State of play in eurozone enlargement

The euro has existed for over 20 years but many EU member states still have not signed up, with hesitance for political and economic reasons cited as the main stumbling block.

While all EU member states except Denmark are, in theory, obliged to adopt the euro, Sweden, Poland, the Czech Republic, Romania, Hungary, Bulgaria, and Croatia do not yet use it.

Sweden, for example, could quickly join the euro if there was enough political will to do so. But since the Swedish people voted against adopting the currency in a 2003 referendum, Sweden continues to avoid meeting one of the criteria to join, thereby postponing eurozone accession.

Croatian accession in 2023?

Bulgaria and Croatia were admitted to the Exchange Rate Mechanism (ERM II) in July 2020, which pegs national currencies to the euro with only a small margin for exchange rate fluctuation. States must participate for at least two years in ERM II, before introducing the euro.

“It is a kind of testing period to see how the national economy of the candidate country can operate without the possibility of exchange rate fluctuations”, explained Zsolt Darvas, senior fellow at the economics thinktank Bruegel.

Bulgaria hopes to introduce the euro in 2024, and Croatia aims for January 2023, pending final approval.

For Croatia to meet its goal, it needs a positive assessment by the European Commission in spring 2022 and a subsequent decision by the EU Council in summer 2022.

Could inflation be a stumbling block?

The Croatian National Bank is optimistic that Croatia, whose economy relies largely on tourism and services, will meet the EU’s criteria to join.

“Croatia has de facto been compliant with the convergence criteria continuously since 2016.” a bank spokesperson told EURACTIV.

Due to the recent surge in inflation, Croatia might breach the price stability criterion. However, as the price rises are also observable in the eurozone, the Croatian National Bank argued that Croatia should be considered as fulfilling the criterion nevertheless.

Most Croatians believe the introduction of the euro would have positive consequences for the country, according to a 2021 Eurobarometer poll. However, 70% believe it could lead to price increases.

Political reasoning in Poland

Poland, the largest EU member state that still uses a national currency, is not expected to join the eurozone under the current government.

“The government is against the euro, the opposition is for the euro, and a big part of public opinion supports the euro, but mostly for political reasons instead of economic reasons,” said Stefan Kawalec, a Polish economist and former deputy minister of finance.

According to him, many Poles fear the current right-wing government could take Poland out of the EU. For them, joining the euro would be a way to bind Poland to the Union, thus preventing a “Polexit”.

However, from an economic point of view, Kawalec is sceptical of the merits of a Polish euro accession.

“Due to the national currency, we have a counter-cyclical mechanism that serves our economic growth in the long run.

“When the global economy is in a good condition, supporting our export markets, the Polish zloty tends to appreciate, which tempers the economic boom. But if you have a deterioration of the global economy, you will see a depreciation of the Polish zloty, which acts in the opposite way,” Kawalec explained to EURACTIV.

The benefits of a domestic currency

Bruegel’s Darvas agrees that the exchange rate could be an important tool to adjust to economic shocks.

“During the global financial crisis, the Polish zloty, the Hungarian forint, and the Czech koruna depreciated by 20-30% relative to the euro, which helped those economies to adjust,” he argued.

For both Bulgaria and Croatia, however, this benefit of a domestic currency is unavailable in practice. Bulgaria, for example, has pegged its currency to the euro since 1999.

Meanwhile, in Croatia, there is a high degree of “euroisation”, which means that the euro already plays an important role in the economy through euro-indexed liabilities.

“For Croatia, the loss of monetary autonomy is more a theoretical than a practical cost, given the high euroisation and a rather limited room for a pure free-floating exchange rate policy”, the Croatian National Bank told EURACTIV in emailed comments.

Patience in Romania

For Romania, the conditions are different yet again, as it partly bases its policy on the actions of regional economic partners.

“I don’t expect Romania to be in a hurry to join the European monetary union, unless Poland is getting closer to the euro”, said Andrei Radulescu, director of macroeconomic research at Banca Transilvania.

Currently, Romania does not meet the convergence criteria.

According to Radulescu, Romania might be able to meet the criteria to join the euro by 2025, which is when he thinks the question of eurozone accession should be revisited.

“Being a member of the European Union but not of the eurozone is not efficient from an economic point of view”, Radulescu told EURACTIV.

“In the medium term, as long as the euro exists, Romania should be a member of the eurozone”, he added, arguing that remaining outside the eurozone meant higher transaction costs and interest rates.

Darvas, who analysed how EU member states inside and outside the eurozone fared economically, found that countries can prosper in both cases.

“Joining the euro is a political decision. Economic arguments do not clearly prefer one option over the other,” he told EURACTIV.


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