"It's the euro, stupid," New Europe finds belatedly

By Adam Jasser - Analysis

WARSAW (Reuters) - A Polish proverb "Jak trwoga to do Boga" (Run to God when in trouble) is a fitting description of how the financial crisis is shifting attitudes in much of the ex-communist central Europe toward the euro.

Stung by rapid depreciation of their currencies, credit rating downgrades and capital flight in the last few weeks, many "New Europe" politicians are waking up to the status of the euro as sanctuary in economic hard times.

In Poland, Hungary, Czech Republic, Romania and the Baltic states, governments look with envy at Slovakia which, thanks to its imminent adoption of the single currency on January 1, has suffered none of the investor anxiety or capital flight that the global financial turmoil has inspired elsewhere.

The crisis engulfed Hungary, once an economic leader in the region, seeing it become the first European Union state in 30 years to be bailed out by the International Monetary Fund after years of overspending and living on credit.

The plunge in the Hungarian forint and the drastic measures the beleaguered Socialist government in Budapest has had to take to save the country from financial collapse have sent shockwaves across the region.

Even eurosceptic politicians such as Polish President Lech Kaczynski have pointed to the Hungarian "events" as perhaps a good reason to pursue the euro after all.

This in itself is remarkable. Since joining the EU in two waves since 2004, only a few of the 10 ex-communist EU members have pursued the euro vigorously -- despite committing to adopt it in their accession treaties.

FALSE SENSE OF SECURITY

Lulled by the fast economic growth that came with EU membership, a rise in the value of their currencies and access to cheap credit on global markets, governments of left and right assumed their risk profile was permanently hoisted above emerging market status.

With no determined push to meet strict euro zone criteria, original plans to adopt the single currency in 2008-2009 were pushed back or dropped altogether, with the exception of Slovakia and tiny Slovenia, a euro zone member since 2007.

For their part, investors contributed to this false sense of security, ignoring the slippage of euro timetables and reform in favor of pumping billions of euros into the region's assets because the growth story was too good to be missed.

The benefits of eliminating currency risk, having lower borrowing costs, or being protected by the European Central Bank and wielding influence on the Ecofin council of EU finance ministers seemed too abstract for politicians and investors.

Even when the crisis started to bite hard in the United States and Europe, the region was considered a safe haven.

But in the last few weeks of panic, it became clear to all that with the wafer-thin capital stock and the absence of ECB protection, the "new Europe" economies were still wearing a rather large emerging market badge on their sleeves.

Those who were most exposed, like Hungary, were punished accordingly for its feeble and much delayed reform efforts.