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Eastern Europe: Euro's Impact Could Be Minor

Hong Kong, 17 September 1997 (RFE/RL) - The introduction of the European Union's new common currency, the euro, possibly may have some of its larger external effects felt in the countries of Central and Eastern Europe, according to the International Monetary Fund.

The establishment of monetary union and introduction of the euro, replacing the national currencies in a number of major West European nations, is scheduled for the beginning of 1999.

In its semi-annual updating of the World Economic Outlook, released in Hong Kong today, the IMF calls the establishment of the EMU (European Monetary Union) a "milestone" in the 40-year history of the quest for European integration. The IMF says it will constitute the largest change to the global monetary system since the break-up of the old Bretton Woods gold value system.

Its impact will generally be positive around the world, says the IMF, but for some countries of Central and East Europe, there could be a minor impact in the beginning. This is because with strong trade links, these countries peg their currencies to EU currencies -- and that will continue with the euro -- but pay contractual financial obligations on their international debt in dollars and yen.

With this kind of what the fund calls "mismatch," a depreciation of the euro would lead to an increase in the domestic currency cost of international debt payments, probably without an offsetting gain in trade.

This potential problem is mostly of concern to countries which have a heavier debt load. None of the nations in Central and East Europe are considered to have a heavy debt load. However, Slovenia, Poland and Hungary have more than 50 percent of their foreign trade with EU countries, but only around 30 to 40 percent of their debt denominated in EU currencies.

Still, says the fund in its analysis of the impact of the euro, it is only a "potential" difficulty. It says that even if the euro experiences some fluctuations in value in its first days, it is "unlikely to trigger debt-servicing difficulties since the affected countries have continuing access to international financial markets."

Additionally, says the IMF, most have a relatively moderate level of debt and Hungary, the only exception, has been successful in reducing its exposure to currency fluctuations by using sophisticated international currency market transactions to keep a balance in its debt payment requirements.

Countries that have pegged their currencies to the deutsche mark, or to a basket of currencies in which the deutsche mark has a large weight, are likely to switch to the euro once it's introduced and that will eliminate any potential problems.

Bulgaria and Estonia, both with currency boards, have already stated their intention to do just that.

The fund says that the initial strength or weakness of the euro should have "little effect" on the terms of trade for the region, although it says a weak euro might lead to higher prices for energy imports, which are priced in dollars, and that would push domestic prices up.

In the long run, says the IMF, the transition economies of Central and East Europe and the Baltics will "unambiguously benefit" from a successful EMU -- both from higher growth in their principal export markets and from lower real interest rates that will help with the financing of their continuing economic restructuring.

Continued low inflation in the EMU countries will, says the fund, further provide a sound goal for the transition countries to aim for in order to fulfil their own aspirations of acceding to the EU.

Overall, the IMF says the countries of Central and East Europe now do 60 percent of their trade with the EU, while the Baltic countries get over 50 percent of their imports, and sell about 40 percent of their exports, to EU nations.