Europe, but in Siberia

When, on 31 December, at 11:30, Wim Deisenberg, governor of the European Central Bank sets the exchange rate for the single European currency in relation to the US dollar, that is, the exchange rate for the 11 European currencies in relation to the Euro and the dollar, and pronounces, on 1 January 1999, that around 10,000 billion dollars worth of gross national product of 11 states with the total population of 290 million will from then on be calculated in the new currency, this will probably be just an ordinary news item on the Serbian state television’s news program, which will follow the more important coverage of Milosevic’s message to the Serbian people, a commentary on the ‘defense of the sovereignty and the integrity’ of Yugoslavia and Serbia, and the evaluation that the greatest success of the Serbian government in 1998 has been the victory in the fight against traitors and the world order.

An alternative scenario seems impossible: Milosevic appears before the nation and pronounces that (after eight centuries) the Serbian dinar is to be extinguished as the sovereign national currency, that from then on we are to receive our salaries and pensions in euros, that the Serbian monetary system is now governed from Germany, that the Serbian Prime Minister, Mirko Marjanovic, will have to conduct his independent monetary policy under the orders from Brussels, etc. This would be great, if only it were possible.
Six weeks ahead of the beginning of the single European currency - the euro - Yugoslavia is still without an answer to a number of cardinal ‘monetary questions’ which the single European currency imposes on this country, its industry and its citizens. No one dares mention the issue of the euro, because it concerns a very distant future and involves dealing with a very ugly present. That is why, whenever you ask a state official, governor of the national bank or a director of a bank- are you ready for 1 January 1999, when the euro comes to life?- the usual response is: the Dinar-euro exchange rate is in the newspaper, and for the time being the rest has nothing to do with us! The first part of the answer is correct, because the ecu (European currency unit), which on Yugoslav currency exchange lists is worth on average 11.8 dinars, will at some point in the future become the euro (according to the Amsterdam agreement one euro will be equivalent to one ecu). The second part of the official position, that the euro does not effect our monetary policy, is incorrect, because Yugoslav exporters and importers will very quickly face a number of practical (mainly positive) consequences of a single currency which covers 11 states of the European union. Also it is not entirely true that we do not have a response to the euro.

Vojislav Despotov, a writer from Novi Sad, for example, recently offered his own response to the beginning of the single European currency, that is to the start of a truly united Europe. He published a novel entitled ‘Europe Number 2’. In this prophetic booklet, the hero, who is for some reason unhappy with the Old Continent, is looking for a new Europe in Siberia. He finds this second Europe, where he intends to build a new Rome and dig through a new Tiber, a Europe where money is unnecessary because the exchange of goods is one-directional. As if enacting Despotov’s morbid tale, Vojislav Seselj recently visited Russia in an attempt to secure a place for Yugoslavia - at least as an observer - in the Union of Russia and Belarussia. However, he only managed to ‘make a great impact’, which lead Europe to conclude that this was yet another response from Yugoslavia to the euro-challenge.

The concluding statement of a meeting of European Union foreign ministers, held on 9 November, stated that negotiations concerning trade benefits for Yugoslavia ‘can not be set in motion in the near future’. The rejecting stance was justified on the grounds that Yugoslavia suffers from an acute ‘disregard for democratic principles, neglect of human and minority rights, and insufficient efforts in the domain of economic reforms’, as well as from a ‘deterioration in the freedom of the press and academic freedoms’ and ‘unbalanced’ relations with neighboring countries. Our problems with Europe, which date back to November 1989, thus continue, while the decision by the Contact Group, reached in London on 9 May this year, to impose selective sanctions against Yugoslavia (Serbia) means that Yugoslavia is now the only European country without any serious economic arrangement with the European Union.

