Euro membership anchored inflation better than independent policy in Visegrad test

The textbook case for keeping a national currency is straightforward: when a symmetric shock hits, an independent central bank can set interest rates tailored to domestic conditions while a flexible exchange rate absorbs external pressure. The Visegrad four, Poland, Hungary, Czechia and Slovakia, offered a rare real-world test of that proposition during the 2022 inflation surge. Three kept their own money; one, Slovakia, had been in the euro area since 2009. The results, documented in a study by Rainer Martin and Piroska Nagy Mohácsi at the London School of Economics, contradict the textbook.

A natural experiment with a clear control

The four economies share more than geography. All are deeply integrated into German-centred manufacturing supply chains, all are members of the EU single market, and all emerged from the same post-communist transition. Their GDP per capita, export structure and institutional frameworks are comparable. The principal institutional difference is monetary: Slovakia ceded policy to Frankfurt in 2009, while the National Bank of Poland, the Czech National Bank and the Magyar Nemzeti Bank retained full autonomy.

When energy and food prices jumped after Russia's invasion of Ukraine, the three independent central banks moved first. The Czech National Bank began tightening in June 2021, the National Bank of Poland in October 2021, and the Magyar Nemzeti Bank in the same month. The European Central Bank did not lift its deposit rate until July 2022. By the time the ECB reached 2.5 per cent in March 2023, the Czech policy rate stood at 7 per cent, Poland's at 6.75 per cent and Hungary's at 13 per cent.

Faster hikes, weaker currencies, higher inflation

Conventional logic suggests the early movers should have contained price pressures more effectively. Their currencies also weakened against the euro, the zloty by roughly 8 per cent, the forint by more than 15 per cent and the koruna by about 5 per cent between late 2021 and mid-2022, which ought to have boosted export competitiveness. Yet harmonised index of consumer prices (HICP) data from Eurostat shows Slovakian inflation peaked lower and fell faster. Poland and Czechia recorded peak annual rates above 17 per cent; Hungary exceeded 25 per cent. Slovakia's peak remained below 14 per cent.

The growth dividend from currency depreciation is equally elusive. Real GDP trajectories for Slovakia, Poland and Czechia tracked each other closely through 2022 and 2023. Hungary, which combined the steepest rate hikes with the largest fiscal deficit, above 6 per cent of GDP in 2022, lagged visibly. The exchange rate channel, in other words, did not deliver the offsetting expansion the textbooks promise.

The ECB's gravitational pull

Martin and Nagy Mohácsi argue that the explanation lies in the ECB's sheer scale. Its balance sheet, swollen by years of asset purchases and pandemic emergency programmes, exceeds €7 trillion, larger than the combined balance sheets of every other European central bank. That size creates what the authors call "economic gravity": financial conditions in open European economies adjust to Frankfurt regardless of formal membership.

If a small open economy sets rates far above the ECB, capital inflows appreciate the currency, tightening financial conditions beyond the central bank's intent. If it sets rates too far below, capital flees, the currency slides and imported inflation rises. In either case the market forces convergence. The result is a loss of policy autonomy without the credibility gain that comes from full euro adoption. Investors, the study finds, simply trust the ECB's commitment to price stability more than they trust a national central bank operating in the euro's shadow.

Anchored expectations, unanchored reality

The clearest evidence appears in inflation expectations. Surveys by the European Commission and Consensus Economics show that one-year-ahead expectations in Slovakia remained within half a percentage point of the ECB's 2 per cent target throughout 2022. In Poland, Czechia and Hungary they drifted 3 to 5 percentage points higher. Long-term expectations, which central bankers watch most closely, barely budged in Slovakia but widened markedly in the three non-euro economies. Credibility, it turns out, is not a function of independence alone; it is a function of the institution that ultimately backstops the financial system.

Fiscal policy did not explain the gap

The researchers also examined whether fiscal divergence drove the inflation gap. General government deficits in 2022 were similar: Slovakia at 2.0 per cent of GDP, Poland at 3.7 per cent, Czechia at 3.2 per cent. Hungary was the outlier at 6.2 per cent, consistent with its worse inflation and growth outcomes. But the similarity among the other three suggests fiscal policy cannot account for the systematically higher inflation in the non-euro trio. The monetary regime itself appears to be the differentiating factor.

Implications for the waiting room

Poland and Czechia are legally obliged to adopt the euro once they meet the Maastricht convergence criteria; both have missed the inflation criterion repeatedly since 2020. Hungary has no target date. Denmark maintains a fixed exchange rate via ERM II but keeps its krone. Sweden floats. Romania and Bulgaria are preparing for entry, Bulgaria targeting 2025, Romania 2026 or later. The LSE study suggests that delay carries a hidden cost: the worst of both worlds, exposure to ECB-driven financial conditions without the institutional anchor that keeps expectations stable.

The ECB's own analysis, published in its 2023 convergence report, acknowledges that financial integration transmits euro-area monetary conditions to non-euro members but stops short of quantifying the credibility penalty. Martin and Nagy Mohácsi's work provides that quantification for the most comparable group of economies in the union. Their conclusion is blunt: for small, open, financially integrated economies on Europe's periphery, "in" really is better than "out" when the goal is price stability.

What the next shock will test

The ECB began cutting rates in June 2024. The Czech National Bank followed in December 2023, the National Bank of Poland in September 2024, the Magyar Nemzeti Bank in May 2024. The easing cycle will reveal whether the asymmetry persists in reverse: whether non-euro central banks can sustain lower rates than the ECB without triggering capital outflows and currency weakness that reignite inflation. If the gravitational pull works symmetrically, the answer is already written in the 2022 data.