A deep economic and political division exists within the European Union between the eurozone states and the 10 EU members outside of the monetary bloc: the United Kingdom, Sweden, Denmark, Latvia, Lithuania, Poland, the Czech Republic, Hungary, Romania and Bulgaria. Among these 10 countries, there are vastly different views of the banking union and the overall trajectory of the European Union and eurozone. As the European Union continues trying to resolve the financial crisis, efforts at deeper integration among the eurozone states will be high on the EU agenda in the coming months. Projects such as the proposed European banking union and more comprehensive fiscal integration efforts aiming to overcome the crisis within the currency union — but affecting countries outside the currency union — will be especially high priorities. The eurozone states’ national strategic interests have spawned differing views of these projects, and the debate likely will push the banking union’s debut well past its proposed start date of January 2013.
VIDEO: A Conversation on the EU-Eurozone Divisions
However, an even deeper division exists between the eurozone states and the EU members not in the monetary bloc. Some of these countries are apprehensive about signing on to projects like the banking union — which, according to current proposals, will have greater control over banking regulations but will not give the non-eurozone countries what they consider a sufficient voice in decision-making efforts. The EU countries outside the eurozone are attempting to adapt to this new situation. While some of these countries need to keep a distance from eurozone developments for strategic reasons, they face the possibility of increasing irrelevance in European policy discussions if they choose to avoid further European integration.
It is important to understand the non-eurozone states’ positions regarding the eurozone and its integration efforts in order to get a more comprehensive idea of where the European Union and eurozone will be in the months and years ahead.
United Kingdom
Relations with Europe
The United Kingdom’s relationship with continental Europe is complex. London has a dual strategy that involves maintaining a close link with the United States without straying too far from European affairs. London has sought a balance between the protection of its sovereignty and the growth of the European project. In 1992, the United Kingdom agreed to sign the Maastricht Treaty that created the European Union but gained a concession exempting it from joining the common currency. In the past two decades, London has sought exemptions and concessions in each new European treaty.
The United Kingdom’s political elite are critical of the European Union. The general opinion in the country is that it is a net contributor to the European Union (and Brussels’ bureaucracy in particular). The British Parliament is often suspicious of the supremacy of European law over British law. The United Kingdom often criticizes the Common Agricultural Policy, which basically subsidizes agricultural sectors in continental Europe, and the Common Fisheries Policy, which essentially forces the United Kingdom to share its fishing waters. However, London is a strong defender of the single market, and 48 percent of the United Kingdom’s total goods and service exports go to the European Union.
London has failed in its efforts to block recent measures designed to deepen economic integration within Europe, and Germany and France have decided to move forward with those measures despite the lack of British support. In November 2011, the European Union decided to proceed with the fiscal compact treaty although the United Kingdom refused to sign it. At present, London’s refusal to accept a banking union will not prevent the union’s implementation by eurozone members.
Eurozone Accession and View of Integration
Because of its exemption from the European Union, the United Kingdom is one of the few EU members, along with Denmark, not required to eventually join the common currency. London has opposed the banking union since it was first proposed. British Prime Minister David Cameron said he would not ask British taxpayers to underwrite the debts of ailing banks in Greece and Spain, saying, “It is not our currency.” London is also concerned that the banking union would undermine the European Banking Authority. That said, the United Kingdom has said it will not oppose measures designed to solve the eurozone crisis, but it is unclear how London will manage this apparent contradiction.
The Domestic Political Situation
In 2011, the British Parliament approved the European Union Act, which requires new transfers of sovereign powers to Brussels to be approved by referendum. Now, a faction of the Conservative Party is pressuring Cameron’s government to call a referendum on the United Kingdom’s EU membership. The conservative government’s current tactic is in line with London’s long-term strategy regarding the European Union. The United Kingdom is wary of any sovereignty concession to Brussels, but is not interested in quitting the European Union. We can expect a constant British opposition to each new European agreement or treaty, but a formal break is unlikely.
Sweden
Relations with Europe
Sweden, the largest Nordic economy, is strongly integrated into Europe. The country has a strategic interest in containing the large European powers to its south and Russia to its east. The European Union and its stability are important for both of those purposes, which is why Sweden sees European integration as beneficial. So far, Sweden has shown resilience in the European crisis. However, growth forecasts for Sweden have been lowered, and Stockholm has a general interest in the eurozone overcoming the crisis to avoid further domestic slowdown.