Since the final decision concerning the European monetary Union, reached in Brussels on 2 May 1998, when the Euro was effectively born, this number one topic in Europe has been neglected in Yugoslavia. Apart from two expert consultations which passed largely unnoticed, and the recent statement by SPS spokesman Ivica Dacic regarding Serbia’s interest in European matters, nothing else reached the public, mainly because nothing  happened behind the curtain. So far the only issue regarding the introduction of the euro, which has been discussed in banking circles, concerns the relatively distant future, that is the period after 1 January 2002, when euro notes and coins will begin to arrive in Yugoslavia: should banks charge a commission for changing old German marks, currently kept in mattresses around the country, into euros? (Politika, 1 November). The dilemma - although serious considering that we are dealing with an estimated 2 to 4 billion DEM, which will have to be changed in a relatively short period of time (six months) - is nonetheless secondary in relation to numerous other questions posed by the introduction of the single European currency.

The euro synthesizes the model of a healthy but firm economic policy, primarily directed at maintaining stability of the currency and the market, and therefore imposes on Yugoslavia at least an orientational comparison with the famous five criteria which must be met by a national economy in order for it to be considered for the entry into the ‘Euro zone’. The criteria concern the budget deficit, public borrowing, the rate of inflation, the foreign exchange rate, and interest rates.

Those who wish to enter the euro union must not have a budget deficit in excess of three percent and a debt exceeding 60 percent of gross national product. According to estimates by leading economists, Yugoslavia has a budget deficit of at least 10 percent, while public borrowing exceeds 100 percent of GNP (although it is not officially called ‘public borrowing’ because of the state’s arrogance and carelessness in regulating the old foreign currency savings and other unresolved state obligations).
According to euro criteria, the inflation must not exceed the mean rate of inflation of the three most stable countries in the union by more that 1.5 percent. Governors of European national banks recently announced that an acceptable inflation rate for the euro is around 2 percent. The estimated annual rate of inflation in Yugoslavia is currently 40-60 percent.

In the last two years, the members of the euro union were allowed to have a foreign exchange rate fluctuation only within a range foreseen by the European monetary system (maximum 15 percent). In the same period, the Yugoslav dinar practically devalued by some 100 percent (on the black market).

The interest rate for long term investment in the 11 euro union member states must not exceed by more than two percent the mean interest rate of the three member states with the lowest inflation. Yugoslav interest rates which apply to rare long term investments are approximately ten times higher than the European ones, while the interest rates for short term borrowing are up to forty times higher.

Yugoslavia’s main problem however, is not the fact that it does not meet the above mentioned ‘convergence criteria’ set by the euro zone. The main problem is that since the beginning of the single European financial market, on 1 January, 1994, when all limits on the free flow of capital were lifted, very little has been done to direct the economic policy towards reducing the differences between Yugoslavia and the members of the Euro zone in terms of the criteria for healthy economic policy promoted by that zone. In practical terms, this means that our manufacturers have to go to the market with goods produced in an environment of considerably higher taxes, increasing prices, unstable foreign exchange rate, excessive interest rates, and without any trade privileges. It is true however that they will be getting euros in exchange for the goods.

Yugoslav economists have, for a long time, been suggesting a number of moves which would bring our system and economic policy closer to Europe.  Here is what Dr. Blagoje Babic, a Yugoslav expert for European finance suggested five years ago, at a time when the European  monetary union was still under construction (‘World of Finance’ June, 1993). He proposed a number of steps which would give our banking system a ‘national treatment’ on EU territory, which implies reciprocity, that is a realistic and not only theoretical possibility for European banks to establish their own banking companies on Yugoslav territory. Our banks should have been forced to adopt the business norms and technology of European banks, and should have been subjected to the scrutiny of auditing firms. In the meantime a body should have been created, which would conduct direct financial dealings with corporate banking in the EU, which implies above all the organization of a stock market, and the creation of stock to be placed on the market, i.e. privatization.

