AJRC2021E27 by Antall József Tudásközpont

A J R C A N A LY S E S

ANTALL JÓZSEF RESEARCH CENTRE AJRC2021E27

Konrad Poplawski

FUTURE OF THE EMU HOW TO MAKE THE EUROZONE ENLARGEMENT MORE ATTRACTIVE— A QUESTION OF ERM II CRITERIA?

d i g i t a l i s t u d a s t a r. a j t k . h u

ANTALL JÓZSEF RESEARCH CENTRE

AJRC-Analyses Series of the Antall József Knowledge Centre

Publisher-in-Chief: Péter Antall Managing editor: Zsolt Csepregi Editorial office: Antall József Knowledge Centre H-1027 Budapest, Királyfürdő street 4

This is a joint publication of the Wilfried Martens Centre for European Studies and the Antall József Knowledge Centre. The Wilfried Martens Centre for European Studies, the Antall József Knowledge Centre, and the European Parliament assume no responsibility for facts or opinions expressed in this publication or any subsequent use of the information contained therein. Sole responsibility lies on the author of the publication.

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FUTURE OF THE EMU HOW TO MAKE THE EUROZONE ENLARGEMENT MORE ATTRACTIVE— A QUESTION OF ERM II CRITERIA? KONRAD POPLAWSKI

INTRODUCTION Following the 2004 enlargement of the European Union, accession to the Eurozone seemed to be a natural political choice for all the new Member States. The widespread conviction was that participation in the single currency is a natural next step that would stabilise the economy and create solid foundations for stimulating trade and investments. The economic literature supported it. A vast majority of economists and textbooks authors saw much more benefits than costs of having the euro. The opinions, such as those of Milton Friedman, who claimed that the adoption of the euro would lead to growing economic and political tensions inside between the monetary union states, were rare.1 Thus intensity and longevity of the Eurozone crisis constituted a shock not only for the Eurozone members but also states aspiring to be part of it. After quite successful navigation during the global financial crisis in 2010, a lasting five years wave of speculation attacks emerged, threatening the single currency's existence. The crisis revealed some critical defects of the Eurozone, showing that the project hasn’t been finished. It was also closely observed by the EU Member States outside the euro, who since then started to be much more sceptical towards the credibility of the Eurozone. Since then, some necessary steps have been taken to fix the euro and the economies of its Member States stabilised in the next few years. The pandemic outbreak seems to be a stress test, which could examine if the reforms that were taken in the last decade succeeded in bringing back more confidence in the euro also by those who are not yet members, but are obliged to become once. It could help assess, what problems of the Eurozone have been solved and what are still valid. Finally, comparing the Eurozone resilience towards these two crises could answer the question of usefulness of Maastricht criteria the fulfilment of which is a requirement to enter the Eurozone. Thus the objective of the chapter is to analyse the Eurozone in the last decade from the perspective of the potential candidate countries. In that way it could be shown what the main drivers of anxiety of the next states to join the euro are. Then it will be examined upon the pandemic crisis, what problems of the Eurozone have been solved through the process of reforms. It will be also considered to what extent the convergence criteria are still a valuable tool to prepare economies to enter the Eurozone, taking into account the challenges exposed by recent crises.

Milton Friedman: The Euro: Monetary Unity to Political Disunity? Project Syndicate. 28 August 1997. <https://www. project-syndicate.org/commentary/the-euro--monetary-unity-to-political-disunity > Accessed: 13 October 2021.