Eurozone Accession and View of Integration
Sweden is supposed to join the eurozone at some point, and the country’s major political parties support eurozone membership. However, in a 2003 referendum, Stockholm opposed eurozone membership and since the outbreak of the European crisis, opposition toward the currency union has been growing. Although Sweden is not a eurozone country, it did ratify the fiscal compact. However, Stockholm opposes the banking union proposal because it fears that the European Central Bank as a regulator would gain too much power in the European financial sector. Sweden, like the United Kingdom, has a large banking sector and does not want it to be too regulated by a body in which Stockholm has no say.
The Domestic Political Situation
Most Swedish political parties support eurozone membership but have said they will not push the issue in the near future. There are fringe euroskeptic parties in Sweden, and a poll from May showed that 77 percent of Swedes opposed eurozone membership. Although the political elite generally favor deeper European integration, the government does not plan to hold a referendum on eurozone membership until there is strong sign of support for joining the monetary bloc.
Denmark
Relations with Europe
Denmark, a longtime NATO and EU member, is strongly integrated with Europe and the West. As a trade-dependent country, Denmark is concerned about the economic downturn in Europe. While Denmark has remained outside the currency union, just like other small but stable European countries it wants to ensure that the European Union and the eurozone are not dominated by the largest European powers such as Germany, France and the United Kingdom. It therefore approves of European integration as a means of containing the large powers. Denmark has especially strong ties to the other Nordic countries, which — except for Finland — are not eurozone members.
Eurozone Accession and View of Integration
Denmark is one of the two EU countries technically not required to join the eurozone. This was agreed to after Denmark rejected the Maastricht Treaty in a 1992 referendum. While most political parties support Danish eurozone membership, the population rejected joining the currency union in 2000. Opposition to eurozone membership has been especially high since the outbreak of the financial crisis. Because of this popular opposition, there is no further referendum planned. However, since Denmark has a fixed exchange rate to the euro, under the European Exchange Rate Mechanism the country does not really have an independent monetary policy and the Danish Central Bank often mirrors the European Central Bank’s monetary policy decisions.
Although Denmark is not part of the eurozone, it still pursues deeper European integration. Denmark ratified the European fiscal compact and is not entirely opposed to the recently proposed banking union. Danish Economy Minister Margrethe Vestager and Danish Central Bank head Nils Bernstein said that non-eurozone countries would have to be treated as equals if they join the banking union to make sure these countries’ monetary policies are not dictated by the European Central Bank.
The Danish foreign minister is one of 11 EU foreign ministers in the Future of Europe Group, organized by German Foreign Minister Guido Westerwelle. The group does not make formal decisions, and the ministers do not speak for their respective governments, but the group is an opportunity to discuss deeper European integration. The Polish and Danish foreign ministers are the only two non-eurozone members in this group, which shows that both countries want to make sure the eurozone is not divided from the larger European Union.
The Domestic Political Situation
The only euroskeptic political parties in Denmark are small; the political elite generally favor greater European integration. Since 2011, Denmark has had a minority center-left government. The Social Democratic Party leads the current government coalition. The Socialist People’s Party, which is part of the current government coalition, initially was a euroskeptic party and opposed eurozone membership in the 2000 referendum. While the party is no longer strictly euroskeptic, it called for a referendum on the fiscal compact (which never took place). Certain parties within the current government are unlikely to agree to stronger fiscal control from Brussels should this be debated.
Read more: EU: Views From Outside the Eurozone, Part 1 | Stratfor
Poland
Relations with Europe
Given Poland’s strategic but vulnerable geographic position, Warsaw’s main fear is getting wedged between two strong blocs: a bloc dominated by Germany and France to the west and a Russia-led bloc to the east. By promoting the integration of Central European countries into the European Union, Warsaw hopes to contain rising German and French influence while weakening Russia’s presence in the region.
Eurozone Accession and View of Integration
Poland joined the European Union in 2004 and planned to join the eurozone in 2012. However, after the global financial downturn and the onset of the European crisis, Warsaw pushed its joining date back to 2016. Poland still does not meet many of the accession criteria and would have to be part of the European Exchange Rate Mechanism for two years before it could join the eurozone.
Popular support within Poland for gaining eurozone membership has decreased since the European financial crisis began. Even so, Warsaw still wants to be a part of deeper European integration efforts. Poland ratified the European fiscal compact only after securing a guarantee that it and the other nine EU countries outside the eurozone would be allowed to participate in eurozone meetings at least once a year. Warsaw’s main concern is that EU countries without eurozone membership will be sidelined as the eurozone countries integrate further. It is for this reason that Poland also does not want to see France and Germany leading the debate on solving Europe’s financial crisis. In January, Polish Prime Minister Donald Tusk warned against the formation of a Paris-Berlin political monopoly, emphasizing that all EU countries should be involved in finding a solution to the crisis.
