The EU's single currency, the euro, has had a rough ride since its launch some 18 months ago, steadily declining in value. Nevertheless, the euro has an increasing impact on the countries of Central and East Europe. RFE/RL correspondent Breffni O'Rourke looks at a study just issued in Munich that explores what the East's relationship to the new currency should be.
Prague, 24 May 2000 (RFE/RL) -- A study issued by one of Germany's leading economic research centers says the smaller and weaker among the Eastern candidates for European Union membership should peg their currencies to the euro, even though it will be years before they are admitted as EU members.
The study, issued by the IFO Institute for Economic Research in Munich, says however that the bigger and more robust candidates have the option -- if they choose -- of following independent exchange rate policies, and letting their currencies float until they eventually join the eurozone.
The author of the study, Heidemarie Sherman, tells RFE/RL why the less developed candidates, like Romania and Bulgaria, should peg their currencies directly to the euro:
"They are really still very much behind, they have very unstable institutions, structural change has not progressed very fast, they are weak, they are subject to speculative attacks."
For this reason, those countries need the stability provided by the euro. Not that the euro in its short life has turned out to be a strong currency -- it has lost almost 25 percent of its initial value against the U.S. dollar -- but it has been able to provide internal price stability inside the huge eurozone single market.
In any event, Bulgaria's currency is already effectively pegged to the euro, through the Deutschmark, the German currency which is now incorporated into the euro. Romania, however, operates a managed float in which the euro is used only informally as a reference.
The three Baltic republics fall into a separate category, in that their post-communist transitions, particularly in the case of Estonia, have been much more successful. But according to Sherman, they too should retain or move towards a currency peg with the euro:
"The Baltic states, they are very small, so an independent monetary policy for them is not really a realistic option, so they should have a currency board, let's say, or fix their exchange rates -- what form that takes is secondary." In fact Estonia already has a currency board with a peg to the euro through the D-mark, and Latvia has a de facto peg to a mechanism called the "special drawing right," which is attached to a basket of currencies including the U.S. dollar. Lithuania, however, is an anomaly, in that it alone among the EU eastern candidates has a peg only to the dollar.
The continued strength of the U.S. currency against the euro has caused considerable economic difficulties for Lithuania, because most of its trade is done with the EU, and its goods have therefore become uncompetitively priced. In view of this, the national Bank of Lithuania has announced its intention to re-peg the litas to the euro in the second half of 2001.
Moving on to the front-running countries for EU membership, the IFO study puts Poland, Hungary, the Czech Republic and Slovenia in a class of their own. Sherman:
"They are bigger, they are more advanced, they have done more structural reforms, and their institutions have been reformed to a larger extent, so those countries might not only choose, but [be able to] assert more monetary autonomy and independence in their actions, and therefore more flexibility in their exchange rates."
Sherman sees political questions, as distinct from pure economic issues, as playing a part in this question of monetary autonomy. She says the bigger candidates, particularly Poland, have become "rather proud" of their own central banking and want to keep their autonomy, at least for an interim period until they themselves join the eurozone. But the more basic choice is one between economic policy goals. If fighting inflation is the main aim, then a government will normally favor fixing the currency's exchange rate to a stable anchor -- such as the euro is meant to be.
However, if international trade competitiveness is the primary goal, then the best course, particularly in Eastern Europe, would normally be to float the currency, on the assumption that it would fall against major currencies.
But the continuing slide in the value of the euro has complicated that conventional picture. Having a pegged link to the euro has actually increased the exposure of the Eastern candidates to inflationary pressures, because commodities like oil have to be paid for in strong dollars.
And a surprised Poland, when it fully floated its currency the zloty in April, saw it actually rise in value. That made its exports into the key eurozone market more expensive, and thus less competitive.
At any rate, the situation will eventually resolve itself. All new EU members are committed to joining the eurozone either from the moment of entry into the EU, or as soon as possible thereafter.