Euro Adoption by Accession Countries - Macroeconomic Aspects of the Economic and Monetary Union

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If the eurozone countries are too diverse, there will be a problem with internal stability — even after implementing institutional reforms, which should change the principle of decision-making on European rates over to the majority principle. Therefore, the eurozone entry must be assessed separately for each accession state according to its conditions, whereby a slower entry will be favored regarding to stability in the EU.

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Euro Adoption by Accession Countries - Macroeconomic Aspects of the Economic and Monetary Union

Our newsletter keeps you up to date with all new papers in your subjects. Request a new password via email. The four main criteria, based on Article 1 of the EC Treaty, are the following: The following Table 1 provides an overview of the status quo regarding to the fulfillment of the convergence criteria dark fields mark fulfilled criteria by each country: Steady Euro Adoption Since the accession states have different target dates, reasons pro and contra for a fast or slow eurozone entry will be weighed up in this section.

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The countries won't adopt the euro as their new currency immediately, because they first have to show that their economies have converged with the economy of the euro zone. Presently, the efforts and opinions of the new members differ about the adoption of the single currency. For instance, the Slovenian Prime Minister Janez Jansa told the press in February that there 'is nothing on the path ahead' that could endanger the euro adoption in The government pursues a tight fiscal policy to meet all entry requirements.

Recently, it introduced a dual pricing - that means all prices of goods and services are marked in tolars as well as euros - to raise consumer awareness in the preparation for the euro adoption.

The leader of the Polish conservative party Jaroslaw Kaczynski said during a campaign that he 'doesn't see any benefits in adopting the euro. Euro adoption would lead to lower exports, lower national income and higher unemployment. We heard that when Finland adopted the euro, it took them quite a while to get used to it and prices increased. How does the adoption process work? It is merely the end of the beginning. Indeed, joining the euro is not in itself a recipe for success.

Countries need to pursue the right policies in order to thrive in the euro area.

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Joining the EMU removes the national instrument of nominal exchange rate adjustment. This implies increased flexibility of national economies and increased responsibilities for the co-ordination of the national economic policies of the member states, because they have to compensate for the elimination of this adjustment channel. Against this backdrop, the institutional framework in the EC Treaty for the EMU does not only set a new institutional framework for monetary policy but also for the economic policies of the member states:.

They set the overall frame for the economic policies of the Member States. Building on this co-ordination framework the EU leaders agreed on a wide-ranging program of structural reforms — the so-called Lisbon Strategy in In addition to the co-ordination of economic policies the EC Treaty has put in place a framework for stability-oriented budgetary policies. The main element of this framework is the Stability and Growth Pact , which requires Member States to pursue sound fiscal policies. The economic policy guidelines and the budgetary rules are important so as to facilitate the adjustment to economic shocks in the absence of a national monetary and exchange rate policy.

Accordingly, it is not surprising that the EU has taken a negative position towards unilateral euroisation by a candidate country or a Member State with a derogation. In November , the ECOFIN Council — bringing together the Economics and Finance ministers of the EU Member States — formally adopted the position that unilateral euroisation is not compatible with the Treaty and cannot be a way to bypass the convergence process foreseen by the Treaty for the adoption of the euro.

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It would not ensure that the country in question pursues the right policies to thrive under the euro. This raises the question of the approach to be taken towards countries, which would in principle qualify for EU membership Art 49 TEU but do not formally aspire to join the EU and are thus not candidate countries. This is the category of countries like Iceland. Here, both the rule of law and the principle of equal treatment provide answers. The Treaty does not provide a framework for euro adoption by non-candidate countries.

Explicit exceptions are only made for a limited number of countries which legally used a legacy currency before the euro was introduced, and whose economic and financial structures were closely intertwined with a euro area Member State. From the point of view of equal treatment, it would be difficult to conceive that the EU would be more open towards euroisation by non-candidate countries than by candidate countries or Member States with a derogation. This is also the line followed by the ECB.

This brings me to another question: What would happen if a country nonetheless adopts the euro? I am aware that unilateral euroisation is being discussed in Iceland as a possible option. I would like to emphasise that the ECB, in line with the official position outlined above and consistent with our mandate, would neither encourage nor facilitate such a move. Countries which unilaterally introduce the euro would do so in their responsibility and at their own risk, without committing the EU or the ECB.

The ECB would thus pursue a policy of non-engagement and non-support towards these countries. Let me take a closer look at the economic costs and benefits of unilateral euroisation. I will focus my remarks on euroisation in general, and will not look specifically at the case of Iceland. Euroisation would also eliminate exchange rate risk.

In turn, the country in question may benefit from lower interest rates. On the micro-economic side, euroisation would lead to lower transaction costs, and might provide a boost to trade and financial integration.

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These benefits can, however, not be taken for granted. Most of these benefits can indeed only be reaped if they are supported by sound economic policies.

For instance, inflation may still be running high in case of pro-cyclical fiscal and wage policies. Accordingly, euroisation cannot be a substitute for stability-oriented policies. Again, this underlines the importance of having in place a stability-oriented macro-economic framework, such as the one established at EU level. First of all, the country in question may face an inappropriate monetary policy stance in case of diverging business cycles. The loss of an independent monetary policy and the exchange rate instrument may make it more difficult for the country in question to respond to idiosyncratic shocks, or to correct a loss of competitiveness.

The country in question could also run into logistical difficulties, since it would exclusively depend upon private arrangements with credit institutions for a number of key services, such as banknote handling and the execution of high-value payments.

It would also render it more difficult to extend the lender of last resort function to its own credit institutions. In short, unilateral euroisation is not a panacea.

The adoption of the euro: principles, procedures and criteria

Its benefits are uncertain, whereas the costs are real, and the risks serious. Admittedly, euroisation would provide some shelter against adverse winds coming from the outside. In a way, the euro can be likened to the armours worn by knights during the Middle Ages.

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