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The Euro's Slow Way East

The deutsche mark, franc, lira -- all currencies that don't exist anymore. But some others, like Poland's zloty, Hungary's forint and the Czech crown, could be around longer. EU membership doesn't mean automatic euro.


It could be a while before new EU members adopt the euro

Many Europeans these days, simply take the euro for granted. Whether in Paris, Lisbon or Berlin, purchases can be paid for with the same coins and bills. However, somewhat less clear is how many countries actually use the common currency. Is it a.) 12, b.) 16 or c.) 18?

The answer: all of the above. Strange, but true.

Sparschwein räkelt sich auf Eurogeldscheinen

The first answer seems obvious, since there are 12 EU states which are official members of the European currency union. But, in addition, there are four smaller states that also use the euro: Andorra, Monaco, San Marino and Vatican City. They already used the former currencies of their bigger neighbors, like the franc or the lira, and so indirectly became members of the euro zone. All except Andorra even have permission to mint their own euro coins. So b.) 16 is also correct.

But answer c.) 18 is also perfectly acceptable. There are two additional regions in Europe, which aren't actually countries in their own right. In one of them, Kosovo, the deutsche mark was introduced by international administrators. The other, Montenegro, opted for the deutsche mark on its own. When the deutsche mark ceased to exist, the euro automatically became the de facto currency in these areas as well.

Opt outs

Since the Maastricht Treaty was signed in 1992, currency union has been one of the pillars of the European project. A common currency is meant to aid in the free exchange of goods and services, making, for example price, comparisons easier across borders and eliminating currency risks.

In theory, the member states of the EU are meant to join the currency union when they fulfill the criteria. But three of the 15 old members have not done so, much to the dismay of the former president of the European Central Bank (ECB), Wim Duisenberg.

Wim Duisenberg

Wim Duisenberg

"That message is to Denmark, to Sweden, to the United Kingdom: Come and join us!" he said on New Year's Eve 2001 when presenting the new euro currency.

But so far his entreaty has fallen on deaf ears. Denmark and Great Britain ensured that a clause was inserted in the Maastricht Treaty enabling them to opt out of the currency union. A referendum in Sweden showed the populace there is not interested in deserting the Swedish crown. The government found a way to "disqualify" itself from euro acceptance.

Chances for the newcomers?

The ten new members of the EU also "must" adopt the euro when they fulfill the Maastricht criteria. But so far, none of them has, according to a sober assessment made in October by ECB head Jean-Claude Trichet.

EZB Claude Trichet

Jean-Claude Trichet

"Let me also use this occasion to stress again that there is no preset timetable for the enlargement of the euro area," he said. "In order to adapt the euro, non-participating EU member states have to achieve -- and it is a necessary condition -- a high degree of sustainable economic and legal convergence."

Among the new EU states, there are large gaps between their preparedness for the euro -- Estonia, Lithuania and Slovenia riding at the front of the pack, Poland, the Czech Republic and Hungary pulling up the rear.

Over- and underachievers

For example, Estonia's finances could make about every third EU politician from the 15 old member states green with envy.

Gesangchor in Estland

The Estonians have a lot to sing about.

The Estonians achieved a budgetary surplus in 2003 of more than three percent of GDP, without a deficit in sight. The entire national debt, at 5 percent, is so low that it wasn't even possible for the ECB to calculate long-term interest rates for securities.

The Estonian crown has been pegged to the euro for several years and, since July, the country has been a member of the European Exchange Rate Mechanism II, which aims to reduce exchange-rate variability and achieve monetary stability.

Devisentafel in Frankfurt

After the two-year mandatory wait and without large currency fluctuations, Estonia should be ready to join the euro club at the end of 2006.

Those countries pulling up the rear, the Czech Republic, Poland and Hungary, have less to brag about and their finances have raised concerns at the ECB. Their budget deficits are well over the Maastricht limit of 3 percent. In fact, the Czech deficit reached 12 percent in 2003.

It will be quite a while, central bankers say, until the three can start dealing in euros. But then again, much the same was said about Portugal and Spain in the mid-1990s when few thought they could get their households in order.

But in these cases, the desire to be early members of the euro club brought about the kind of political pressure needed to do some budgetary weightlifting and get in shape for the new common currency.

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