Euro becomes more popular in central Europe
Many people in central European countries objected to the introduction of the euro because they wanted to preserve their national currencies. However, the credit crisis has led to an increase in the euro’s popularity.
There have been many objections to the euro: it would stunt economic growth, lead to an erosion of sovereignty and, most importantly, cause a steep increase in prices.
“Drivel,” says Morten Hansen, a Danish economist who teaches in the Latvian capital Riga. “The current international banking crisis demonstrates that you are better off in the eurozone.”
Members of the European Union who are not in the eurozone have had to take extraordinary measures to protect their currencies from the panic on the financial markets. The National Bank of Latvia sold 80 million euros in the past two weeks to protect its own currency, the lat, from devaluation.
Because investors were looking for security, the Hungarian forint collapsed and the Polish zloty wobbled. Polish economist Witold Orlowski says: “Having your own currency is an expensive hobby. However, people often don’t understand this until it gets painful.”
National pride has long been a major obstacle to the euro in central European countries. However the banking crisis is beginning to change this. Last week, Hungary announced that it wants to introduce the European currency in 2011.
A week earlier Poland said it wants to introduce the euro in 2012 and Romania wants to join the eurozone in 2014. Are the plans serious or just tactical moves to calm the markets? Analysts are not sure.
The biggest obstacles are of a political nature. Polish prime minister Donald Tusk has been trying for weeks – unsuccessfully - to convince the nationalist opposition of the necessity of joining the eurozone. Hungarian parties are also sharply divided over the question. The crisis has apparently not been painful enough.
Nevertheless, the crisis is bad news for euro sceptics. Although the banking crisis means a lot of headaches for the EU, it also weakens the position of opponents to the European currency. Even Polish president Lech Kaczynski, not known for his pro-Brussels stance, recently conceded that the euro was not all that bad.
Many people in the new EU member states took out low-interest loans in foreign currencies. Nearly all mortgages in Poland are in Swiss francs. They considered the Polish currency stable and were not afraid of the risk of currency fluctuations.
But last month many Poles discovered that they had under-calculated the risk. Tens of thousands of households in eastern Europe are faced with monthly mortgage payments which are 15 to 25 percent higher because their own currency has fallen.
Hungarian households have been hit twice because the country is wrestling with the repercussions of a major budgetary crisis from 2006. Hungarians are faced with higher interest and tax rates.
Two years ago, Poland and the Czech Republic had good chances of joining the eurozone. Poland in particular could have met the criteria for joining fairly easily, but the former prime minister was a nationalist who opposed the euro.
But if all goes well, Slovakia will introduce the euro in January. “The Slovakians have enormous luck,” says Orlowski. “They are introducing the currency at the best moment possible, now that the markets are panicking.”
The Baltic countries are kicking themselves. They were close to meeting the eurozone criteria but their inflation rates were too high, a situation which countries with small, open economies can do little about. In May 2006, Lithuania was told it could not introduce the euro because its inflation rate was 0.07 percent above the limit.
Orlowski says applying the rules so strictly is ridiculous. The euro would have saved the vulnerable Baltic countries, while the rest of the EU would hardly have noticed them joining.
And he points out that the eurozone countries have been disregarding the criteria themselves. “Portugal and Greece hardly ever meet the criteria. If you are a member you can break the rules, but as long as you are outside you must scrupulously meet every single point.”
Sign up for NRC's daily newsletter and get the best of our international coverage in your inbox every day.