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THE SHOCK OF THE EUROZONE CRISIS The disclosure of long-hidden information about the poor budgetary situation of Greece triggered a course of events constituting a perfect storm shaking the foundations of the Eurozone and revealing its serious defects. Soon it turned out that other Member States such as Ireland and Portugal were on the brink of bankruptcy and the speculation emerged that also Italy and Spain could follow a similar path. The situation became dramatic as the Eurozone did not offer any assistance mechanisms for Member States coping with insolvency threat as it was based on the principle of ban of bailing out. Moreover the political disunity between countries with better financial standings and those in worse budgetary situations fueled the wave of speculation attacks that increased borrowing costs of governments of some Member States. Figure 1: Public debt levels in selected Eurozone member states in 2008 and 2015 (in % of GDP)

Source: Eurostat One of the first considerations and subject of intensive political debate concerning the roots of the Eurozone crisis was non-compliance with Maastricht criteria, especially budget deficit and public debt obligations. The Maastricht criteria turned out to be a poor instrument to discipline governments to keep low levels of deficit and public debt.2 Some countries indeed conducted relatively lax budgetary policy, but the EU institutions tolerated it. However, the argument that non-compliance with Maastricht criteria led to the Eurozone crisis proves

Agnès Bénassy-Quéré: Maastricht flaws and remedies. VoxEU. 7 September 2015 <https://voxeu.org/article/ maastricht-flaws-and-remedies > Accessed: 13 October 2021. 2

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to be wrong in case of some countries. As it is visible in Figure 1, in 2008 public debt level was indeed high in some of the Eurozone the most crisis-affected countries such as Greece (109.4% of GDP), Italy (106.2%), Portugal (75.6%). Though, in Member States coping later on with speculation attacks such as Ireland and Spain the public debt levels in 2008 (respectively 42.4% and 39.7%) were lower than the Maastricht obligations and lower than the debt levels of the Eurozone strongest economies such as Germany (65.7%) and France (68.8%). Figure 2: Public and private debt levels in selected Eurozone member states 2000-2010 (in % of GDP)

Source: Eurostat The criteria of public debt had been ignored since the foundation of the Eurozone. An inefficient and too political procedure to execute the rules constituted the original sin of the Maastricht treaty. Many Member States exceeded the threshold of 60% of GDP (Figure 2), when the euro was created in 1999. However, in most cases the level of public debt was not rising over time and remained stable until 2008. Few countries were experiencing an upward trend in public debt in the time frame of 2000-2008. In relation to GDP in Portugal, it rose from 54% to 75%, in Germany from 59% to 66% and in France from 59% to 69%. On the other end in Spain the public debt level decreased from 58% to 40%. The situation in the whole Eurozone looked not good, but it did not appear alarming. Much worse tendencies had been experienced when it comes to private debt level. Its fast expansion was observed

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in virtually all of the analysed Eurozone members and in the economically weaker states the dynamics were especially alarming as in some cases it doubled. From 2000 to 2008 the level of private debt rose in Spain from 103% to 197%, in Greece from 54% to 113%, in Portugal from 139% to 196%, in Italy from 72% to 110%. In Ireland in 2001-2008 the private debt increased from 139% to 237%. The overall situation with debt levels before the Eurozone crisis wasn't optimistic, though the basic question was if the loans had been taken from domestic lenders or from abroad. Figure 3: Current account balance in selected Eurozone member states in 2000-2015 (in % of GDP)3

Source: Eurostat The debate around the roots of the Eurozone crisis swiftly evolved, taking into account other factors. Economists quickly noticed the problem of growing macroeconomic imbalances well illustrated by opposite tendencies in current account balances between northern and southern Eurozone members.4 As illustrated in Figure 3 especially in the period, 2000-2008 worsening of this account balance was experienced by Greece (by 8,3 p. p. of GDP from 2003), France (by 1,8 p.p.), Ireland (by 6,8 p. p.), Italy (by 2,5 p.p.), Spain (by 4,6 p.p.), Portugal (by one p.p.). Conversely, for example, Germany recorded a rising current account surplus (by 7,5 p.p.). It meant that the economically weaker states were increasing their indebtedness

Lack of data for some years for Greece and the Netherlands in the Eurostat database.

