Membership of the euro can shelter small countries from global financial turmoil, while its global role is likely to grow at the expense of the dollar, according to Economics Professor David Cobham, who was speaking to EurActiv Slovakia in an interview.
David Cobham is a professor of economics at Heriot-Watt University in Edinburgh.
Some of the new EU members ‘rushed’ into the euro zone, while others were a bit more cautious. Do you think that they might have a rational reason for this or are they simply lagging behind due to a lack of political will or public support for the necessary reforms?
The countries that had gone into the euro immediately were in some sense already converged in real terms as well as nominal terms – Cyprus and Malta for sure, and to a large extent also Slovenia. So it was an easy thing for them to do. The other countries – the Visegrad four and the Baltic countries – had more to do in terms of structural reforms. I guess they just needed a little bit more time. I don’t think it is a negative thing. If they were not able to get in for the next ten years, that would represent a serious unwillingness. But the current indications are not showing that.
Let’s look at Slovakia. A few years ago it was behind in economic terms compared to other countries in the region, and now it will probably be the first to enter the euro zone. Still, some people are saying that this is a bit superficial, real convergence is problematic and all this could cause problems in the future. What role should we assign to real convergence?
For real convergence, there are no criteria. The Maastricht criteria are about nominal convergence, and I think that is correct. Sure, some economists argue that you need to have some level of real convergence to enter monetary union, but I think that this is not quite true. In some respects, countries that are weaker in terms of real convergence tend to get more from entering monetary union.
Think about Portugal, which had all sorts of structural problems and an average income level much below, say, Germany. Portugal made large gains, rather than experiencing difficulties. Slovakia and the other Visegrad countries are in similar position.
Slovakia is most likely to be the first country in the region to enter the euro zone. Do you think this could harm trade relations with Hungary, Poland or the Czech Republic?
I don’t think so. All of these countries are trading heavily with the euro zone.
Some of the ‘old’ EU members have still not entered the euro zone. Leaving aside the UK, this also includes smaller economies like Denmark and Sweden. Do you think there is some rationale behind their decisions or are they purely political ones?
In all three countries, including the UK, it is a highly political decision. What differentiates the UK in this regard is that it has had an overvalued currency for the last ten years, even with the recent depreciation. Denmark and Sweden do not have the same experience; they can enter without any worries. Maybe their decision is just political. But also in the UK, it is a political case. Even with Tony Blair as leader, who was supposedly pro-European, it did not stand up to the public opinion, which is strongly anti-European, and the tabloid press.
Is there any role played by the financial services sector in this decision in the UK?
The financial services sector in the UK is heavily ‘euro-ised’. An enormous amount of the activity that goes on in the City of London is in euro. The financial sector is already in kind of a euro zone. That is not an obstacle and the City of London is not particularly anti-euro.
Do you think that euro zone membership can offer shelter from global financial crises or turmoil?
Definitely – it does. For a country like Slovakia, a small country, without a long history in global markets or developed credibility, there is no question about that. Euro-zone membership provides a shelter. Of course, you have to pay for it with some loss of flexibility, but flexibility for a country like Slovakia is in no case anywhere near to being serious.
The euro plays an important role in global markets. Would you say that it has been a success in this regard?
There were all sorts of synergetic effects. The bond market in euros took off early on and greatly surpassed the sum of the bond markets elsewhere. In general, the euro is now clearly more than just the sum of the parts that had created it. And it is likely to become stronger, particularly because the dollar is expecting some difficulties that seem more long-term.
Debate over whether the euro or the dollar is the ‘major world currency’ is obviously highly politicised. What are the economic benefits of being ‘the major world currency’?
The economic benefits are probably more limited than one might think. The euro zone and the ECB do not do anything to promote the euro as the major world currency. And I think that is correct. On the other hand, some Americans think it is important for them to have the dollar as the major world currency. But I don’t think that the benefits are not as big as people think they are. The key thing is that if the euro zone is a large currency block, it is an area where currency relations are stabilised, which promotes trade, investment and growth.