Access to Eurozone banking union must be opened up, says EBRD Chief Economist, Erik Berglof. The EBRD Transition Report 2012: ‘Integration Across Borders’ also looks at the Eurasian Economic Union and the progress of structural reforms in the EBRD region.

A full transcript of the video is available below.

“In the report we look at the last 10-15 years of growth in our region and looking at how it is affected by what is going on in the eurozone. What we see is that there is a huge variation in terms of how vulnerable these countries are to what is happening in the eurozone. They are all quite connected to the eurozone. They all have strong links through the financial system through direct investment, export and trade and the job market. All these links are very strong. Yes, the development of the eurozone is somewhat better now – we feel that there is hopefully some floor to how bad it can get. But certainly the eurozone problems are not out of the way and the prospects of growth over the next few years are not very strong in the eurozone and that is something that will shape the immediate future of the countries in eastern Europe as well.

“What is new is that the eurozone is now really affecting Russian growth. A lot of Russia’s links to the eurozone come through very large energy exports and as the growth is slowing down, the demand for energy is lower. Since Russia is so important to so many countries in our region, what is happening in Russia is critical. Again, Ukraine is very vulnerable both to what is happening in the eurozone and in Russia, so Ukraine through the weaknesses of its domestic institutions and the weaknesses of its political system is very much affected by these developments in its surroundings.

“The way to think about the eurozone and the financial dimension of the eurozone is that we have built a building that is half-finished. We have very advanced integration in terms of the financial institutions and they play an enormous role in different parts of the eurozone but also in central and eastern Europe. But we haven’t built the structures that can support these cross-border linkages.

“What we are arguing in this chapter is that now, for the first time, there is a real attempt by the European Union to create this new architecture, this new support system for cross-border banking. And we very much welcome that but we are worried that for the countries outside the eurozone this could distort things. They will possibly subject themselves to supervision from the ECB while not having access to the support of what we call the fiscal backstop, this crisis fund, and that will worsen the situation for banks that are not based in the eurozone. In countries like Poland there are quite a few eurozone banks active, but there are also domestic banks. Having the playing field distorted by this new structure emerging at the European level is what we need to address.

“We are proposing a number of possible ways around it. One is to try to find ways for these countries to opt in. But we need to be clear about what opting in means. It implies a certain level of supervision and being part of the single supervision mechanism. But we also think that there should be the possibility of letting countries participate in the rescue mechanism, the European Stability Mechanism, the ESM. There needs to be some balance there. There also needs to be some opening up in the governance structure so that the countries that would opt in would be allowed to participate in a meaningful way in these critical decisions that are made in the eurozone.”