Costas Lapavitsas et al: Eurozone crisis: beggar thyself and thy neighbor. Journal of Balkan and Near Eastern Studies. Vol. 12. No 4. 2010. 4

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towards the states of the Eurozone with higher savings. The macroeconomic imbalances have drawn attention to the problem of the widening competitiveness gap between Eurozone Member A States. The capital was flowing to some Eurozone Member States reflecting in a widening current account deficits and was mostly invested in sectors of nontradable goods and services (such as real estate and public services). This generated high increase of public and private debt and put pressure on the wages increase but without stimulation of exports growth.5 That in turn often led to an aggravation of international competitiveness of many of the economies hit harder by the crisis.6 The Eurozone crisis could be described as classical asymmetric shock affecting in different manner the Member States. Even if the causes of it couldn't be identified before the crisis as many of the risks hadn't been taken into account by the Maastricht criteria. Another problem was that there were no adequate instruments to cope with the crisis outbreak, such as stabilisation funds. Moreover the political disunity made it more difficult to break the political deadlock and ending the speculation attacks. Eventually, the European Central Bank decided to take some responsibility for stabilising the economies of the most disadvantaged Member States. It launched programs such as the Outright Monetary Transactions and the head of the Frankfurt-based central bank promised to do “whatever it takes” to protect the Eurozone from break-up. From the perspective of countries that hadn't entered the Eurozone before its crisis and had no exchange rate pegged to the euro, the whole situation created a lot of distrust and anxiety. It turned out that the European Monetary Union is something else than it was assumed by the theory and entering the Eurozone would generate, apart from benefits, also serious risks.

Richard Baldwin—Francesco Giavazzi: The Eurozone Crisis. A Consensus View of the Causes and a Few Possible Solutions. (CEPR Press, London, 2015). 28-29. 5

6 Gábor Kutasi: External Imbalances in the EU: A REER-based Explanation. Intereconomics. Vol. 50. No 5. 2015. <https://www.intereconomics.eu/contents/year/2015/number/5/article/external-imbalances-in-the-eu-a-reerbased-explanation.html > Accessed: 13 October 2021.

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Figure 4: Long-term government bonds yields (in % of GDP)

Source: OECD Before the global financial crisis, all the long-term bonds yielded by Eurozone Member States were almost equal and significantly lower than of those EU countries outside the euro. When the global financial crisis out broke in 2008, the market price for the 10-year bonds of Hungary was by 2 p.p. of GDP and in Poland by 1 p. p. of GDP higher than in Eurozone Member States and the spreads even increased in 2009 (Figure 4). Since 2010 the situation changed as the yield of long-term bonds of Eurozone Member States started to differentiate. Especially Greece and Portugal experienced dynamic increase of the yields that were much higher even than in Hungary, which also experienced some liquidity problems during the crisis. In case of the Greek bonds, the long-term interest rate stayed significantly higher even than in non-Eurozone Member States until 2017, when it started to decrease steadily. It reached a level comparable to Hungary, Italy or Poland in 2018, though 2-3% higher than Germany. The yield curve of Portugal resembles that of Greece with the exception that the Portuguese long-term interest rate rebounded quicker reaching the level of Hungary and Poland in 2016 and in the next years set at significantly lower level than in Hungary, Poland and even Czechia. Another interesting example is Slovakia, the country with similar growth models to other V4 countries. The Slovak long-term interest rate after

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the accession to the euro in 2009 remained at a similar level to Czechia until 2016 with exception for the peak of the Eurozone crisis 2011-2012 when the Czechs benefited from lower yields than the Slovaks. The situation reversed in 2017-2019, when the Slovak longterm interest rate was lower. Compared to Poland, Slovakia in general sold its bonds with by 1-2% lower yield. Concluding the data, it's quite visible that in the last decade the Eurozone membership hasn't been a factor granting lower interest rates as the situation between the Member States varied. However, since the ECB took a more active part in supporting the bonds of the Member States with programs such as the OMT, their yields lowered significantly. The question could be raised, if a political consensus around such active ECB policy is already set and if the ECB will have the will to withdraw from such moves, when the real threat of inflation emerges. Figure 5: Public debt level and GDP per capital In V4 countries

