Thursday, November 6, 2008

The imperatives for joining a regional currency bloc: Dispatches from the Eurozone

The current financial turmoil is going to be a boon on the Eurozone – the group of European counties that use the common Euro currency. Members of the European Monetary Union (EMU) have remained relatively stable, compared to their non-member peers.

Currently, its roster of member states includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia and Spain. Slovakia will join in 2009. More and more, countries that still maintain their own currencies have had a harder time trying to stay afloat.

Recent news dispatches could be signs of things to come. This from, a financial website in Hungary, which is now contemplating of joining the Eurozone:

A series of countries learned the hard way how good it is to have a common currency. The common denominator for Iceland, Hungary, Latvia, Denmark, Sweden and the UK is not only the fact that the capital market crisis undermined the stability of their economies, but also that they drew the same conclusion from it: euro zone membership could prove to be a sturdy shield against such turmoils.

The stabilisation force of the single currency bloc is known for long. For small and open economies it is especially advantageous to enter a highly stable fixed exchange rate system, thus shaking off the nuisances of shepherding their own national currencies. In an instant, there are no more excessive exchange rate fluctuations, risks of a currency crisis or contagion and the balance of payment limitation will also be softer.

Similar to Hungary, now Denmark, Iceland, and Sweden are also contemplating of joining the Eurocurrency group of nations. Denmark is coming to terms with the reality of needing to join for very much the same reasons as Hungary. This from the Independent in UK:

Danes were now having to carry a "very heavy burden", Mr Rasmussen said, after the Danish Central Bank's move to raise interest rates to 5.5 per cent to support the krone. The Danish currency is closely pegged to the euro and has come under fierce pressure as investors dump it in favour of bigger and safer currencies.

The Danish and Swedish governments have begun preparing the ground for referendums on joining the euro, as part of a huge political reversal across Europe's northern fringes in favour of the single currency. Although voters have overwhelming rejected the euro in the past, both countries are now pointing to the recent damage inflicted on their national currencies as evidence that staying out has left them dangerously over-exposed to market vagaries.

"The financial turmoil has made it clear to all Danes that there is both a political and economic cost of staying out of the eurozone and that's why we should join it as soon as possible," the Danish Prime Minister Anders Fogh Rasmussen said this week.

Still, joining the Eurozone will not be a bed of roses for these countries. The sacrifices and difficulties involved with coordinating monetary policies with the rest of the Eurozone was precisely the reason these countries did not join in the first place. Businessweek reports: Conditions to join the euro are tough, with countries being required to have inflation and budget deficits at sustainable low levels, something many eastern European countries are failing in due to unreformed public finances and soaring budget deficits.

The Danish concerns, according to the Independent: But despite the current enthusiasm, both governments will struggle to address deep-rooted fears among their voters that giving up their currencies would tie them closer to the EU.

On the Drottninggatan, a shopping street in Stockholm, Swedes were divided. One man in his fifties held out a handful of coins, saying: "I know the value of this money, it's safe and I don't see reason to change." A mother fretted about rising prices if the euro was introduced. "Things will just get more expensive like they did in other countries."

Hungary, which is currently in a delicate state, has asked for leniency on the Euro’s standards. Expectations of the request being granted are however low. All in all, it would be a folly if Hungary hoped for leniency from the EU's part - EU officials would certainly reject such a request hands down, anyhow.

What Hungary has to do is pursue a great economic policy for three years and adopt the single European currency in 2012. Should the country try to run faster than that towards EMU membership, it could find itself in an even bigger slump than the current one. If it ran slower than that, though, it would only put its future on the line - just like over the past years.

Despite the potential short-term hardships, opinions in Denmark have already turned towards joining. reports: Denmark, which was granted its opt-outs after it initially rejected the EU's Maastricht Treaty in a June 1992 referendum, has said "No" to the European single currency once before in a plebiscite in September 2000. A poll published Tuesday by television channel TV2 News indicated that 48 percent of Danes were in favour of adopting the euro and 44 percent opposed.

But concerns still weigh heavily against the move in some eastern European nations, ironically the same countries most vulnerable to further financial turmoil. Businessweek reports: The euro debate has also heated up in eastern Europe. In Poland, President Lech Kaczynski at first supported government plans to shoot for euro adoption by 2012, but later appeared to change his mind.

"I have serious doubts. We have to think of those who have no savings and for whom the price rises linked to euro adoption could take away 10 percent or more of their income," he said on Thursday, Gazeta Wyborcza reports.

Business leaders in the Czech Republic have also called for swift entry, but the message was quashed by the country's central bank chief Zdenek Tuma on Thursday, who said the financial crisis is not a good time for policy-making. "At a time when the waters are stormy, even a good swimmer will not take a dive. For me, no decision should be made now," Tuma said, AFP reports. "We will know better next year."

Still, if the financial crisis continues its beating of small emerging economy currencies, I’m pretty sure the debate about the benefits of joining a major currency group will become moot. We’ll perhaps begin to see regional currency blocs forming around the world.

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