© Copyright by Polski Instytut Spraw Międzynarodowych, Warszawa 2014

Editor-in-chief: Marcin Zaborowski

Managing editor: Kacper Rękawek

Copy editor: Brien Barnett

Proof-reading: Katarzyna Staniewska

Cover design: Malwina Kühn

Typeset: Dorota Dołęgowska

Contributors:

Peter Becker, PhD—senior associate at the Stiftung Wissenschaft und Politik (SWP)

Endre Domonkos—senior research fellow at Budapest Business School,

College of International Management and Business

Olivér Kovács—research fellow at ICEG European Centre

Jozef Stískala—MA graduate in international relations and graduate student in applied economics at CERGE-EI, Prague

Patryk Toporowski—analyst at the Polish Institute of International Affairs (PISM)

Paweł Tokarski, PhD—associate at the Stiftung Wissenschaft und Politik (SWP)

Stijn Verhelst—senior research fellow at Egmont – The Royal Institute for International Relations

Jolanta Zombirt—associate professor at the Institute for European Studies, Jagiellonian University

This issue has been published with the support of the RASTANEWS

project funded by the European Commission under the Seventh Framework Programme (SSH.2012.1.3-1)

Publisher:

Polski Instytut Spraw Międzynarodowych (The Polish Institute of International Affairs)

ul. Warecka 1a, 00-950 Warszawa;

tel. +48 22 556 80 00; fax +48 22 556 80 99; e-mail: pqia@pism.pl

ISSN 1230-4999

The views expressed in The Polish Quarterly of International Affairs are solely those of the authors.

The Polish Quarterly of International Affairs is regularly presented in the catalogue of International Current Awareness Services, in Ulrich’s International Periodical Directory, and in International Political Science Abstracts/Documentation Politique Internationale. Selected articles are included in the International Bibliography of the Social Sciences.

Edition: 350 copies. Sent to press in November 2014

Printed by OWP SIM, ul. E. Plater 9/11, 00-669 Warszawa

CONTENTS

ARTICLES

Paweł Tokarski

The Challenge of Eurozone Reforms in a Time of Uncertain Economic Prospects

The autumn 2014 brings widespread fear that the crisis in the eurozone may reescalate. A truism is to say that its main drawbacks have not been solved. The problems with the banking sector in the EU are far from solved and the need to clean up bank balance sheets. The necessary process of private sector deleveraging will continue to have an adverse effect on economic activity. The public finances of several eurozone economies are in poor condition. In three out of four of the largest eurozone economies, the general government gross debt-to-GDP ratio is increasing. Several Member States still face considerable structural challenges and the sustainability of economic models will have to be reconsidered, not only in countries such as Greece, Cyprus, Spain, Italy or France but also in Finland. After Standard & Poor’s stripped Finland of its triple “A” rating in October 2014, the only members of this exclusive club in the eurozone remained Germany and Luxembourg.

Peter Becker

Reinforced Economic Policy Coordination as Crisis Prevention in the Eurozone

What is needed mostly is to stabilise economies and to improve economic policy coordination in the EU. Not only do the Member States have to get their budgets in order, they also have to reform their national economies so that they become competitive again. However, this should not become a decision between austerity versus growth or between demand-side versus supply-side economics. It is obvious that Europe needs both, along with sustainable fiscal policies of all Member States, which goes hand in hand with incentives for sustainable growth. Almost all European economies need structural reforms to strengthen their growth potential, to recover domestic demand and to make labour markets more robust. The task for European policy is, hence, to develop real European economic policy reform to tackle weaknesses in some economies, to generate growth, to create more and better jobs, and finally to guarantee the coherence of the European Union as a whole and the democratic legitimacy of these reform measures.

Endre Domonkos

Hungary’s Perspective on the Banking Union and Remarks on the Possibility of Eurozone Accession

The objective of this essay is to analyse the position of the Hungarian government towards the banking union. In order to better understand the official standpoint of the cabinet, it is necessary to make a brief overview related to the possible introduction of the euro in Hungary. As far as the country’s preparedness for the adoption of the euro is concerned, several internal factors (fulfilment of the Maastricht convergence criteria, pursuance of credible and responsible economic policy that promote sustainable economic growth and macroeconomic stability, etc.) and external ones (the structural problems of some eurozone countries and the extended and modified rules of the Stability and Growth Pact and the Euro Plus Pact) have to be taken into account if a responsible decision about accession to the eurozone is to be taken. Only with wide consensus between the participants in the country’s economy and society and considered, balanced economic policy can Hungary reap the possible benefits of the adoption of the common currency.