Source: Eurostat Interestingly the saved financial resources in Slovakia despite relative benefits of lower longterm interest `rates (in comparison to other V4 countries, especially Poland and Hungary) didn't led to more favourable tendencies in public debt development. As illustrated in Figure 5, after an increase of public debt level in 2009-2013, admittedly it started to decrease in the next years, though very similar tendencies have been observed in the case of other V4

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countries. In 2019, the year before the pandemic outbreak, the public debt level in Slovakia equalled 48.2% of GDP, which was higher than in Czechia (30.3%) and Poland (45.6%), but lower than in Hungary (65.5%). No substantial economic progress has been observed in Slovak GDP per capita level. The convergence of this indicator in Slovakia towards the level of Czech Republic proceeded in 2012-2014. At that period, GDP per capita grew faster than in Hungary and Poland. However, in the next years the Slovak progress was diluted. GDP per capita of Czechia, Hungary and Poland grew faster. Summarising these developments, it turns out that whereas the GDP per capita of Slovaks amounted in 2009 83% of that of the Czechs, 126% of the Polish and 144% of the Hungarians, in 2019 it comprised respectively 81%, 115% and 124%.

PROGRESS ON EUROZONE REFORMS BEFORE PANDEMIC Since the outbreak of the Eurozone crisis there were new instruments established to strengthen the single currency. The most important has been the European Stability Mechanism offering loans to Member States coping with sovereign debt crisis and other liquidity problems. Its lending capacity of EUR 500 billion was not high enough to regain the trust of the financial markets at the peak of the Eurozone crisis as it was barely sufficient to repay the current debt of Greece. Nevertheless, the establishment of the ESM was an important step showing that the Eurozone is ready to grant some assistance to the Member States coping with liquidity problems. Another important instrument of supporting the economic momentum in the Eurozone was unorthodox lax monetary policy of the European Central Bank which financial support capacity is practically unlimited. At the peak of the crisis, the ECB offered programs like the Outright Monetary Transactions granting some relief for the Eurozone countries coping with liquidity problems. Figure 6: Proportion of GDP per capita of countries in relation to GDP per capita of Germany (%) Source: Eurostat

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The ECB activities helped to stabilise the long-term interest rate of the economically weaker states and to regain the credibility of the euro, though it couldn't bring back the process of economic convergence that slowed down in recent years. Comparing the Eurozone Member States GDP per capita development, opposite tendencies were observed. Treating Germany as a role model for other countries’ GDP per capita changes, the process of divergence was clearly visible. Most states listed on the graph experienced loss in welfare compared to Germany. According to Figure 6, the average GDP per capita in the Eurozone decreased from 91% of German GDP in 2009 to 82% in 2019. In the case of the states most affected by the economic crisis, the pace of this process was especially dramatic. The decrease of Greece GDP per capita was almost two-fold, from 70% to 38%, Spain from 75% to 59% and Italy from 87% to 69%. It shows that the basic assumption of the monetary union that financial integration would lead to macroeconomic stability and convergence proved to be wrong.7 On the other hand, Slovakia managed to reduce the distance with Germany by 2 p.p., though other V4 countries did it even faster (Czechia and Hungary by 3 p.p., Poland by 7 p.p.). Figure 7: Unemployment level in selected EU states (%)

