The Political Fiction of Economic Control

The delusion of monetary autonomy is holding Hungary, and perhaps Poland and the Czech Republic, back from the benefits of the eurozone.

Wojciech Przybylski, Lajos Bokros
18 July 2017

We have a declaration from the European Commission that the future of European integration is going to centre around the eurozone. Yet, two Central European countries – Poland and Hungary – are not only independent of the monetary union but fiercely oppose entering the eurozone. To begin, what are the arguments for governments to not join the euro?

Let me make one short introductory remark. I’m a great fan of the euro, so you have to know that I’m pro-euro, and I’m teaching my students to appreciate its benefits. Obviously, I’m going to argue for the euro, for the Eastern countries to join the euro or any other country which has joined the European Union recently.

My starting point is the following: for a small and open economy, there isn’t any real monetary autonomy or sovereignty. This used to be and still is the most important counter-argument against joining the eurozone; essentially if they join, then they give up autonomy of their monetary policy.

Two questions arise from this stance: first, is there any monetary autonomy today without being part of the eurozone? And if yes, can we use it efficiently? The typical benefit – which is mentioned very frequently in Poland – is that we can adapt the interest rates to match the conditions in the local business cycle. But is this possible, to put it in another way, can we foster economic growth using monetary policy tools?

My argument would be in small and open economies where you have unrestricted cross-border capital flows, when you have a fully convertible currency, then you can probably influence either the exchange rate or the interest rates but never both.

This is what we call “the unholy trinity” in monetary economics. Once you have a completely open economy, especially a small one, which takes all price signals from abroad, you can choose what exchange rate would suit best your economy, but once you have made that decision there is no longer any autonomy on the interest rate. If you think that you have to set the interest rate because it is important for the management of the business cycle, for example, then the exchange rate cannot be an autonomously defined scenario.

So, my view is that in these countries as a consequence of being open and having unrestricted capital flows and linked with the consequence of relative exchange rates stability, we have no monetary autonomy. The Czech, Polish and Hungarian national banks – all of these national banks have to adjust their interest rates in order to keep the exchange rate stable, which has nothing to do with managing the business cycle. No monetary policy, no interest rate policy can help economic growth under such circumstances.

This is exactly what is happening in Poland. So, I would be very happy to see a better argument but unfortunately the President of the Polish National Bank hasn’t provided any, opted instead for the unsubstantiated banality that it is a good thing to have monetary autonomy; the bad news is that Poland doesn’t.

He compares an imaginary situation to one reality whereas I compare two realities: one reality is today when we don’t have monetary autonomy and as a consequence we don’t adjust the interest rate according to the local circumstances of the business cycle and there is no exchange rate – where we would have the additional advantage of more exchange rate stability – since there is no exchange rate this is perfectly stable.

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On the other hand, it is much cheaper for the whole economy because there is no restriction for managing the money supply by the central bank. And thirdly, and this will be my most important argument, if you have no central bank to speak of, if you don’t have any autonomy then the government cannot spoil the functioning of the central bank. In this respect, Hungary is the best case in negative scenario, because unfortunately here in Hungary the government, deliberately manipulates the exchange rate in order to try to support export competitiveness, which the government itself destroys by all other means.

So, I will advise you to read my answer as this, the most important advantage of the euro is that the EU central bank is a much stronger institution than Hungary’s or Poland’s.

Which I believe is a political argument already in the debate?

It’s not only political because central bank autonomy is still important. Central bank autonomy is important for the credibility and efficiency of monetary policy which is very important for fostering sustainable economic growth. If you have no local central bank to speak of but you have an institution which is protected by European law that can make sure that local economic policy is becoming much more rational and predictable, as a consequence, it would contribute to better growth.

Allow me to play devil’s advocate: the arguments about the European standards of law as well as the independence of the European Central Bank are criticised for not having a fiscal policy or being kind of detached from the European policy, having no democratic legitimacy. It goes far beyond quantitative easing.

That is a valid point, but it is not a good argument against joining the eurozone. It’s valid argument in a sense that by having this extraordinary relaxed monetary policy and purchasing all kinds of government and non-government bonds and debentures discounting even the closet paper is tantamount to interjecting with fiscal policy. I’m a very conservative economist, and as a result of this, I agree with those arguments saying we shouldn’t do that to such a great extent as is done today. Especially not when the European Central Bank would buy the bonds and debentures of insolvent sovereign states because that is tantamount to a bailout which is applicable to Greece and also, to certain extend, Portugal.

But I want to go back to the original argument because the question is if we should join or not. And another good argument, a better argument I would say, on the part of those who are against it – in Hungary, Poland and the Czech Republic – is that the eurozone is very fragile. It doesn’t have fiscal union; it doesn’t have a common banking union or something like that. Consequently, the fiscal and the banking fragility can undermine the monetary unity – these are valid arguments, but we seldom hear those arguments.