Olivér Kovács

A Systemic Narrative of Hungarian Eurozone Accession

Against this background, Hungary must also pursue such an approach, if for no other reason than its socio-economic development has been showing certain signs of deterioration, and what is more, real convergence to the EU average seems to be stuck. Since some sort of agony has been cast upon Hungary, it must be noted this paper does not intend to be exhaustive in deciphering the reasons why Hungary could continue to lag by the end of the 2000s despite its leading position in terms of transition in the early nineties. Instead, the paper purports to illustrate why a more systemic approach is needed when it comes to considering Hungary’s eurozone accession. This systemic approach lines up with thinking that emphasises the central role of analysing not only the parts of such things as a living socio-economic system but also the relationships among the relevant parts (i.e., public and private sector) and the patterns that evolve over time. This per se requires a broader perspective.

Jozef Stískala

TARGET 2 and the Risks for the National Bank of Slovakia

The objective of this paper is to clarify the real impact of the TARGET 2 imbalances that emerged for the eurozone as a whole and reveal its consequences for the National Bank of Slovakia. The main aim of this study is to try to finally close the discussion among well-known European economists about the real effects of disproportional flows of funds (in central bank money) between eurozone states. Opinions on this issue have been amended a few times and we should first make clear whether rising TARGET balances are accompanied by increasing risk for the stability of the monetary union. We understand the term “risk” to mean the prospect of loss. After introductory remarks on the fundamentals of payment settlement via a correspondent bank and via a payment system, we will review the conclusions of specialists discussing the problem of payments. These diverse outcomes also motivated the author to exhaustively specify the risks to the eurozone as well as the National Bank of Slovakia. That is why we analyse the fundamentals of payments in the first place. After closing the debate with a prospective loss analysis, we dismantle the real implications of imbalanced payments, evaluating the experience of the National Bank of Slovakia.

Patryk Toporowski

The European Semester and the Competitiveness of the Southern EU Member States and the Visegrad States

This paper addresses the issue of building competitiveness through implementing the European Semester’s country specific recommendations (CSRs) in the V4 countries (Czech Republic, Hungary, Poland and Slovakia) and the southern eurozone states (Portugal, Spain and Italy). As far as the V4 are concerned, they experienced large and persistent external imbalances (i.e., measured by the magnitude of the balance of payments deficit) until the beginning of the crisis, as with the Mediterranean EU Member States. This points at some similar structural problems that affect their competitiveness. Later, among the V4, the imbalances were in Poland and Czech Republic only.

Stijn Verhelst

Cohesion Policy and Sound Economic Governance: A Loveless Marriage

The appellation “macroeconomic conditionality” itself did not make the final legal texts, as the rules now refer to “sound economic governance.” Nonetheless, the content of expanded macroeconomic conditionality remains. In contrast to previous rules, macroeconomic conditionality now applies to all cohesion policy funds and even to agriculture and fishery funds, i.e., all the European Structural and Investment Funds (ESI Funds). In addition, conditionality applies to all economic governance procedures. To appease the European Parliament, the Commission’s original proposal was nonetheless substantially amended. The result is a form of conditionality with a great deal of caps and safeguards. Due to the large opposition to macroeconomic conditionality, the relation between cohesion policy and sound economic governance got off to a rocky start. This article aims to evaluate these expanded macroeconomic conditionality rules. First, the article describes the functioning of macroeconomic conditionality, both its sanctioning part (the stick) and incentive part (the carrot). Subsequently, the potential impact of these new rules is assessed.

Jolanta Zombirt

Banking Union: An Effective Instrument for the Eurozone Banking Sector or a Useful Distraction from Other Issues?

The ongoing review performed by European institutions with closer and closer cooperation with Member States since the beginning of the crisis has revealed that nowadays, with globalisation and the greater presence of trans-border banks, such a situation can jeopardise not only the process of economic integration and the completion of the single market for financial services but also, according to the directive, “continuation of the critical functions of institutions and the preservation of financial stability.” It can also threaten confidence in the European financial markets and financial players, which in turn could bring unintended consequences for economic growth. From political and economic points of view, such a situation could no longer be accepted. Therefore, politicians and economists, having been accused of doing nothing by European taxpayers bearing the huge costs of numerous rescue packages granted to failing banks, had to find a solution.

REVIEWS

Mohamed Mokaddem: Al-Qaïda au Maghreb Islamique: Contrebande au nom de l’Islam (Nathan Dufour)

Eric Rouleau: Dans les coulisses du Proche-Orient: Mémoires d’un journaliste diplomate (1952–2012) (Morgane Hoarau)

William Ascher, Natalia Mirovitskaya (eds.): The Economic Roots of Conflict and Cooperation in Africa (Maya Rostowska)

Table of Contents

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