Source: Eurostat

Agnès Bénassy-Quéré

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The weakening of the convergence process had also its social dimension. Conversely to what had been predicted before the creation of the Eurozone, it turned out during its crisis that implementation of internal devaluation mechanism (substituting in the monetary union the exchange rate instrument) is not so easy and could lead to prolonged period of hysteresis.8 This phenomenon is quite well visible comparing the unemployment data from Figure 7. Out of the economically weaker states, Portugal is an exemplification of a successful restructuring of the economy from the crisis. After a sharp increase of unemployment in 2009-2013 from 11% to 16.4%, in the next years it decreased constantly to reach 6.5%. Unemployment in Portugal was quite low compared to the crisis time, but still significantly higher than in Eurozone states as Germany (3.1%) or the Netherlands (3.4%) and countries outside the monetary union such as Czechia (2%), Poland (3.3%) and Hungary (3.4%). The unemployment data of Slovakia resemble these of Portugal. Its level fluctuated in 20102014 between 13-14% and in the next years started to drop until 5.8% in 2019. Through the whole period of the Eurozone membership, the Slovak unemployment rate was at least 2-4 p.p. higher than in any other of V4 countries. Greece and Spain were less successful in reforming their economy and unemployment levels soared in 2009-2013 respectively from 9.6% to 27.5% and from 17.9% to 26.5%. The situation improved in the next years and in 2019 the unemployment rate decreased in Greece to 17.3% and in Spain to 14.1%, still not enough to ensure social stability. The observed process of divergence seems problematic from the perspective of the Eurozone stability as it makes it difficult for the European Central Bank to conduct the monetary policy suitable for all the Member States. This was visible already in the last years when the ECB tried to target with its policy the most indebted Eurozone states by introducing ultra-lax monetary policy. Many economists saw in such a policy a threat for stronger economies due to risk of generating speculation bubbles and weakening the middle class by lowering interest rate on deposits.9 However, the problem couldn't be resolved by existing instruments, as the Eurozone does not have at its disposal redistribution mechanisms apart from the tools in the framework of the EU such as the Multiannual Financial Framework. The only positive development in this respect was a condemnation of the austerity policy that was the guiding principle of the Eurozone crisis management mostly supported by the Member States from so-called northern Europe. The intellectual inspiration for this approach was German ordoliberalism and its stress on debt reduction.10 That approach did not perform too well, taking into account that many economically weaker states coped with prolonged period of stagnation, as a collapse of private investments was accompanied

8 European Central Bank: Scars or scratches? Hysteresis in the euro area. ECB. 19 May 2017. <https://www.ecb. europa.eu/press/key/date/2017/html/ecb.sp170519.en.html > Accessed: 13 October 2021.

Jochen Möbert—Marc Schattenberg: Ausblick auf den deutschen Immobilienmarkt 2020. Deutsche Bank Research. 22 April 2020. <https://www.dbresearch.de/PROD/RPS_DE-PROD/PROD0000000000507294/ Ausblick_auf_den_deutschen_Immobilienmarkt_2020.pdf > Accessed: 13 October 2021. 9

Sebastian Dullien—Ulrike Guérot: The Long Shadow of Ordoliberalism. ECFR. 27 July 2012. <https://ecfr.eu/ article/commentary_the_long_shadow_of_ordoliberalism > Accessed: 12 October 2021. 10

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by a drop in public spending.11 An incomplete solution to the defects of the Eurozone was the establishment of the banking union. The idea of its creation aimed at breaking the toxic relationship between banks and governments, as it was perceived as one of the main causes of the Eurozone crisis. Governments, as main debtors to banks, eagerly buying public bonds did not have interests in the dissolution of financial institutions even if their financial condition was weak. Thus, the first pillar of banking union, the ECB assuming control over the largest banking groups has been introduced in 2014. In the framework of the second pillar, a European institution was established in 2015 preparing resolution plans for the banks coping with insolvency. However, the third pillar, foreseeing mutualisation of money collected in the national bank reserve funds hasn't been so far agreed. Some Eurozone Member States were afraid that their reserves would be spent to support the banking groups of more lenient Member States.12 Figure 8: Unemployment level in selected Eurozone member states (% of GDP)

Source: Eurostat Philipp Engler—Mathias Klein: Austerity measures amplified crisis in Spain, Portugal, and Italy. DIW Economic Bulletin. Vol. 7. No 8. <https://www.econstor.eu/bitstream/10419/155378/1/880913754.pdf > Accessed: 11 October 2021.

Luis Garicano: Two proposals to resurrect the Banking Union: The Safe Portfolio Approach and SRB+. CEPR. November 2020. <https://cepr.org/sites/default/files/policy_insights/PolicyInsight108.pdf > Accessed: 13 October 2021.

