from this week's Europe section

The euro

Seeking shelter
Oct 30th 2008
From The Economist print edition


Countries outside the euro zone are worried, but joining may not be easy

SHARING a currency but not a government—the hybrid arrangement for the 15 countries that use the euro—may look less than ideal in times of turmoil. But from the outside, the single currency looks like an increasingly attractive shelter.



Even solid ex-communist countries such as Poland want to speed up their preparations to meet the conditions for joining the common currency. And rich EU members that stayed out by choice, Sweden and Denmark, are thinking again. Joining the euro, at least in some eyes, means a loss of national identity. It also means governments cannot devalue or change interest rates to suit economic needs. During the sunny financial weather of the past years, that seemed to argue for staying out. The balance of the argument is now changing.

Denmark twice raised interest rates in October to help protect its currency, the krone, which is pegged closely to the euro. Sweden’s krona fell to a record low against the euro in October as the central bank there cut interest rates in the hope of fending off a recession. The Danish prime minister, Anders Fogh Rasmussen, says that being outside the euro zone during the financial crisis is “detrimental” to the economy, and he wants a referendum by 2011. Even in non-EU countries, such as Iceland, adopting the euro is now a hot topic.

In eastern Europe, meanwhile, Slovenia has already adopted the euro and Slovakia will do so by the end of the year. But no other country looks close. Standard & Poor’s this week cut Romania’s credit rating to “junk” status, blaming politicians’ irresponsibility about public-sector wage increases. Poland, ambitiously, says it wants to meet the criteria and set a fixed rate for the zloty against the euro in 2011. The government is now seeking cross-party support for the necessary constitutional amendments.

To join the euro, countries are required to have inflation and budget deficits at sustainably low levels (“low” is an average based on other countries’ performance). In past years, eastern European countries have missed that because roaring growth pushed up prices. Foreign investment is likely to fall sharply. Soaring tax revenues once shrank budget deficits—but now the tax take is falling, exposing unreformed public finances. In Poland, these include wastefully untargeted social benefits such as early retirement.

Talking about a quick move to the euro may be a good gimmick for politicians, but the practical difficulties are huge. The countries of the euro zone are not longing for troubled new members; its existing ones, such as Greece and Italy, are worry enough. The higher taxes and lower spending needed to satisfy the entry criteria are not the choices that a country would normally make in a recession.

The prospect of euro membership in three years’ time is unlikely to calm panicky financial markets now. That requires, at a minimum, large quantities of cash—as seen in this week’s bail-out of Hungary (see article). This week the European Union said it would raise its own rescue fund from €12 billion ($15 billion) perhaps to €25 billion. Yet even with such outside help, running an independent currency is beginning to look too risky for all but the biggest economies.