This tricky Maastricht

If all the EU countries had to reapply for membership of the Eurozone today, who would get back in? The answer is that only Finland, Bulgaria and Luxembourg of the 25 member states currently meet the original Maastricht criteria.

Bulgaria? Bulgaria is supposed to be a basket-case bucolic economy of uncontrolled corruption, despite joining the EU in 2003. But it has low inflation of 0.3pc, low public debt of only 13.5pc of GDP, and low interest rates of 0.8pc – all way under the Maastricht limits of 3.2pc, 60pc and 6.5pc respectively.

The international financial crisis has turned Europe on its head and has made a mockery of the old division into East (read “backward”) and West (read “developed”) that was prevalent only two years ago. Indeed, any list that ranks the economic health of all the countries on the Continent is now a mash-up of Eastern and Western names. Many so-called “industrialised” countries of the West now have structural problems more typical of “emerging markets” whereas many “emerging markets” in Europe sport much better fundamentals than their western cousins. And, as several emerging European markets approach the verge of the Maastricht criteria, some of their Western peers are moving further away.

Take public debt, for example; the debt basket case of Europe is EU member Italy. Italy owes more than the value of its entire economy (115pc of GDP) closely followed by fellow EU member, Greece. Both these countries will see their public debt increase to 120pc and 125pc of GDP next year – more than double the Maastricht limit.

Maastricht requirements

Sources: bne, global insight, citi group, erste group, unicredit, tradingeconomics, credit agricole

On the other hand, every single one of the countries of Central, Eastern and Southeast Europe (except Hungary) are well below the Maastricht limit of 60pc of GDP. Russia is way out in front with a total public external debt of a mere 6.7pc of GDP. Given that, even after dropping more £128bn of its hard reserves on a gradual devaluation of the rouble at the start of 2009, as well as tens of billions of dollars on supporting the bank system or rescuing companies, the state still had more than £281bn in reserves at the end of 2009, making it the world’s third richest country in terms of cash in the bank after China and Japan. (The UK and the USA have just less than £57bn in reserves putting them well down on the list.) Although they are already overextended, all of the existing eurozone members will see their debt get further away from the Maastricht limits. (The only exception is, again, Hungary which hopes to reduce its borrowing from 75.9pc of GDP to 72.2pc.)

Where the EU members do a lot better is on inflation. Here, almost all the existing members are below 1pc – way below the Maastricht criteria of 3.2pc; the exceptions are Poland, Romania, Ireland and, predictably, Hungary again. But the low rates in the West are artificial, caused by a collapse in consumer confidence. Once things get back to normal, the problems of rising prices will almost certainly reassert themselves.

Inflation remains a problem for emerging Europe. While the global slowdown has brought down inflation rates in almost all the Balkan countries to below the Maastricht cap of 3.2pc, it remains more than twice this figure in Eastern Europe. However, inflation is continuing to fall. Russia is expecting 8.8pc this year – the lowest rate in its modern history. Even Ukraine, which had the highest inflation level in Europe in 2008 at over 25pc, was down to 14.9pc at the end of 2009. All the countries of the east are expecting this trend to continue.

Finally, the place where the division between East and West makes least sense is with budget deficits. The UK and Ireland have the biggest deficits, which are at emerging market levels over 12pc of GDP. But these two countries are joined in their fiscal woes by a very mixed bag from East and West: Ukraine, Russia, Serbia, Latvia, Lithuania, France, Italy, Poland and Spain – all of which have deficits twice as much as the Maastricht limit of 3pc. The only difference between the countries in this list is that all the Western countries are expecting to see their deficits increase this year, whereas two thirds of the “Eastern” countries (and that includes the new members of the EU) expect to see their deficits decrease in 2010.

On the face of it, Eastern Europe has taken much more of a beating that Western Europe as most of emerging Europe’s economies saw catastrophic economic collapse. Russia’s economy came to a standstill last winter, turning the 7pc-plus economic growth into a collapse of more than -8pc, while Ukraine’s GDP fell 20pc in a single quarter: the economic slowdown in the West was only a few percentage points.

However, going forward the “emerging markets” are much better placed to bounce back. The key to a turnaround will be the universally low level of sovereign debt, which allows the governments of the East to continue cutting interest rates, borrowing to fund deficits, and spending money on stimulus packages. The West, on the other hand, has its hands tied by huge debt and large deficits. It will have to raise interest rates to stave off inflation and hike taxes to reduce both deficits and debt. (Greece has already seen rioting in protest against its austerity package.) In short, the East can follow policies to promote growth while the West has to follow policies that will stifle it.

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