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There was also a general problem of bringing back the deficit and debts level on the path to fulfil the Maastricht criteria. The Member States with better financial standings were able, thanks to ultra-low yields on their bonds, to decrease their deficits under 3% level and start the process of public debt reduction quite early (Germany already in 2011 and the Netherlands in 2013), but the Member States with weaker financial standings, coping with more acute economic and social problems, managed to decrease budget deficits only from 2016 as shown on Figure 8. As a result, their public debts levels were extremely high compared to 60% level required by the Maastricht criteria. In 2019, before the pandemic, it reached 180% of GDP in Greece, 134% in Italy, 98% in France and 95% in Spain, whereas Germany was able to reduce it to the level of 59.7%. The difficulties of the Eurozone Member States to comply with Maastricht criteria reduced the credibility of the convergence criteria as the obligations of budget deficit and public debt are the same. The Eurozone tried to build a new framework of more tightening criteria of economic policy, but it brought just modest results. The attempts to reform public finance requirements, such as introduction of medium-term objective of structural deficit reduction as required by the Fiscal Compact agreement, has brought not much effect. Also, the program of the European Semester listing structural reforms recommendations for every EU Member State based upon the European Commission recommendations cannot be fully considered fa success. Finally, the Macroeconomic Imbalances Procedure what should have pushed EU Member States to decrease excessive current account surpluses or deficits didn't bring to many improvements.13 One of the basic divisions between the Eurozone Member States remained a strain over the financial assistance to countries facing an economic downturn. Eurozone countries finally agreed to establish a makeshift monetary union budget (the Budgetary Instrument for Convergence and Competitiveness) in 2019, though it was much below the real needs of the economically weaker Member States. In fact, its capacity was only EUR 17 billion for 7 years, about seventy one times less than the capacity of the Multiannual Financial Framework for the period 2021-2027.14

THE PANDEMIC—STRESS TEST FOR THE REFORMED EUROZONE After the Eurozone crisis the last 5 years brought some stability. The speculation attacks stopped and the states hit harder by the crisis started to strengthen their macroeconomic foundations. The central and eastern EU Member States initiated again discussions about their accession to the euro. The Eurozone did not manage to introduce deep reforms yet, though some fiscal and monetary instruments helping with crisis management were established. Therefore it was difficult to assess, if the Eurozone in a sufficient extent resolved the problems unfolded by the crisis. The answer could give just the real test of managing the next crisis.

Agnès Bénassy-Quéré—Guntram Wolff: How has the macro-economic imbalances procedure worked in practice to improve the resilience of the euro area? Economic Governance Support Unit (EGOV). March 2020. <https://www. bruegel.org/wp-content/uploads/2020/03/IPOL_STU2020645710_EN.pdf > Accessed: 11 October 2021.

Multiannual Financial Framework 2021-2027 (in commitments) - Current prices. <https://ec.europa.eu/info/ sites/default/files/about_the_european_commission/eu_budget/mff_2021-2027_breakdown_current_prices. pdf > Accessed: 11 October 2021.