VIDEO: A Conversation on the EU-Eurozone Divisions
Warsaw is skeptical about the recently proposed banking union since non-eurozone countries would have limited influence within the union and non-eurozone banks would not profit from the bailout efforts. However, foreign banks largely dominate Poland’s banking sector, so it would be unlikely that Warsaw would attempt to derail the banking union.
Domestic Political Situation
Poland’s opposition Law and Justice party is less enthusiastic about European integration than the ruling Civic Platform party. The Law and Justice party is willing to support deeper military and economic integration with the rest of the bloc but remains skeptical about political integration and the federalization of Europe. Poland also has euroskeptic parties such as Real Politics Union and The Congress of the New Right, but they are small and failed to obtain parliamentary seats during the 2011 elections.
The Czech Republic
Relations with Europe
Like many other Central European countries, the Czech Republic fears the loss of economic independence associated with joining the eurozone. The security concerns regarding Russia that plague Poland and the Baltic states are somewhat muted in the Czech Republic and it is open to associating with Moscow. While Prague considers itself truly European and is conscious of its political and economic dependence on the European Union, its willingness to work with Russia gives it enough leeway to weigh the benefits and detriments of a complete assimilation into Brussels’ orbit.
Eurozone Accession and View of Integration
The Czech Republic has never had a hard deadline for joining the eurozone and has pushed back the date for talks on accession since 2007. Czech National Bank head Miroslav Singer said he could not see the Czech Republic entering the eurozone during his term, which ends in mid-2016. Additionally, Czech Prime Minister Petr Necas has said he will not bring the issue of eurozone accession to parliament during his current term, which expires in 2014. The Czech Republic was also the only country to join the United Kingdom in openly opposing the EU-wide fiscal compact in 2011.
Discussions about the creation of a banking union have received an overwhelmingly negative response from the country’s people and leadership. Even the generally pro-European Necas said his government is very circumspect on the issue and considers the Czech banking sector’s independence essential. The banking union presents a problem to the Czech Republic because more than 90 percent of Czech banks are held by foreign institutions — primarily banks in the eurozone that would be subject to the rules and oversight of the eurozone banking union. Some economists argue that the Czech banks will, by proxy, be under Brussels’ control, and if Prague refuses to agree to the banking union, it could lose its ability to represent the interests of its banks. However, this argument does not thus far appear to have persuaded the top echelons of the Czech government (where mistrust of Brussels prevails) to back the proposed banking union.
Domestic Political Situation
A major contributing factor to Prague’s lack of commitment to the European Union and eurozone projects is the governing coalition’s continued weakness. The center-right coalition has a one-vote majority in Parliament and holds periodic talks on the division between its constituent members. While the coalition members generally agree on domestic economic issues, the two largest parties have divergent ideas regarding Prague’s relationship with Brussels.
Necas, who typically supports cultivating the country’s relationship with the European Union, is counterbalanced in the coalition leadership by the staunchly euroskeptic Klaus. Euroskepticism is relatively widespread throughout the Czech population and the government is still divided on the benefits of EU membership and a common currency.
Latvia
Relations with Europe
Latvia, a relatively new member of the European Union, has a favorable view of the West and of the eurozone in particular. It is also in a better financial position than many other countries in Central and Eastern Europe, including Hungary, Romania and Bulgaria. The main source of friction between Latvia and the West is Riga’s quest to obtain a commitment from the European Union and NATO to protect Latvia from Russian advances. However, Riga is more cooperative with Moscow than the other Baltic states are, so securing this commitment is less critical for Latvia than it is for some of its neighbors.
Eurozone Accession and View of Integration
Latvia, along with Denmark and Lithuania, is part of the European Exchange Rate Mechanism (a requirement for eurozone membership) and is scheduled to adopt the euro on Jan. 1, 2014. Latvian Prime Minister Valdis Dombrovskis has said that his country will decide whether to join the eurozone after the European Union’s Convergence Report is released at the beginning of 2013.
Opinions on European integration are mixed in Latvia. The country’s central bank head, Ilmars Rimsevics, has said that Riga is willing to contribute to future bailouts for eurozone countries, but other officials like Ventspils Mayor Aivars Lembergs have equated such a move to “boarding a sinking ship.” Still, among the country’s leadership the overall view of joining the eurozone is favorable.
