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EU: Euro's Next Step Looks To Be In The East

  • Breffni O'Rourke

Since the introduction of the European Union's single currency in 1999, the national currencies of the eastern candidate countries have shown very different trends against the euro. Some have sharply appreciated, others are down -- all of which makes trade with the eastern region's main trade partners in the eurozone more difficult. Is this a case for the introduction of the euro as soon as possible in the accession countries?

Prague, 17 September 2003 (RFE/RL) -- Sweden's rejection last weekend of the European Union's common currency means the eurozone will likely remain at its present 12 countries for some years to come.

In fact, unless Britain or Denmark make an early move to join the single currency, the next countries to introduce it will be the accession nations, mainly from Central and Eastern Europe, which are set to join the EU next year.

Unlike existing EU members, the accession countries are not being given an option on the euro -- they have to adopt the euro as soon they fulfill the required criteria. But that still may take time - at least three years in the earliest cases.

Until then, the accession countries will retain their national currencies, which will mean that from next year, actually more EU member countries will be outside the eurozone than inside it.

And the enlargement will bring into the union a raft of new currencies, many of which have fluctuated heavily against the euro, thus complicating trade.

These fluctuations are detailed in a recent report from the EU's Eurostat statistical agency in Brussels ("Exchange Rates in the Candidate Countries," by Giuliano Amerini).

The report points out that Estonia's kroon, Bulgaria's lev, and Lithuania's litas are now fixed in value against the euro under a currency board system, and cannot vary as they did before.

However, the Czech crown, which has a floating exchange rate under which the rate is determined by foreign-exchange supply and demand, has appreciated by 11 percent since 1999.

By contrast, the Slovenian tolar has lost 19 percent against the euro since 1999. Likewise the Polish zloty, which floats freely on the foreign exchange markets, fell more than 10 percent against the euro in the first six months of this year, following earlier periods when it gained some 18 percent in value.

Slovakia's crown has gone through several years of turbulence as a managed floating currency, but appears to have stabilized. The Hungarian forint fell by over 11 percent against the euro in the first half of this year. Latvia's lats spent several years rising against the euro, but since last year has tended to fall. The Romanian leu has plummeted 66 percent since 1999, while Turkey's lira has tumbled a full 77 percent.

Does this make a case for the new members to join the euro as soon as possible? Deutsche Bank analyst Claus Papenbrock says it makes sense in terms of providing stability for trade.

"It simplifies [trade] and makes it more calculable, and to some extent also cheaper for the exporters and importers because they do not have to hedge their exposure," he said.

By hedging Papenbrock means that, in a situation where currencies fluctuate, the prices of products have to have a built-in cost component so that profit is preserved even if the exchange rate is unfavorable.

But joining the eurozone depends on fulfilling five economic criteria. One continuing hindrance for the easterners is their level of budgetary deficits. EU figures show that on average, the budgetary deficit of the 10 accession countries grew to 4.7 percent of the size of the economy (gross domestic economy) in 2002, compared with 3.8 percent the previous years.

The EU has set a deficit level of 3 percent as the maximum allowable, although that figure may be revised as the two major eurozone economies, France and Germany, are already exceeding that level.

The arrival of the 10 newcomers, with their generally higher rates of growth than in Western Europe, will also complicate the work of the European Central Bank when they join the eurozone. The ECB is responsible for setting the single official interest rate for the euro, no easy task considering the different level of economic development already inside the bloc.

In order to make a "one size fits all" interest rate practical, the different economies in the union are meant to be "converging," or becoming more alike. So far, as Deutsche Bank analyst Papenbrock says, the system has been working reasonably well.

"For Germany and for some other low inflation countries, the interest level is still somewhat too high; for other countries, especially Greece and Ireland, which are registering high growth rates, it is still somewhat too low well, okay, this is a problem of this 'one size fits all' policy, but so far that policy has not produced any severe tensions."

"Convergence" must proceed apace in the accession countries if the entry into the eurozone is not to be too bumpy of a ride.