Professional Documents
Culture Documents
September 2011
Summary: Euro-expansion is alive and well, despite widespread doubts about the future of the currency. For a small European country with an open economy dependent on trade with the big economies on the continent, it makes sense to have a currency peg and economic and monetary union with the rest of the continent. But to reap these greater rewards, candidate countries must become leaner and more efficient, by first implementing underlying structural reforms in their economies, which would put them on a path to greater convergence with the current eurozone economies.
1744 R Street NW Washington, DC 20009 T 1 202 745 3950 F 1 202 265 1662 E info@gmfus.org
Euro-expansion is alive and well, despite widespread doubts about the future of the euro should contagion spread from Greece to Italy and Spain. This paper builds upon views expressed at a recent roundtable gathering of experts and embassy representatives held under the Chatham House rule at the German Marshall Fund. Public enthusiasm for joining the euro varies by region in Europe: The Baltic countries are euro-enthusiasts, inspired by Estonias successful adoption of the euro on January 1, 2011, and euro-accession remains a strategic goal for Latvia and Lithuania. For a small European country with an open economy dependent on trade with the big economies on the continent, it makes sense to have a currency peg and Economic and Monetary Union (EMU) with the rest of the continent, as this would eliminate currency risk, lower borrowing costs, and open up access to liquidity from the European Central Bank. But to reap these greater rewards, candidate countries must become leaner and more efficient, by first implementing underlying structural reforms in their economies, which would put them on a path to greater convergence with the current eurozone economies. The Eastern Europeans are required to adopt the euro under the terms
of the treaties governing their entry to the EU, but the treaties, while requiring that these countries meet the Maastricht convergence criteria, do not specify a deadline by which they must do so. Joining the euro would be a good thing, both for the current eurozone and the acceding countries. It would demonstrate that the dream of greater European unity is alive and well, and that the European project is capable of weathering adverse circumstances. It would expand the collective experience in good governance (in the case of the Baltics) to the current eurozone, and it would make Europe a larger, more competitive economy on the world stage. To successfully join the euro, however, it is critical for a country to keep its economic house in order. This is what the Baltic countries did in response to the East European financial crisis of 2008-09, when, during the sudden credit crunch following the excess capital inflows of the boom years, they reduced their budget deficits by 8-10 percent of GDP in 2009 by slashing wages and costs and tackling difficult health and educational sector reforms. The lack of liquidity available from abroad also spurred higher domestic savings in these countries. Their currency boards helped foster
About GMF
The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm.