Monday, April 06, 2009

IMF wants euro for eastern EU

Sources: Financial Times-IMF urges eastern EU to adopt euro

AFP: IMF backs euro for eastern Europe: report

The Eastern EU member states that are not part of the “Eurozone,” that is, those that have not yet adopted the euro as their currency, should adopt the euro now--even without officially joining the Eurozone, according to a recently released report by the IMF.  These countries (Bulgaria, the Czech Republic, Estonia, Hungary, Romania, Poland, Latvia, and Lithuania) have been hard hit by the global financial crisis and many are facing a large debt load in foreign currencies, like the euro.  Additionally, many of the nations have experienced currency depreciation, which makes it harder to pay off their foreign currency debt.  Hungary, for example, has seen the Hungarian forint depreciate by 25 percent since October 2008.

The IMF sees this “euroisation” as the best way for these nations to service their respective national debts, restore confidence in their economies, and remove uncertainties.  Without the euro, the reductions in public spending that would be required to service the debt would be politically unpopular and difficult to achieve, according to the report.

The Eastern EU countries would be adopting the euro as their currency without having seats on the board of the European Central Bank, which controls monetary policy and regulates price stability for the Eurozone.  Nonetheless, eurozone members and the European Central Bank continue to oppose lowering the entry requirements.  And, the Eastern EU countries themselves may not wish to adopt the euro without full membership, which could be seen as a sort of “second-class” membership.  Analysts are skeptical about the chances for implementation, but the disclosure of the IMF recommendations is sure to rekindle old debates about the value of Eurozone membership in both the Eurozone and the new members states.

Discussion: Is adopting the euro a good idea for these nations?  What are some pros and cons?  Would bringing these nations into the Eurozone reduce the stability of the euro?  

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