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Business

Euro Goes East

After 10 countries join the EU in May, they will adopt the euro as their currency. While some are likely to fulfill the criteria for entering the monetary union soon, others still have a long way ahead of them.

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New EU states will have to wait a while for their euro starter kits.

Eastern European states should adopt the common currency as quickly as possible to reap the benefits, said Werner Becker, senior economist at Deutsche Bank Research in Frankfurt.

“They’ll be able to enjoy low interest rates, a stable currency, a fixed exchange rate with main trading partners as well as with the euroland, where most direct investments come from,” Becker said. He added that without the risk of fluctuating exchange rates, companies in these countries can better plan and act. Thus, the euro would stimulate economic growth.

Joining too early hinders growth

But there are also those arguing against an early accession to the euro. The new EU countries could actually be slowed down in their attempt to catch up economically with the rest of the union, according to Hermann Rempsberger, a member of the German Federal Bank’s executive board.

Trying to catch up with the other EU countries, the new member states -- Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia -- are likely to experience higher inflation rates.

So far, they have been able to counter this by devaluing their currency. But that will no longer be possible once they have joined the euro zone. One consequence of the fixed currency is the risk of losing their competitive economic advantage, Rempsberger said.

Criteria to join the euro zone pose hurdle

In order to adopt the common currency, the new EU member states have to fulfil the criteria set up in the Maastricht treaty:

  1. The rate of inflation cannot exceed that of the euro zone’s three most stable countries by more than 1.5 percentage points.
  2. Long-term interest rates can only be 2 percentage points higher than in those countries.
  3. No exchange rate realignment for at least two years.
  4. A government budget deficit of no more than 3 percent of gross domestic product.
  5. National debt cannot be higher than 60 percent of gross domestic product.

    Already, it’s possible to see countries moving towards fulfilling those criteria, similar to Portugal or Spain, who unexpectedly managed to be among the first to join the euro zone. Budget deficits in some countries are worrisome, however: Those of Hungary, Poland or the Czech Republic are still well above the 3 percent cut-off line.

    High achievers and problem children

    As far as national debt is concerned, however, all Central and Eastern European candidates to join the union in 2004 are in the clear. Nevertheless, there are big differences between them: While Estonia’s national debt is 5 percent of GDP, Hungary’s has reached 53 percent of its GDP.

    As far as the exchange rate alignment is concerned, some countries have come quite close to the euro already. Hungary’s exchange rate stays within plus or minus 15 percent against the euro -- the same fluctuation margin currently in place for the European exchange rate mechanism. Estonia and Lithuania have practically tied their currencies to the euro by means of a currency board, almost as if they had already joined the euro.

    Euro not before 2007

    The road to euroland still remains a long one, however. Since the 10 countries are supposed to join the European Union in 2004, the euro probably will not become their official currency before 2007, as the candidates have to spend the required two years within the European exchange rate mechanism. While that’s still three years away, Deutsche Bank’s Werner Becker has also come up with his list of top candidates: “Estonia, Poland, the Czech Republic, Hungary and Slovenia will quickly make it, I expect.”

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