At the Kopaonik School of Natural Law, Dr. Babic pointed out that ‘the euro will be the most important foreign currency for the Yugoslav economy. It will be the most important asset in terms of foreign currency reserves, it will play a significant role in trading on the international market, and will be the most important currency in international and domestic financial transactions. At the same time, the whole of Yugoslav economy will have to adapt to the conditions which exist on the EU market’

Dr. Oskar Kovac and Dr. Tomislav Popovic also advocate adapting to Europe and the European monetary union (see their introductions to the book ‘Adapting the Economy to the Trading Conditions of the EU’; 1995). Dr. Kovac suggested that Yugoslavia should demand of the EU the rehabilitation of the SFRY-EEC 1983 agreement until a new agreement is signed (which has already been done by other former Yugoslav states), but he also concluded that this would be difficult to achieve. However, he suggested that an attempt should be made to sign at least a financial protocol, because this is where the interest of the EU is strongest, considering that member states have up to 2.5 billion German marks invested in the region. Three years ago, Dr. Oskar Kovac also insisted on an unconditional liberalization of all current transaction payments and on freedom of movement for middle and long-term capital in Yugoslavia.

Dr. Tomislav Popovic and the Institute of Economic Sciences in Belgrade of which he is president, have been researching for some time Yugoslavia’s ‘European option’. On this occasion we will deal only with the phases through which, according to Dr. Popovic, Central and Eastern European states had to pass in approaching the EU and its monetary union.  First is a phase of suspicion and rejection, followed by a phase in which the essence of the integration is identified, a phase of ideological maturation, a phase of euphorical and illusionist positioning, a phase of institutional organization of the relations with the EU, a phase of structural, economic and social adaptation and finally a sobering phase.

Several weeks before the beginning of the euro zone, Yugoslavia can not be identified as being in any of the above mentioned phases, save for the first - one of suspicion and rejection. However, some aspects of the other phases are also present. The most complex is the situation regarding the ‘ideological maturation and choosing the European option’, which in our case will be possible only after the ‘sobering phase’. The first psychological and political ‘trial option’ in Yugoslavia will take place when the Yugoslav Federal Bank announces whether the Yugoslav dinar will be tied to the US dollar (as was announced after the recent devaluation), or the euro (in the way that it was tied to the mark in the days of Ante Markovic). The American dollar would be more suitable considering that it is the main foreign currency in Russia and Belarussia. On the other hand, the euro will soon become absolutely dominant in all financial transactions. It is therefore not difficult to imagine that in three years time the whispers ‘marks, marks...’ uttered by the black market dealers in the street will be substituted with ‘euro, euro, euro’. Considering that it is difficult to believe that the mistakes made in the last five years will be corrected in the near future, the street is likely to remain the principal currency market in the country.

Further evidence that fixing the dinar to the euro is not only a question of ‘psycho-politics’, comes from last year’s stance of the Swiss national bank towards the euro. Namely, the bank was having doubts about whether to tie the frank to the euro, fearing the potential ‘firmness’ of the latter, and thus warned the Swiss government that the move might limit its room to maneuver. Even the IMF warned countries outside the EU against fixing their currencies to the euro before they meet the ‘convergence criteria’. However, Yugoslavia practically has no choice on the matter, because in a few years it will be physically surrounded by states whose currencies are tied to the euro.

Two other major questions cannot be avoided when it comes to relations between Yugoslavia and its workers and the euro and the market where it functions. The first question refers to the way in which Yugoslav companies can take loans from banks in the euro zone. Once European sanctions are alleviated, companies will be able to borrow cheaper and more easily, because competition will be fierce, and loans in easily exchangeable euros will be available not only in Frankfurt, but also in Madrid and Lisbon.

It is more difficult to estimate the effects which a single currency might have on the labor market in the countries within the euro zone, which means that it would be impossible to answer the question regarding the effect of the euro on Yugoslavs working abroad. America’s principle criticism of the whole euro project is the idea that the mobility of the labor force is an important precondition for the stability of a currency operating in such a large economic space, and that in Europe the mobility of the labor force is far below that in the US. As far as our workers are concerned, they should bare in mind that they will face competition from their Italian, Spanish and Portuguese colleagues - but that was always the case. The main danger which the euro brings to Yugoslavia, the way things are at the moment, is that any movement away from the euro might push this country further into isolation, that is, into incurable poverty.