Euro turns to problem for Eastern Europe

[December 30, 2010]  BRATISLAVA, Slovakia (AP) -- Bells pealed and fireworks shot across midnight skies in Bratislava two years ago, as Slovaks celebrated not only the New Year but also their country's long-sought entry to the club of nations using the continent's common currency, the euro.

Fast forward to the dying days of 2010 -- after the eurozone's debt crisis forced the bailouts of Greece and Ireland and painful austerity measures across the region- and one thing is clear: while Slovaks will again turn out in droves on Dec. 31, the cheer will have nothing to do with belonging to the euro.

The pride felt back then at being the first in the former Soviet bloc to adopt the euro has been tempered by the responsibilities that come with sharing a common European currency.

Two years ago, the euro was viewed as a safe haven of financial stability, insurance against wild swings of national currencies that could throw national budgets out of kilter and threaten economic growth. For Slovakia, it also signaled arrival into the prosperous club of EU nations just a decade after the fall of the Iron Curtain.

Now, as eurozone nations are asked to help bail out others overwhelmed by debt and the risk of contagion spreads beyond Ireland and Greece, adopting the common currency is no longer a top priority for former communist countries still outside the zone. And in newcomer countries, like Slovakia, some now see the euro as a burden, not a blessing.

"It seems that they allowed us to enter only to pay for their debts," said Petra Hargasova, a 22-year old economics student, her hands cupped around a glass of mulled wine to fight the chill while taking in a Bratislava Christmas market.

Some in the Slovak leadership are even looking for a way out.

In a recent commentary in the Hospodarske Noviny business daily, Parliament speaker Richard Sulik sent ripples across the already edgy eurozone by arguing that Slovakia should be ready to abandon the euro and switch to its former national currency.

The Finance Ministry was quick to dismiss his remarks and experts note that the quick fix proposed by Sulik would likely backfire. Economist Nicolas Veron of the Brussels-based think-tank Bruegel says that leaving the eurozone "would be economically disruptive" for the nation.

On the plus side, dropping the euro would allow a nation like Slovakia to devalue its national currency. That would help it boost its trade competitiveness against eurozone nations wrestling with the costs of the bailout and tightening their own belts.

At the same time investors are likely to punish defectors, pulling out in fear that their euro-denominated assets will be converted and devalued, to the point of possible financial collapse for the nation involved.

But anti-euro sentiment remains strong in a country that defied its partners earlier this year by refusing to provide its euro800 million ($1.05 billion) share of the euro110 billion ($145 billion) EU bailout loan for Greece.

"Everyone with common sense can see that the system is ill," said Matus Posvanc, an analyst from the F. A. Hayek Foundation, a conservative think tank in Bratislava. He called attempts to bail out Athens futile "because Greece's bankruptcy is inevitable."

With euro-skepticism extending into the top levels of government, Slovakia is among the most vocal of nations pressing for new rules that would force private investors, not only taxpayers, to pay their share. Under discussion is a so-called European Stability Mechanism, which would force private creditors to do just that by allotting them a share of the bailout burden if a nation is deemed insolvent.

In refusing to pay its share of the Greek bailout package, "our main objection was ... that it was only the taxpayers who have to pay," Slovak Finance Minister Ivan Miklos told The Associated Press. "But the banks, which contributed to the problem and made profit by providing loans to problematic countries in the past, didn't have to pay a single cent."

"To maintain such practice means to repeat the previous mistakes," he said.

Miklos argued that the current rules undermine a trust of people in the free market economy.

"The profits are privatized but the losses are socialized," Miklos said. "When it works, a few make money, but when it collapses because they take too big a risk, we all have to pay. That's a huge problem."

Nigel Rendell, an economist at RBC Capital Markets in London, said Slovak concerns were understandable.

"Slovakia worked incredibly hard to gain membership of the euro," he said. "Now they find themselves having to dip into their own pockets to finance foreign governments that spent too much and should have known better."

Other newcomers are also having doubts, while outsiders are suddenly in no hurry to join the euro club, which Rendell says is no longer seen "as a final seal of approval for completing the transition from command to market economy."

"Timetables for membership right across the region are being pushed back, perhaps even delayed forever," he said.

Recent developments seem to back that view.

Although Slovene Prime Minister Borut Pahor has defended his country's loan guarantees for Ireland, a recent survey by the prominent polling agency Mediana indicated 67 percent of citizens were opposed.

While the Polish government has suggested 2015 as a target date, it's lagging commitment to meeting necessary criteria may speak louder than words. At a forecast 7.9 percent of gross domestic product this year, Poland's budget deficit -- like those of some other former Soviet bloc nations -- remains notably above the 3 percent benchmark needed for eurozone entry.

Polish skepticism of euro adoption has been growing since the country did relatively well during the global economic downturn while still using its currency, the zloty. In 2009, Poland's economy grew 1.7 percent, making it the only EU country to avoid recession.

The governor of Poland's central bank, Marek Belka, voiced the country's anxieties when he said earlier this month that Poland should not rush to adopt the euro until the EU reforms its institutions to support a stable common currency. He called European monetary union "an ambitious but unfinished project."

Monika Kurtek, an economist with the BPH Bank in Warsaw, said she believed the 2015 date was not a real goal and that in any case Poland will not be ready by then.

"Our government does not want to point to a concrete date," she says. "They are speaking about 2015 but it is not even a forecast."

Euro outsiders can now devalue their currencies against their eurozone partners and -- like the Polish zloty -- the weaker Czech koruna has helped Prague's export sector during the financial crisis gripping the eurozone.

The Czech Republic is yet to set a target date to join the euro, which President Vaclav Klaus has repeatedly described as a failure.

He scoffed last month -- when visiting German President Christian Wulff called the joint currency a "success story" -- that neither the government, parliament nor the Czech central bank were ready to push to join the eurozone in the foreseeable future. Czech Prime Minister Petr Necas said that adapting the euro now "would be economic and political foolishness."

Despite the chorus of disapproval, Estonia is bucking the trend and will become the 17th member of the eurozone on Jan 1. Finance Minister Jurgen Ligi recently said his country was willing to pitch in financially "to keep the eurozone stable and the European Union healthy."

But ordinary Estonians are dubious and wonder what they may be getting into as daily headlines trace the downfall of once-thriving economies like Ireland.

Just 54 percent of Estonians currently support eurozone entry, according to a November poll by the Faktum & Ariko polling organization.

As for Slovakia, Miklos, the finance minister, says his country still benefits from the euro, pointing to projected economic growth of 4.1 percent in 2010 -- the eurozone's highest.

But he said Slovakia and all other euro nations must apply strict fiscal policies, reduce deficits and carry out necessary reforms to remain credible for the markets.

"It turned out the risk of (the euro's) sustainability is higher than we had expected," he said.

[Associated Press; By KAREL JANICEK and GEORGE JAHN]

Jahn reported from Vienna. Vanessa Gera in Warsaw, Snjezana Vukic in Zagreb, Jari Tanner in Tallinn and Pablo Gorondi in Budapest contributed to this story.

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