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The pandemic constituted a shock of unprecedented magnitude and with very different impact compared to the previous crises. It is still unknown what will be the long-standing effects of the pandemic. Medical researchers are not sure if the Sars-Cov2 virus will someday disappear or it will evolve into a virus causing milder sickness like the flu or it will maintain a serious threat for the people's health in the next years. Anyway it is already visible that the pandemic was a factor strengthening many already visible tendencies. It revealed some structural problems of modern states and the global economy, such as under-financing of the health sector, high level of indebtedness, overuse of monetary policy to stimulate the economy, overstretched supply chains, overconcentration of production of some sectors in specific regions and overdependence of some economies on service sector. This combination of factors affecting all the economies of the world posed a stress test for the resilience of the EU economy. The EU countries reactions to the pandemic were different in scale and timing, but the used tools were basically similar. Lockdowns as tool of fighting the pandemic were a radical and not covered by economic analyses novelty. Generally, the countries of central Europe were more timely in introducing restrictions on social contacts and border traffic than western Europe during the first wave of Sars-Cov2, whereas the situation reversed during the next waves. This policy had its consequences in higher excess mortality rates, though an assessment of reactions is not easy. It seems that the central European countries in general coped with underfinanced health systems compared to the western countries. Another thing was that central European governments more afraid of the economic sustainibility of lockdowns and its political costs, experimented the introduction of lockdown measures to the least possible extent. Also, citizens of countries in this region with previous experiences of restrictions of civic liberties during the socialism were also more sensitive of such restrictions. For example, in Poland a curfew has never been introduced during the pandemic, which was a norm in western Europe. There were strong concerns that the impact of these measures on the economy could be devastating. This time not only EU Members States outside the Eurozone, but also its members decided to not resort to austerity measures. The European Commission gave the green light to Member States to launch programs protecting the categories and companies most affected by the lockdowns even if that would result in more indebtedness. The socalled kurz-arbeit (short-time) working policy adopted by Germany at the time of the global financial crisis which resulted in a slight increase of unemployment was adopted as a steering policy in many countries. The evident lesson drawn from the Eurozone crisis was that its Member States were allowed to relax fiscal policy despite having already a quite high level of indebtedness.

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Figure 9: GDP growth of EU member states in 2020 (%)

Source: Eurostat The impact of the pandemic on the EU economy has been so far very unequal. It affected mostly the economies dependent on services connected to mobility of people (Figure 9). Therefore the worst affected were the southern countries more dependent on tourism such as Spain (-10.8%), Italy (-8.9%), Portugal (-8.4%), Malta (-8.3%), Greece (-8.2%), Croatia (-8%) and France (-7.9%). Much milder recession experienced countries of northern and central Europe to some extent thanks to their stronger concentration on manufacturing and pharmaceuticals. Thus during the pandemic and lockdowns, consumers stayed at home and were more inclined to buying industrial goods and had to restrain from buying some services. There was no distinction between the euro and non-euro EU Member States. Economies of both groups reacted in a similar manner. Among the V4 countries for example Poland experienced the mildest recession (-2.5%), then Slovakia (-4.6%), Hungary (-4.7%) and Czechia (-5.8%).

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Figure 10: Long-term government bonds yields (in % of GDP)

Source: OECD Looking at the long-term bonds yield development illustrated by Figure 10 it's quite clear that so far only in the beginning of the pandemic (from April to May of 2020) the gap between the German bonds and those of other Eurozone Member States was growing. In the next months, the tendencies in long-term interest rates were similar and the different pricing of long-term bonds remained stable but was not growing. However, this time the yields of V4 countries not being part of the euro were in general higher than of even the economically weaker Eurozone Member States, since euro granted some advantage in ensuring lower debt issuance costs. It's important to be careful in drawing too many conclusions as it's still unknown if the world economy is ready to recover from the turbulences caused by the pandemic. For now, It's clear that the pandemic crisis economic management was conducted so far much better by the European institutions than in the case of the Eurozone crisis. Probably the Eurozone could have been hit harder by long-term bonds yields increase. This time, however, Member States quite unexpectedly managed at an early stage to agree on a new instrument supporting the countries hit harder and the ones suffering the most severe consequence from the pandemic. The establishment in 2020 of the Recovery and

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Resilience Facility (RRF) with a capacity of EUR 396 billion in grants and EUR 166 billion in cheap loans was addressed to all EU Member States as a one time assistance program for the recovery after the pandemic crisis. The financial resources started to flow to countries only in 2021, but already at the time of the agreement in July 2020 financial markets reacted positively welcoming the more solidarity among the EU Member States. Considering the RRF in the context of the Eurozone structural malfunctions, even though it has quite significant financial capacity, it could be a breakthrough only if it becomes a permanent mechanism. However, currently it remains a temporary mechanism tailor-suited to address the problems caused by the pandemic. Figure 11: Covid-19 related state aid for the EU member states approved by the European Commission in 2020 (in billion euro)

