Hard Sell: ČR skeptical on euro bailout fund

A Feb. 14 meeting of the European Union's finance ministers in Brussels about the union's fiscal policy highlighted the divide between smaller southern economies and more dominant northern members - but Czech representation just drew a euroskeptic line even deeper in the sand, a move economists say is not in the country's long-term best interests.

Leading economies appeared to be pitted against smaller members as Germany, a dominant economy that has borne much of the recent bailouts in the eurozone, demanded tighter fiscal policies among members in exchange for expanding the capacity of the current bailout fund.

But the Czech Republic was skeptical about both sides at the meeting, which was meant to facilitate plans for fiscal policy to be finalized in March. Finance Minister Miroslav Kalousek rejected expanding the lending capacity of the European Stability Mechanism (ESM), and Prime Minister Petr Nečas criticized the Competitiveness Pact introduced by France and Germany that would require harmonized tax and labor policies across the EU.

"I cannot by any means recommend that the Czech government take part in the mechanism," Kalousek said.

Nečas rejected the harmonization of tax rates suggested by the crackdown on budgetary oversight advanced by France and Germany, saying it would make the economy "less competitive," though he agreed with other measures in the plan like pension reform and controlled wage growth.

"The fundamental question is whether these steps should be somehow introduced at the European level or whether individual member countries should introduce them each in its own interest. We prefer the latter approach," Nečas said.

Economists dismissed the importance of the Czech Republic's view on the bailout fund because only eurozone countries would be obliged to contribute; however, they suggested the Czech Republic and other small economies were unwise to reject the tighter fiscal policies suggested by Germany, which could help create a more stable eurozone for those bound to join.

"There are fears that the enhanced cooperation in the competitiveness pact would increase the gap between those who have and those who haven't introduced the euro, and that it will make the hurdles to joining the eurozone higher," said Janis Emmanouilidis, a senior policy analyst at the European Policy Centre in Brussels. "That is simply not the case."

Those countries not yet in the eurozone fear they will have to deal with stricter standards that those in the 17-state economy have flouted, economists said.

"This reform is more about strengthening regulatory enforcement on existing member states," said Tomáš Búry, an EU financial affairs expert at the Prague-based Association for International Affairs (AMO). Instead of working double time to meet eurozone entrance standards only to end up in a gang of free wheelers gambling with the euro, new members could expect to be met halfway. "There is no point for the Czech Republic to enter the eurozone unless this reform is made. ... The strengthening of budgetary regulations is in the key interest of the Czech Republic.

"In five years, when there is a thought-out reform and strengthened surveillance of states, there should be a political debate about entering the eurozone."

Despite the common end goal of a stable eurozone, tighter fiscal reforms will probably slip through the cracked coalition.

"It's likely many of these measures will not go through," said Zsolt Darvas, a research fellow at the Brussels-based think tank Bruegel, as they are highly politicized. "Just look at France. It took 10 years of discussion just to raise the retirement age by a single year."

Partly to blame is the discomfort of smaller economies with Germany's dominance.

"I remember when Germans were hesitant in 2010 to show solidarity and do something to help calm down the markets," Emmanouilidis said. "I know that others have a problem with the German leadership role ... but they're coming up with these proposals because they're the strongest boy in the group, and from their perspective, it's the high route."

What did make some ground was an agreement among eurozone finance ministers to double the EU's lending capacity with the creation of the 500 billion euro ($680 billion/12.2 trillion Kč) ESM starting in 2013, though specifics remained unclear. ESM skeptics led by Germany suggested instead that the existing European Stability Finance Mechanism expand to its full capacity of 440 billion euros, only 250 billion of which can currently be lent without lowering the fund's bond rating.

Kalousek said if the Czech Republic was in the eurozone, it would pay 170 billion to 180 billion Kč into the fund over three years.

"Roughly a third of the eurozone countries would probably risk a situation where they would have to apply for financial help" after meeting their fund contributions, he said.

Some members of Parliament in the Committee on Economic Affairs have also complained that wording for the bailout plan discussed at the Brussels meeting stipulated bailouts are for times of a "systemic risk to the eurozone," which some smaller countries fear eliminates them.

"Greece's economy is a small part of the Euro 17 economy, but at the same time, when Greece was stumbling and about to fall, this was an issue that could have become a systemic threat. The argument that because you are small, you won't get help doesn't fly," Emmanouilidis said.

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com