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Europe: Monetary Union Will Affect The East

Prague, 5 May 1998 (RFE/RL) -- The 11 states committing themselves to monetary union at the European Union summit (May 1-3) are not the only countries affected by this momentous decision.

The new single currency comes into force next January 1. It will of course have considerable impact on those four remaining EU member states which do not wish to join monetary union for now, or which are not eligible to join.

But beyond the EU itself there is an even broader spectrum of countries whose future is closely linked to monetary union -- including the prospective member states in Central and East Europe.

There has been lively debate about the likely affects of monetary union on the 10 eastern applicants. Those favoring EMU say that the "deepening" of west European integration is a pre-condition for "widening" to the east, and thus EMU will help the expansion process. Critics on the other hand say the move will further divide Europe into "ins" and "outs", into richer and poorer.

The single currency will have immediate repercussions for the east for instance in terms of currency exchange rates. The Czech Republic maintains a float against the D-mark, but that national currency will of course be submerged into the new euro, for which no overall market value has yet been established. Two other countries, Bulgaria and Estonia, have currency boards based on the D-mark. These in turn will become directly linked to the euro.

The second immediate change will be in trading relationships. A number of EU applicant states like front-runners Poland, Hungary and the Czech Republic already have most of their trade with the EU, and so the euro will affect those ties. The Minister Counselor at the Romanian mission to the EU, Radu Serban, put it this way: he says he believes the euro will be a slightly weaker currency than the D-mark, which in affect will mean German-made goods will be cheaper, thus stimulating German exports to the east. This in turn means that in specific cases trade balances could be worsened.

But in general, Serban, like many other Eastern European diplomats, is optimistic that EMU will bring more benefits than problems.

He says Romania could well benefit in the first instance from increased foreign investment, because average interest rates in the EU will be lower under the euro, therefore there is likely to be an increased flow of money outside the EU seeking profitable investment targets in East Europe, including Romania.

Romania is considered a "second wave" applicant to the EU. Like a surprising number of eastern prospective members, it does not fare too badly when compared against the major Maastricht criteria for EMU membership. Its budget deficit is 3.6 percent of GDP, its government debt is 38 percent of GDP. But as with many of the other applicants, its weak spot is inflation, which this year is likely to be above 37 percent.

Neighbor Bulgaria, another late starter in reforms and like Romania a "second-wave" prospect, is also making big efforts to meet the Maastricht criteria, as Ves Volkanov, political counselor at Sofia's mission to the EU, told RFE/RL.

He says that the Bulgarian government takes very seriously the convergence criteria for the single currency states. It has adopted these criteria as its own, and its economic policies are focused on achieving the high standards necessary for joining the EMU. Volkanov noted that Prime Minister Ivan Kostov has set tangible dates to meet some of these criteria, namely by 2001 or shortly thereafter.

The three Baltic states are keen prospective EU members, but only Estonia is in the first wave. Taavi Toom, First Secretary at the Estonian EU mission, makes the point however that EU membership is not conditional on joining the single currency zone.

The two things are separate issues, and he said that he expects Estonia to be a member of the EU before it joins the single currency. At the same time however Toom notes that when Estonia submitted its application for EU membership, it committed itself to working towards fulfilling the conditions for monetary union.

All candidates must embrace the goal of monetary union as part of their effort to meet the EU's "acquis communautaire", the body or rules for member states. Lithuanian mission First Secretary in Brussels, Algirdas Paleckis, says this means it provides an additional impetus to countries like his own to be better prepared economically.

He says Lithuania is ambitious and joining the euro zone will be a very important target for it, and the Vilnius government will be doing its best to prepare for this move.