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Tuesday, 30 October, 2001, 15:05 GMT
Why Eastern Europe loves the euro
By BBC News Online's James Arnold
Three years ago, an Estonian government delegation arrived in Brussels with an unusual request.
European Union membership could still be a long way off, the Estonians said; would the EU mind if Estonia adopted the euro as its currency straight away?
And not just there: ex-communist Eastern Europe is pretty much the only place where the battered euro is regarded with excited anticipation, rather than nervous mistrust.
But as Estonia and its peers move towards EU membership within the next couple of years, the process of shoe-horning them into the single currency mechanism is starting to look dangerously problematic.
Hurry up, please
Barely a week goes by without an East European policy maker calling for early adoption of the euro - or at least some relaxation of the current timetable, under which new members must put their currencies into an exchange-rate mechanism for two years after joining the EU.
The existing rules would postpone euro adoption until at least 2006 for most candidate countries.
Fanatically reform-minded and Europhile Estonia has so far tended to be the keenest enthusiast, but it has been joined by a growing chorus of mutterings from elsewhere.
In Poland, the largest candidate country, the governing council of the central bank is split on the euro issue, with governor Leszek Balcerowicz a key campaigner for euro adoption.
Mr Balcerowicz is arguably the best-regarded economic voice in the region, having pioneered free-market reform as finance minister in Poland's first post-communist government.
Even countries with no hope or ambition of joining the EU - including Russia - are tinkering with their financial systems in an effort to become more euro-compliant.
The Russian government recently said that its foreign-exchange reserves were being gradually shifted to the euro from the dollar - long the currency of choice for discerning Russians.
De facto, if not de jure
The pro-euro argument seem strong.
First, the euro is in any case Eastern Europe's de facto currency.
Even floating currencies, such as the Polish zloty, have tended closely to track the euro.
Most East Europeans have cash holdings of Deutschmarks, and are likely to shift their allegiance even further away from the dollar when euro cash launches next year.
And their economies are inextricably linked with Western Europe by patterns of trade.
Some candidate countries export a greater proportion of their goods to the EU than do most EU members.
The unloved forint
Second, East Europeans have little reason to love their own currencies.
Notwithstanding the relative stability of most East European currencies, they are regarded by deep mistrust by locals, who have been scarred by the hyperinflation of the immediate post-communist years.
And while there is little prestige in, say, the Hungarian forint, the symbolic value of joining the world's biggest currency bloc has considerable allure.
Sweetening the pill
And while few ordinary folk may share this view, some reforming zealots around the region see euro convergence as a key disciplinary measure - a means of kicking economies into shape under a strict timetable.
Pushing through stringest fiscal reforms has always been political tricky in Eastern Europe.
Some are hoping that impending euro membership could prove an attractive enough sweetener to help the medicine down.
Not so fast
But the excitement does not seem to be shared in the West.
EU leaders, although keen to pay lip-service to enlargement of the union, tend to look shifty when pressed on the issue of eurozone expansion.
Although many East European countries may be able to meet the criteria on paper, the argument goes, they lack the credibility to bolster the euro at this sensitive time.
In late October, Germany's Bundesbank warned that there should be no easing whatever of the rules for euro entry, and repeated its belief that no early adoption should be allowed.
The credibility gap
At first glance, this seems unfair.
The economies of most leading candidate countries - notably Poland, the Czech Republic, Hungary, Slovenia and Estonia - are pretty much up to speed for euro adoption.
But the worry of the Bundesbank and others lies in the fragility of this apparent economic health.
After only a decade of capitalism - and only a couple of years of economic respectability - no country has enough of a track-record to inspire confidence in the currency markets.
And there is a lack of political continuity: governments rarely last more than one term, leading to the sort of policy risk that makes financiers nervous.
Sharp suits and sweet talk
Over the past couple of years, Eastern Europe's governments have done much to allay such fears.
After a somewhat hit-and-miss start to the 1990s, most governments have now learned the presentational skills of their Western counterparts.
Sharp-suited, multi-lingual Hungarian and Czech officials often make their EU opposite numbers seem parochial hayseeds.
On a political and personal level, relations between governments east and west are warmer than they have ever been - a far cry from the semi-colonial atmosphere of the early 1990s.
But there is a deeper reason for not allowing the East Europeans into the eurozone too quickly, one outlined in a recent speech by Christophe Noyer, vice-president of the European Central Bank (ECB).
But if they leapt too quickly into the eurozone, their incomes and living standards would dangerously lag the EU average, providing long-term inflationary and political pressure that could destabilise the bloc.
Incomes in Eastern Europe are about one-third to one-half of EU levels, and only a few isolated places - the city of Prague, for example - come close to the average.
Far more prudent, Mr Noyer argued, to relax euro-oriented discipline for a few years, in order to allow living standards to rise, even at the expense of a little short-term inflation.
Then, countries such as Hungary and Poland would eventually have the chance to join the eurozone as equals, rather than charity cases.
But in Prague, Warsaw and Tallinn, that word "eventually" is the worrying part.
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