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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?

Exchange rates against the euro
Bulgarian lev:
Czech koruna:
Estonian kroon:
Hungarian forint:
Lithuanian litas:
Latvian lat:
Polish zloty:
Romanian leu:
Slovak koruna:
Slovenian tolar:
The delegation was sent home with a polite refusal, but Estonia's enthusiasm for the European single currency remains undimmed.

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.

The Petrzalka housing estate in Bratislava
Waiting for the euro is a weary business

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.

Serenading in Budapest
But can we pay in euros?
The Estonian kroon, for example, has been linked to the Deutschmark and then the euro, at the same exchange rate since 1992.

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.

Unveiling euro cash
Impossibly glamorous to some
While West Europeans become misty-eyed about the demise of their beloved Deutschmarks or francs, few tears are being shed about the disappearance of the Slovenian tolar, for example.

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.

A man in Bucharest, Romania
Taking a keen interest in monetary policy
Eastern Europe's key economic weak spots have tended to be sloppy fiscal policies and ineffective anti-inflationary measures - both of which should be cured under the criteria for euro adoption.

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.

Guy Verhofstadt of Belgium and Aleksander Kwasniewski of Poland
Personal chemistry counts
A substantial lobby in Western Europe argues that euro adoption by East Europeans will only undermine the already shaky reputation of the single currency.

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.

GDP per head, % of EU average
Slovenia: 71
Czech Republic: 58
Hungary: 52
Slovakia: 48
Poland: 39
Estonia: 37
Latvia: 29
Lithuania: 29
Romania: 27
Bulgaria: 24
Inflation has by and large been beaten, currencies are stable, incomes and output are rising impressively, and almost everything that can be liberalised has been .

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.

Playing catch-up

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).

ECB vice-president Christophe Noyer
Mr Noyer wants inflation now, not later
Many East European countries may well be able to meet euro criteria within the next couple of years, Mr Noyer said.

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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