EU compromises threaten Eastern Europe reform

05/07/2007 | Philip Alexander

Policymakers and investors fear weakened EU commitment to competition and fiscal rules could jeopardize the anchor for market-friendly policies among new members and candidates

There is growing concern that the historic role of the EU as an anchor for economic reform among new members and candidate countries could be under threat. This comes weeks after the EU’s objective of a single internal market, free from anti-competitive practices, was sidelined into a protocol instead of the main body of the new constitutional treaty, under pressure from French President Nicolas Sarkozy.

Mario Monti, former EU Competition Commissioner, and now President of Italian business school Bocconi University, told delegates at the Euro50 Group meeting in Rome that the change might not have legal implications, but it was symptomatic of weakening political commitment.

“The only surprise for me was that people were surprised by the attempt to dilute and delay implementing the single market. This trend has been evident for some time, but it will make it harder for us to encourage the new EU members to move in the right direction,” said Monti.

Domenico Siniscalco, vice-chairman at Morgan Stanley, expressed dismay that the EU’s credibility could be further undermined by suggestions from the French government that they should be allowed greater room for manoeuvre on their fiscal deficit, just two years after a previous reform of the Stability and Growth Pact. As Italian finance minister, Siniscalco participated in negotiations on that earlier revision, which gave members the flexibility to run a larger budget deficit if structural reform was underway.

Hanna Gronkiewicz-Waltz, the Mayor of Warsaw and former governor of the National Bank of Poland, told Emerging Markets she agreed with this pessimistic analysis.

“It still surprises me that after so many articles, debates, and studies, politicians are still coming out with views that are at least 20 or 30 years out of date,” said Gronkiewicz-Waltz.

In particular, she warned that Polish policymakers are beginning to mimic Western European calls for “national champions” in the economy. She was concerned over suggestions of creating a Polish national financial services champion by merging Bank Pekao with insurer PZU. As the latter has already been privatized, this plan could imply renationalization (see "Poland's economy in two minds".)

However, Boris Vujcic, deputy governor of the Croatian National Bank, believed Eastern Europe was actually moving ahead of Western Europe in terms of creating a single market for financial services, thanks to cross-border consolidation in the sector. Even so, he acknowledged that Brussels needs to undertake more groundwork to enable pan-European full service financial institutions – the stated desire of Allianz group, for example.

“If we want a true single market, the EU will need to clarify issues like deposit insurance requirements for bancassurance entities, which vary between member states. And before the next financial crisis, we will have to work out who is responsible for assistance and bail-outs of pan-European banks if that becomes necessary,” Vujcic told Emerging Markets.

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