Two-track diffusion and central bank embeddedness: the politics of Euro adoption in Hungary and the Czech Republic

ABSTRACT Post-communist Europe's increasing convergence with the European Union has generated contentious debate over the underlying impetus for this change. Did the material incentives and implicit coercion inherent in the EU accession process prod East Central European leaders onwards in their reform efforts, or did they adopt new institutions because of the deeper effects of persuasion and socialization? This article uses central banking to make two arguments in relation to this debate. First, differently situated domestic actors may support EU-style institutional convergence in the same issue-area for different reasons; while external incentives may primarily motivate one group, another may fully accept and internalize the underlying EU norms. Such two-track diffusion is more likely to occur when an epistemic community drives the domestic socialization process, because under these conditions socialization can advance within a small group or single institution without requiring active encouragement from other domestic actors. Second, problematic consequences of two-track diffusion appear only after EU accession becomes assured, relaxing or removing external incentives for compliance. At that point, socialized actors may find that they no longer enjoy wider domestic support. I demonstrate this through an examination of Czech and Hungarian central bankers' efforts to adopt the Euro quickly despite the potential risks involved. The socialized central bankers took this position out of weakness, not strength, viewing the external constraint of Euro adoption as the only way to ensure conservative fiscal and monetary policies after EU accession.