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WHILE three members of the European Union, Britain, Denmark and Sweden, dither about adopting the euro, some Central European states who would like to be EU members are considering putting the cart before the horse. They think of making the euro their official currency even before joining the Union.
Physically, at least, neither the European Commission nor the European Central Bank (ECB) can do much to stop them. Indeed, Montenegro and Kosovo—although not EU candidates or even independent countries—switched, from D-marks to euros, on January 1st. In November 2000 the European Council made clear that countries wishing to join the EU should follow the prescribed path to the euro: waiting until they have joined the Union and then putting their national currency through two years of “purgatory” in Europe's second-generation exchange-rate mechanism, as well as fulfilling the other Maastricht criteria. The council also insisted that the exchange rate at which a country joins the euro should be decided jointly, not unilaterally. The use of currency boards—Bulgaria, Estonia and Lithuania have all tied their national currencies to the euro—is about as far as Brussels will let these countries go.
At a gathering at the London School of Economics this week there was no sign from commission or ECB officials that these views will be modified soon. That is despite strong arguments that a handful of EU candidates could benefit from early adoption of the euro. The official objections appear to be as much political as economic, and in particular an unwillingness to reopen the Maastricht treaty. The treaty's criteria that countries must meet before joining the euro include low inflation, low public debt and low budget deficits, as well as exchange-rate stability.
However, by adopting the euro early, a country forgoes the flexibility of altering its exchange rate to absorb economic shocks. This concern mysteriously falls away when a country has joined the club. But there are other arguments against early adoption of the euro. A country gives up the power to act as lender of last resort, for instance.
Still, some academics say with increasing force that too rigid an approach to adopting the euro may not suit small, open economies, such as those of Estonia, Lithuania or even Hungary. A speculative attack on their currencies might wipe out all the good of having to put on Maastricht's monetary and fiscal straitjacket. On the other hand, says Willem Buiter, chief economist of the European Bank for Reconstruction and Development, capital flows into these economies as they adopt the euro might increase inflationary pressures—pushing inflation above the Maastricht targets.
Poland has its own band of unilateralists. Recently, at a meeting in Warsaw held by the Centre for Social and Economic Research, Jacek Rostowski, a veteran adviser to successive Polish governments, pointed out that many EU candidates have stronger trade links with the euro area than do some current members. Anyway, both inflation and high interest rates—which have contributed to an economic slump—would come tumbling down, boosting growth and speeding up convergence.
Poland might be too big a contender for unilateral action. Estonia is keen, but says it will not move without the European Commission's say-so. Croatia is a different matter. It is not even on the EU waiting list, yet nearly nine-tenths of its bank deposits are already in euros. Its euro5.5 billion ($5.1 billion) of foreign reserves could buy up the money supply twice over. Boris Vujcic, deputy governor of Croatia's central bank, says that, despite discouraging talks with Brussels, “the issue is not dead”.
The chances are slight that the commission will give ground. Economists there are not blind to the arguments, although they may still, on balance, favour a cautious stance. But what would happen to a non-candidate country that adopted the euro and then applied for EU membership? Would it be disqualified for being too fond of the euro? “If there is a government willing to call their bluff, things could get interesting,” says Mr Rostowski.
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