Domestic Political Situation
While the Latvian government is fairly stable and unified on the eurozone issue, popular support for eurozone membership is relatively low. An August survey by Latvijas Fakti showed that only 35 percent of people polled supported the adoption of the euro, while 59 percent were opposed and 6 percent were undecided. Dombrovskis has emphasized the importance of communicating with the public on the benefits of Latvia’s move toward the eurozone and plans for an information campaign are in place. The campaign will aim to explain the economic advantages of adopting the euro and the influence this change would have on people’s everyday lives.
Lithuania
Relations with Europe
Lithuania — along with Poland — is probably the nation that is most concerned by Russia’s resurgence. Vilnius sees the European Union and its institutions as guarantors of Lithuanian national interests and thus cannot afford to be isolated. Lithuania was the first country to take Gazprom to court and use the European Union’s third energy package to obtain lower natural gas prices and supply chain unbundling. Though the results have so far been limited, Vilnius has not caved under Moscow’s pressure and has continued its energy diversification efforts with financial support from the European Union.
Eurozone Accession and View of Integration
Lithuania, like Latvia, has been set to join the eurozone in 2014. But in early 2012, Lithuanian President Dalia Grybauskaite said Lithuania likely would not be able to keep that timeframe, citing problems with the deficit and inflation targets that the European Union set for accession. Lithuania is, however, already part of the European Exchange Rate Mechanism. Vilnius is preparing for its upcoming elections in October, and the head of the party currently leading in the polls has already announced his plans to delay the country’s adoption of the euro by at least two years.
The Lithuanian central bank’s reaction to the proposed banking union has been positive for the most part; however, the bank has said that a centralized supervisory body is necessary and has criticized the lack of clarity in the current proposal’s technical details. Within the government, the banking union has not been a contentious issue; officials have assumed a wait-and-see attitude as details of the proposal continue to emerge. Further integration with EU institutions is generally seen as beneficial for the country unless such integration threatens national sovereignty or carries a high economic risk, a view that explains the country’s support for the banking union but not for the adoption of the euro.
Domestic Political Situation
The economic aspect of joining the eurozone continues to worry Lithuania’s people and government. Fifty-one percent of Lithuanian citizens said they would be opposed to joining the eurozone. Algirdas Butkevicius, the front-runner in the next election, has said that joining the eurozone would put Lithuania at risk of becoming the next Greece or Portugal and dismissed the potential for any financial benefits of adopting the euro. However, Lithuania continues to lean heavily on EU institutions to counterbalance Russian influence and will generally prove accommodating and supportive of further integration efforts.
Read more: EU: Views From Outside the Eurozone, Part 2 | Stratfor
Hungary
Relations with Europe
Like most Central European countries that were part of the Soviet bloc, Hungary orients its foreign policy toward Western Europe and the United States. For example, Hungary joined NATO in 1999 and the European Union in 2004. But at the tactical level, Hungary has sought greater independence than most of its neighbors.
As long as the Hungarian government does not commit political or economic excesses, Hungary is not a priority for the European Union. Although the Hungarian economy is feeling the effects of the European crisis, Brussels will only show increased interest in Budapest if it feels that the interests of Western European banks and companies operating in Hungary are at risk.
Eurozone Accession and View of Integration
Hungary has been planning to join the eurozone since before joining the European Union in 2004. However, as of 2012, there is no target date and the forint (Hungary’s currency) is not part of the European Exchange Rate Mechanism.
During the Socialist government under former Hungarian Prime Minister Ferenc Gyurcsany, euro accession was a priority for Hungary. However, the financial crisis that began in 2008 and the political crisis that led to Gyurcsany’s resignation in 2009 made Hungary lack the criteria for joining the currency bloc. Eurozone accession is not a priority for the current Hungarian government. Current Hungarian Prime Minister Viktor Orban stated on several occasions that Hungary would join the eurozone only after 2020.
Several Hungarian officials said the government is studying the proposed banking union and that the proposal has “implications that go beyond the banks,” but Budapest still has not expressed its position. Orban’s vision of Europe is an intergovernmental model, as opposed to a supranational one. For him, Central European integration holds more appeal. He is also keen to diversify Hungarian political and economic relations to include emerging countries in Asia.