Source: https://ec.europa.eu/competition/publications/csb/kdam21001enn.pdf Another thing is that the RRF is addressing all the EU Member States, so it's not targeting exclusively the Eurozone. Notwithstanding the fact that the creation of the instrument was a measure strengthening the Single Market. Thus the pandemic created a risky situation in which stronger EU countries had more capacity to protect their economy in case of lockdowns than the weaker ones. It was quite visible from the data concerning the state aid approved by the European Commission for the EU Member States in 2021. As visible on Figure 11 the largest assistance was granted by Germany (EUR 1,588 billion and 54% of approved resources), then it was Italy (EUR 455 billion, 15%), France (EUR 430 billion, 14%), Spain (EUR 149 billion, 3%) and Poland (EUR 63 billion euro, 2%). It's important to take notice

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that approval of state aid doesn't mean that it was actually used.15 Nevertheless it generally confirmed that the countries with strong economies and better public finance situation had greater capacity to grant more aid to their economy, what could in turn represent a disproportionate support for their companies inside the EU.16 The interesting observation is that the countries being outside the euro have learnt to use the ECB methods. For example Poland during lockdowns launched programs supporting the companies partly financed by the National Bank of Poland.

FINDINGS Upon the analysis presented in the chapter a few important conclusions concerning the Maastricht criteria could be drawn. The Eurozone crisis did severe damage to the credibility of the Eurozone among the potential candidate countries. Neither the accession to it stimulates trade and investments nor strengthens the stability. In fact, stable economies using the euro could count on lower government bonds yields, though the Member States have to take into account the risk of problems with restructuring the economy in case of economic shocks. The reliability of the Eurozone could be regain by efficient navigation of the pandemic crisis especially if it results in inflation growth. Another important step is finishing the Eurozone reforms such as the establishment of a full banking union. An obligation to fulfill the Maastricht criteria before entering the Eurozone still makes some economic sense. However, they would have stronger credibility—especially the debt criterion—if the Eurozone Member States start to follow the path of debt reduction to fulfill the Stability and Growth Pact obligations. For the governments of the aspiring countries it could be puzzling why they have to keep public debt twice lower than in some Eurozone member states. Another problem with Maastricht criteria using GDP as denominator it's prone to strong fluctuations due to speculation bubbles. Spain is a very good example as it was before the global financial crisis one of the least indebted Eurozone Member States. Considerations if debt to GDP ratio makes sense as inflow of capital and speculation bubbles could temporarily increase the GDP, though worsening competitiveness. The situation could also be reversed when the inflow of capital is used to finance productive investments. That is well illustrated by the case of central Europe, where many countries experienced current-account deficits due to foreign investments in their output for exports. It's important to consider if the debtto-GDP ratio is not an obsolete indicator. The reforms conducted in the recent decade strenghtened the Eurozone by creation of stabilisation funds and giving the ECB more powers to support the Member States. However, the problem of the process of convergence hasn't been solved and poses a great risk for the monetary union, especially when the inflation accelerates. Therefore, it's important to

Julia Anderson—Francesco Papadia—Nicolas Véron: Government-guaranteed bank lending: beyond the headline numbers. Bruegel. 14 July 2020. <https://www.bruegel.org/2020/07/government-guaranteed-banklending-beyond-the-headline-numbers/ > Accessed: 13 October 2021.

Massimo Motta—Martin Peitz: EU state aid policies in the time of COVID-19. VoxEU.18 April 2020 <https:// voxeu.org/article/eu-state-aid-policies-time-covid-19 > Accessed: 15 October 2021

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establish a significant and permanent Eurozone budget to support the redistribution of single currency benefits. Alternatively, the Member States could strengthen their macroeconomic imbalances procedure to limit the capital flows between the Member States. A factor improving competitiveness of the Eurozone would be to follow more the recommendations of the European Semester. Non-euro members learnt during the pandemic to use the capacity of central banks to stabilise their economy. On the other hand, the assistance of the ECB is dependent on political understanding and could be politicised as in case of the Next Generation EU fund. Clarifying some principles of ECB interventions would be helpful in showing more transparency of ECB guidelines.