In a little over two weeks’ time the euro celebrates its tenth anniversary — just as a new political will to engage with membership is coming to the fore in central and eastern Europe. The single currency is winning over hearts and minds among the credit-crunch economies of the region.
When the US stockmarket crashed in October 1929, global credit conditions deteriorated and Austria’s biggest bank, Creditanstalt, found itself heavily exposed to foreign currency losses in central and Eastern Europe (CEE). The Austrian government was then forced to guarantee all foreign and domestic deposits of the bank to avoid financial meltdown throughout the region.
History is now repeating itself with vigour. Risky lending in recent years has piled foreign currency debt on to the households and businesses of central and eastern Europe. Regional currencies have plummeted and servicing costs for euro and Swiss franc-denominated debt have soared. But unlike in the Great Depression, these states now look jealously at their eurozone neighbours who enjoy a safe, liquid currency that has acted as a shock absorber to localised crises and as a shield from international currency volatility.
After being accused of ramping up prices in domestic economies and lacking the international clout of the dollar, the euro is enjoying popular appeal among citizens, businesses and policymakers alike. Localised financial disasters such as Spain’s real estate crash and Italy’s chronic budget deficit would have eroded market confidence in such economies and precipitated speculative attacks on their currencies in the pre-euro days.
In central and eastern Europe, economic growth and currency appreciation made citizens and policymakers complacent about euro entry. In fact, some argued that hurried adoption would trigger high inflation and put the brakes on growth.
But regional currencies are now in free-fall. There is a perilous lack of euro liquidity while foreign currency mismatches in household and corporate debt will inflict serious financial distress next year.
The result? Poland has voiced renewed enthusiasm for its 2012-euro adoption date while Hungary hopes to begin membership talks in 2009. Some even talk of unilateral adoption of the currency — such as in Bulgaria where the Confederation of Employers and Industrialists proposed unilaterally adopting the currency, bypassing approval process from the European authorities.
The volatile currencies and rising domestic bond spreads resulting from the credit crunch have in theory undermined the economic groundwork necessary for eurozone convergence. But the same phenomena have reinforced the political desire to join.
Euro membership is not a panacea — some economists think that some of the current southern European members desperately need an option to devalue to restore competitiveness and prevent mass unemployment.
But on its tenth anniversary, the euro is attracting more fans than ever.