Domestic Political Situation
The Hungarian government is in the process of restructuring power, increasing the executive’s control over other institutions, such as the judiciary and central bank. The strategy also involves expanding the Hungarian state’s control of financial resources through control of the pension system and the creation of special taxes for certain economic sectors. These measures are designed to incrementally increase the central government’s power, even if doing so creates tensions with the European Union.
VIDEO: A Conversation on the EU-Eurozone Divisions
Despite Budapest’s usual claims of independence, it is in Hungary’s strategic interest to remain linked to the West and the United States as a counterbalance to the biggest powers in the region (most notably Russia, but eventually also Turkey). Like most countries in the region, Hungary suffered the consequences of its proximity to powerful neighbors and is dependent on external powers to ensure its safety. Consequently, even if some political or economic decisions by Hungary seem to threaten its position within the European Union, Budapest is not interested in cutting ties with Brussels.
Romania
Relations with Europe
Romania sees itself as directly linked to Western Europe. For historical and cultural reasons (Romania has a largely Latin population in the midst of Slavic nations) and because of its proximity to Russia, Romania has directed its foreign policy toward Western Europe and the United States, especially after the Cold War.
With the eurozone crisis still unraveling, Romania is not a priority for the European Union. In the short term, the union’s main objective regarding Romania is for the country to remain as stable as possible. Issues that are crucial for Romania, such as Schengen Zone membership and the adoption of the euro, are not currently a priority for Brussels. The last report on Romania by the European Commission, issued in 2011, said Romania has yet to comply with some of the criteria needed to join the eurozone.
The European Union’s priorities and Romania’s priorities contradict each other. While Romania is very interested in joining the “core” of the European Union, Brussels is in no hurry to integrate Romania. This situation cannot continue indefinitely, and eventually the European Union will have to show more interest in Romania if it wants to prevent Bucharest from reassessing its priorities.
Eurozone Accession and View of Integration
Romania joined the European Union in 2007. During the accession negotiations, Bucharest said it would join the eurozone by 2015. Despite the eurozone crisis, on Sept. 6 Romanian President Traian Basescu affirmed that Romania is still interested in joining the euro by 2015.
Bucharest has supported two core European projects that were designed mainly for eurozone countries: the fiscal compact treaty and the banking union. Even if these projects did not need Bucharest’s support, Romania wanted to support them as a way of showing its commitment to the European plan.
Domestic Political Situation
Romania’s population is largely pro-European, and support for integration with Europe remains strong even though some of the main benefits of EU membership (especially the accession to the Schengen Zone) have not yet materialized. Romania is currently experiencing a deep political crisis that has undermined its foreign policy goals, including Schengen accession. This crisis could abate after the December elections.
Bulgaria
Relations with Europe
Bulgaria is an enthusiastic supporter of the West, though less so than the Baltic states or Poland. Bulgaria also has strong economic relationships with Russia and Turkey, and the European Union is seen as the best option for Bulgaria, although with limits: Citing deteriorating economic conditions in the eurozone, Bulgaria announced Sept. 3 that it was freezing plans to adopt the euro.
Eurozone Accession and View of Integration
Bulgarian Prime Minister Boyko Borisov and Finance Minister Simeon Djankov said Bulgaria’s reversal on the eurozone was the result of the debt crisis and the double dip recession facing the monetary bloc, along with rising public opposition to joining the single currency. Djankov said he only saw costs, not benefits, of entering the eurozone, and that the disagreement among countries on how to best resolve the debt crisis made the prospect of eurozone membership too risky, with rules that could change in a year or two. Bulgaria has broadly maintained an austere fiscal policy over recent years. But the country is not part of the European Exchange Rate Mechanism, despite its fixed exchange rate with the euro. Bulgaria could join the eurozone only once its currency has been fixed to the euro for two years through this system.
Bulgaria’s accession to a future banking union and a common tax policy for all EU member states would not be in the country’s best interest, according to Bulgarian Central Bank governor Ivan Iskrov. However, Djankov has said that Bulgaria approves of proposals to create an EU monitoring body for the union’s banking sector. Djankov also said the EU banking union should cover not only eurozone countries but EU member states outside of the monetary bloc, such as Bulgaria. Djankov qualified his statements, however, saying that too many details about the banking union are too vague or controversial at this point. Djankov also said that in December, his country will host a meeting of the 10 non-eurozone EU finance ministers to discuss the banking union.
Domestic Political Situation
The Bulgarian government is broadly stable, though not unified on eurozone membership. Among the population, 45 percent of respondents to a recent survey approved of the country’s decision to not join the eurozone.
Excellent and informative; thank you.