Which EU do we want to join? First, I want to remind you of two points: this commentary is solely on the economic realm. Second, I am not an EU expert. I started to take interest in the EU issue in 2003. So if you ask why I try to write on the EU issue, I would say that I have the courage of a person who does not know much about a particular subject.

Also relying on this courage, I would like to ask a question: do not you see something awkward in the current state of affairs? Countries in the Eurozone implement a single centralized monetary policy executed by the European Central Bank. On the other hand, each country has a different fiscal policy; none of the member countries has let go their sovereignty in this realm.

In undergraduate macroeconomic and monetary economics courses students are told that monetary policy cannot be independent of fiscal policy. The message tried to be given is that monetary policy cannot go in the opposite direction with the fiscal policy; if it does this adventure would result in a disaster. To put it differently, for instance loose fiscal policy and tight monetary policy cannot fit in together. Such a mixed policy choice eventually puts the economy into trouble.

There is no doubt that Europeans were also aware of this pure fact when they were designing the entrance in the EU and particularly in the Eurozone. This in basically why they introduced rules that try to keep budget deficits and public deficits of member countries within a certain interval. But we should stress the 'that try' part here; the Greece case proved that the rule do not work under some circumstances.

On the other hand, there is another fact well known by everyone. Assume that in a common currency zone one member country encounters a contractionary shock while things are going quite well in other member countries. There are mainly two tools that can turn the tide in the troubled country. First is fiscal expansion through cutting tax rates and increasing public expenditures. And second is monetary expansion to ensure that banks extend higher amounts of credits and stimulate domestic demand with the help of the fall in interest rates.

In our case the second option is automatically eliminated since the problem is valid for only one country and the other do not feel it at all. If the union adopts expansionary monetary policy to save a single country; other countries will encounter problems for no reason. Therefore, the troubled country will be left alone with the fiscal policy option. However, conditions faced might be so tight that the country can be left with no room to maneuver and fail to launch fiscal expansion.

There also are other problems. The latest developments put forth clearly that becoming a member of the EU and joining the Eurozone after fulfilling a series of requirements do not necessarily assure the planned advantages. It is believed that once you join the common currency zone - join the Eurozone in our case - domestic interest rates would converge to the Eurozone interest rates. The new-comer country hopes that its domestic interest rate would converge to the low interest rates in Germany, for instance. One main reason for this expectation is that you get rid of the exchange rate risk that would run when using your domestic currency; you stop worrying about the value of lira against Euro for instance. You do not ask for higher interest rates on bonds in Turkish lira as you are not afraid of a potential jump in exchange rates.

However, the interest rate difference between Greek bonds and German bonds are currently too high. What is more, markets' default risk perception on Greek bonds is much higher than that on Turkish bonds. And Spain's risk is as twice as Turkey's risk. There is no doubt that the main reason for this is the existence of other risks unique for the country in question; for instance this is high public debt for Greece. Apart from this, there is the issue of EU's economic rules. In order for the above mentioned rules to be credible; there should definitely be a mechanism that will control regularly whether or not the rules are complied with (Turkey also needs a similar mechanism to control the implementation of the fiscal rule which was featured widely in the media ). Second, it is not certain what the sanction for not complying with the rule is. If this responsibility to sanction is given to the market, the risk that the EU as a whole will be affected by the consequences appears.

In short, the question 'which EU?' is a righteous one. It is evident that the EU will discuss these extensively (and again) and maybe these discussions will lead to a change in the rules of the game.

 

This commentary was published in Radikal daily on 25.02.2010