A confidential report by the International Monetary Fund (IMF), cited by the "Financial Times," says that struggling EU member states should switch to the euro currency, even if they are not full members of the eurozone.
According to the London daily, the IMF report says crisis-hit EU states in Central and Eastern Europe -- which presumably would include the Baltic states, Romania, Poland, Hungary, and others-- should consider abandoning their own national currencies for the euro.
The IMF paper says the eurozone could relax its entry rules so that countries could join as "quasi-members" -- without controlling board seats on the European Central Bank.
The "Financial Times" says it obtained the confidential report by the IMF after the fund and other international financial institutions failed to win support for a region-wide anticrisis strategy for the European Union and Eastern Europe.
"The context of it is the discussion, which was quite lively a couple of weeks ago, about possibly easing the rules for entering the eurozone for East European countries in the light of the crisis," says Stefan Wagstyl, Eastern Europe editor of the "Financial Times" and author of the newspaper's articles on the confidential IMF report.
"At the time, the public debate was very much on the lines of some international organizations -- the IMF was one and the European Bank for Reconstruction and Development was another -- rather gently suggesting that this should happen. And the eurozone countries, in particular Germany, were very cautious on the grounds that the rules should not be relaxed," Wagstyl adds.
"The significance of the report is that it shows that the private discussions were clearly much fiercer and more intense than was made public."
Wagstyl also tells RFE/RL that the report reveals insights about specific IMF policy recommendations on Eastern Europe before last week's Group of 20 (G20) summit in London.
"It's interesting to see how committed at that stage the IMF was to advocating the introduction of the euro -- in particular, the fact that it is encouraging countries to at least consider introducing the euro, as it were, of their own accord and even without joining formally the European Central Bank," Wagstyl says.
IMF Takes On Key Role
The IMF would not immediately comment on media reports about the confidential policy recommendations. But during last week's G20 summit, IMF Managing Director Dominique Strauss-Kahn admitted that G20 countries sometimes reject policy advice from the IMF.
"As a policymaker -- not only as a forecaster -- but as a policymaker, the IMF is now recognized," Strauss-Kahn said. "And I'm not saying that the different governments of the G20 are going to do all the time what we think is the right thing to do. But at least we are the partner to discuss with and to analyze what kind of policy should be implemented."
Indeed, G20 countries did agree at the London summit to boost IMF reserves to $750 billion in order to help emerging economies deal with the global financial crisis.
Britain's business minister, Peter Mandelson, says that the boosting of IMF resources will help economies in Eastern and Central Europe, "which are more vulnerable in the current international economic crisis, whose economies are more distressed than others. So, one of the points of putting resources behind the IMF and other international financial institutions is to deliver real help to boost growth, to enable those economies take much needed steps out of the recession and to accelerate our return to global growth."
Wagstyl says the economic issues that the IMF highlights and the arguments that it uses in the paper have not gone away. He says he would not be surprised if debate on the euro currency issue is revived in the months ahead -- probably before the end of 2009.
"Essentially, the IMF argues that these countries -- having depended on foreign investment and on credit-driven growth for a number of years, and [having] achieved high levels of growth on that basis -- now need to adjust to a different world. And part of that adjustment involves economic deceleration, which is going on now," Wagstyl says.
"It will involve budget restructuring," he continues. "But it also, says the IMF, would be much easier to do if countries adopted the euro in some way because the currency risk would then be eliminated. And the fund says that some of the other painful cuts might be smaller than they otherwise would be if the countries maintain their own currencies."
East Meets West
If action is not taken, taxpayers in Western Europe ultimately could end up paying the costs of bolstering weak banks in Eastern and Central Europe. That's because a fair portion of the banking sectors of Central and Eastern European countries is owned by Western European multinational banks that have invested there in recent years.
In fact, the IMF data published by the "Financial Times" shows that Austrian institutions are particularly exposed to the weaknesses of the banking sectors in Central and Eastern Europe.
If there is a need, as the IMF and other international institutions say there is, to recapitalize the subsidiary banks in Eastern and Central Europe, Wagstyl says the responsibility would fall on the parent banks in Western Europe.
"Given that some of these banks are in one way or another then receiving government support in Western Europe, one can see how responsibility then transfers to the governments of West European countries as well -- and therefore, to taxpayers. Although I don't think the word 'taxpayer' is mentioned in the IMF report," Wagstyl notes.
"Now, that doesn't have to happen," he adds. "It is conceivable that these subsidiaries raise capital from other sources -- outside investors are brought in. It is also conceivable that the host governments -- in other words, the East European governments -- contribute in some way to the recapitalization. After all, these are their banks. These are the possibilities."
Financial-sector analysts agree that the nexus between Eastern Europe and the eurozone remains a key unsolved problem in the financial system. They say they will closely monitor next month's meeting of the European Central Bank to see if any nonconventional policies are adopted on the issue.