The argument we do hear, in this part of world, are always about national sovereignty as if monetary sovereignty would be the most important, it is not. We have to acknowledge that the eurozone is still under construction – it is not finished yet. I acknowledge and I agree with those who say that we need to have some kind of a fiscal harmonisation as well as a boost for the banking sector, especially regarding regulation and supervision. But this still doesn’t necessarily mean creating a full fiscal union.

Several reasons come to mind here: one is that – like it or not – one of the most important acts of national parliaments is setting the budget. And it is unrealistic to expect that those parliaments would give it up in the foreseeable future. So the national sovereignty is embodied in the fact that national parliaments create local fiscal rules: and this is fine because it is about taxes, it’s about border sharing, it is about societal solidarity which is basically exercised at the national level. Perhaps in 200 years, with the aid of hindsight, we will realise that today was too early to implement these changes.

Nonetheless, we can start talking about a eurozone budget. Not the EU budget but a eurozone budget which would perhaps include also certain guarantees against excessive national debt. This can aid in the reduction national sovereignty, and parallel to this we can create something that you can consider as a nucleus of eurozone fiscal policy.

If that happens, the monetary union will be reinforced. If regulation in the banking area can be strengthened – even overruling national supervisory agencies when it comes to bank supervision – which would signal a step by step build up of common trust and confidence, then this would be absolutely acceptable.

Why wouldn’t we participate in such a project? If we don’t join now, in 20 years when we will have to, we will be rule takers not rule makers. So, in my humble view it will be much better to participate still in this incipient stage. It might not be the most optimal, but it is a very large currency area with the stability it can provide, and all the benefits, predictability and confidence it entails.

Now, still playing the devil’s advocate, let consider another angle, one from the general population. On the eve of the financial crisis in Poland, there was a slight majority willing to take the euro and the Prime Minister of Poland was declaring that 2011 or 2012 is a possible date for joining the eurozone; this, of course, was Donald Tusk. Then he made a sudden U-turn and postponed it for indefinite future. Simply respecting, but also fearing, of course, vox populi and general dissatisfaction and angst about the eurozone. Politics is a zone of unpredictability; you never know what is going to happen. How do you convince the Hungarians (maybe also Poles) who are also sceptical of joining the eurozone?

In Hungary, it could be much easier to convince them because the prestige of the National Bank of Hungary is at an all-time low. The leadership of the National Bank of Hungary is not up to the standards not because of the monetary policy but because they created non-transparent funds where they can spend an extravagantly large amount of money on something which is not under the purview of the parliament or any other agency. It is almost like the mafia state on which Soros mentioned.

It’s a very sad story because it’s not about monetary policy really, but it is something which the Central Bank started without having any jurisdiction or authorisation. So here in Hungary it would be quite easy because the prestige of the Central Bank is simply low.

A more professional argument is that in Hungary, especially right after the crisis – almost 10 years ago – having our own currency gave us monetary autonomy. We have more tools to foster economy. But the experience shows that the growth of the Slovak economy for example, or the growth of the Baltic states which have all joined the eurozone have been much more rapid than that of Hungary.


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It is very curious how Hungarians love to compare themselves to Slovaks though this is mainly due to our 900 years of shared history. Related to this, there is the unfortunate tendency for Hungarians to look down on the Slovaks and see Slovakia as peripheral country which is poor. But today, Slovakia has 30% higher per capita GDP than Hungary. Maybe in real terms it would be 20% higher, the remaining 10 percentage points are because the Hungarian currency is so low in its exchange rate because the Hungarian government is deliberately trying to devalue it. This is not open state policy, but it is the only way for them to compensate the lost of international competitiveness, which they have undermined as a consequence of their unpredictable fiscal policy and predatory taxation.

It’s an interesting story because experience has shown very clearly that even if there was something like monetary autonomy it doesn’t mean there will be growth, not at all. Hungary is much poorer today than any other of the Visegrad countries. Hungary is falling behind all the Visegrad countries and the Baltic states and people know this.

What is the point in having an independent central bank or “monetary autonomy” if such a thing exists? There is no any benefit for having our own national currency, there’re only costs and disadvantages. So, it should be easy to convince the Hungarian people, I think most of them would go for it if they heard anything other than Hungarian government propaganda. But we don’t have free press anymore, and that is important to take into consideration; there isn’t a level playing field for advancing arguments and as a consequence I can’t communicate with the public, I can tell it to you but not in the press.

Social media perhaps?

We do that but imagine how many people have access to it.

Especially Fidesz voters in the countryside…

Public television is only government propaganda. It is important to take into consideration that in the first 20 years of transition I was able to go to any television station anytime I wanted and made my views heard. But since 2010, I have never been invited to any media outlets. How can I influence public opinion? How can I change the perception of the Hungarians about the eurozone? I can’t. It’s not a level playing field anymore. But that’s a different story…

It’s only important in the sense that you say “The Hungarian public view is this or that” – it could be different. And my view is that it is important for the politicians to lead public opinion rather than go after it.

Lajos Bokros is a Hungarian economist, who served as Minister of Finance from 1995 to 1996. He was a Member of the European Parliament for Hungary in the 2009–2014 session.