. See the articles by Darvas, and ‘Support package, gov’t measures bring Hungary closer to Eurozone—Finnish finance minister,’ MTI Econews, 31 October 2008.
  46. ‘PM tells Financial Times that Hungary intends to join ERM-2 in 2010,’ MTI Econews,16 October 2008.
  47. EIU Poland Report, 10 , also see “Euro For Zloty; Why Poland Needs the European Currency” Polish News Bulletin, 1 October 2008.
  48. “Poland,” The Economist Intelligence Unit, September 2008, http://www.eiu.com, 2. 
  49. “Poland,” The Economist Intelligence Unit, October 2008, http://www.eiu.com, 2. 
  50. National Bank of Poland. ‘A report on the costs and benefits of Poland’s adoption of the Euro,’ July 2004.
  51. EIU Poland Report, 12.
  52. EIU Czech Republic Report, 3.
  53. Ibid., 11.
  54. Ibid., 12.
  55. Ibid., 7. 
  56. Ibid., 8.
  57. “Kríza potápa európske automobilky,”Hospodárske Noviny HNOnline, 31 October 2008.
  58. EIU Czech Republic Report, 10–11.
  59. “Banky v SR dosiahli za desat’ mesiacov zisk 17,8 miliardy korún,“ SME, 30 November 2008.
  60. European Central Bank, 7, and.‘Financial crisis takes harsh toll on Europe,’ IMF Survey Magazine,21 October 2008.
  61. ‘Zahranicní investori sú coraz opatrnejší,’Hospodárske Noviny HNOnline,  30 October 2008.
  62. ‘Goldman Sachs sees Hungary joining neighbours in eurozone by 2013,’MTI Econews,  19 September 2008.
  63. The author agrees with the articles by Darvas, and with Deutsche Bank Research’s ‘EMU entrant Slovakia: Well positioned due to sound policies,’ Talking Point 8 August 2008.
  64. European Central Bank, 8.
Zuzana Svetlosakova is an International Relations M.A. Candidate at the Bologna Center of Johns Hopkins University. She holds a M.E.S. degree in European Studies from the Humboldt University Berlin and a B.A. degree in Modern and Medieval Languages from the University of Cambridge. Academic interests include Central and Eastern Europe, European integration and EU enlargement, transition and democratization processes.