According to the London daily, the IMF report says crisis-hit EU states in Central and Eastern Europe -- which presumably would include the Baltic states, Romania, Poland, Hungary, and others-- should consider abandoning their own national currencies for the euro.
The IMF paper says the eurozone could relax its entry rules so that countries could join as "quasi-members" -- without controlling board seats on the European Central Bank.
The "Financial Times" says it obtained the confidential report by the IMF after the fund and other international financial institutions failed to win support for a region-wide anticrisis strategy for the European Union and Eastern Europe.
"The context of it is the discussion, which was quite lively a couple of weeks ago, about possibly easing the rules for entering the eurozone for East European countries in the light of the crisis," says Stefan Wagstyl, Eastern Europe editor of the "Financial Times" and author of the newspaper's articles on the confidential IMF report.
"At the time, the public debate was very much on the lines of some international organizations -- the IMF was one and the European Bank for Reconstruction and Development was another -- rather gently suggesting that this should happen. And the eurozone countries, in particular Germany, were very cautious on the grounds that the rules should not be relaxed," Wagstyl adds.
"The significance of the report is that it shows that the private discussions were clearly much fiercer and more intense than was made public."
Wagstyl also tells RFE/RL that the report reveals insights about specific IMF policy recommendations on Eastern Europe before last week's Group of 20 (G20) summit in London.
"It's interesting to see how committed at that stage the IMF was to advocating the introduction of the euro -- in particular, the fact that it is encouraging countries to at least consider introducing the euro, as it were, of their own accord and even without joining formally the European Central Bank," Wagstyl says.
IMF Takes On Key Role
The IMF would not immediately comment on media reports about the confidential policy recommendations. But during last week's G20 summit, IMF Managing Director Dominique Strauss-Kahn admitted that G20 countries sometimes reject policy advice from the IMF.
"As a policymaker -- not only as a forecaster -- but as a policymaker, the IMF is now recognized," Strauss-Kahn said. "And I'm not saying that the different governments of the G20 are going to do all the time what we think is the right thing to do. But at least we are the partner to discuss with and to analyze what kind of policy should be implemented."
Indeed, G20 countries did agree at the London summit to boost IMF reserves to $750 billion in order to help emerging economies deal with the global financial crisis.
Britain's business minister, Peter Mandelson, says that the boosting of IMF resources will help economies in Eastern and Central Europe, "which are more vulnerable in the current international economic crisis, whose economies are more distressed than others. So, one of the points of putting resources behind the IMF and other international financial institutions is to deliver real help to boost growth, to enable those economies take much needed steps out of the recession and to accelerate our return to global growth."
Wagstyl says the economic issues that the IMF highlights and the arguments that it uses in the paper have not gone away. He says he would not be surprised if debate on the euro currency issue is revived in the months ahead -- probably before the end of 2009.
"Essentially, the IMF argues that these countries -- having depended on foreign investment and on credit-driven growth for a number of years, and [having] achieved high levels of growth on that basis -- now need to adjust to a different world. And part of that adjustment involves economic deceleration, which is going on now," Wagstyl says.
"It will involve budget restructuring," he continues. "But it also, says the IMF, would be much easier to do if countries adopted the euro in some way because the currency risk would then be eliminated. And the fund says that some of the other painful cuts might be smaller than they otherwise would be if the countries maintain their own currencies."
East Meets West
If action is not taken, taxpayers in Western Europe ultimately could end up paying the costs of bolstering weak banks in Eastern and Central Europe. That's because a fair portion of the banking sectors of Central and Eastern European countries is owned by Western European multinational banks that have invested there in recent years.
In fact, the IMF data published by the "Financial Times" shows that Austrian institutions are particularly exposed to the weaknesses of the banking sectors in Central and Eastern Europe.
If there is a need, as the IMF and other international institutions say there is, to recapitalize the subsidiary banks in Eastern and Central Europe, Wagstyl says the responsibility would fall on the parent banks in Western Europe.
"Given that some of these banks are in one way or another then receiving government support in Western Europe, one can see how responsibility then transfers to the governments of West European countries as well -- and therefore, to taxpayers. Although I don't think the word 'taxpayer' is mentioned in the IMF report," Wagstyl notes.
"Now, that doesn't have to happen," he adds. "It is conceivable that these subsidiaries raise capital from other sources -- outside investors are brought in. It is also conceivable that the host governments -- in other words, the East European governments -- contribute in some way to the recapitalization. After all, these are their banks. These are the possibilities."
Financial-sector analysts agree that the nexus between Eastern Europe and the eurozone remains a key unsolved problem in the financial system. They say they will closely monitor next month's meeting of the European Central Bank to see if any nonconventional policies are adopted on the issue.
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