Wednesday, September 19, 2012

Fiscally Cautious Countries Hesitate to Join Eurozone Amid Fears of Future Bailouts

Bloomberg: Bulgaria’s Stability Will Attract Investment, Barroso Says
Bloomberg: Lithuania to Adopt Euro when Europe is Ready, Kubilius Says
European Commission: Enlargement Website
European Commission: Economic and Financial Affairs Website 
WSJ: Bulgaria’s Lesson for Euro-Skeptics
WSJ: Bulgaria Shelves Plan to Join Ailing Euro Bloc

Fiscally cautious European Union (EU) member countries, including Bulgaria, Lithuania, and Latvia, have recently postponed plans to adopt the euro as their official currency due to concerns over future bailouts for weaker members. There are 27 member countries in the EU, 17 of which have adopted the euro (the Eurozone). The remaining ten countries, with the exception of the United Kingdom (U.K.) and Denmark (who both “opted-out” of the euro), are expected to replace their national currencies with the euro when their economies meet the Eurozone’s  entrance criteria. This criteria includes debt-to-GDP (gross domestic product) ratios below 60%, deficit-to-GDP ratios below 3%, stable exchange rates, low consumer price inflation, and low long-term interest rates.

However, on September 3, 2012, Bulgaria, which joined the European Union in 2007, indefinitely postponed its plans to join the Eurozone. Although the country remains one of the region’s poorest member states, its current debt-to-GDP ratio of 15.3% is one of the lowest in Europe. Although Bulgaria’s leadership anticipates meeting the criteria necessary to join the Eurozone by 2013, the government has decided to keep its own national currency (the lev) for the time being. Bulgaria’s Finance Minister, Simeon Djankov, attributes this decision to the uncertainty of future bailouts, such as those for struggling countries like Spain and Greece. Djankov commented that, “The public rightly wants to know who would we have to bail out when we join?” He went on to say that if his country joined the Eurozone, the lack of fiscal discipline among the region’s weaker members to reduce their deficits and debts could negatively impact Bulgaria’s relatively strong economic growth rate.

Bulgaria’s announcement follows decisions made in August by the Lithuanian and Latvian governments to postpone their own plans to adopt the euro. Lithuania and Latvia, who both joined the EU in 2004, expect to meet the criteria necessary to join the Eurozone by 2014. However, Lithuania’s Prime Minister, Andrius Kubilius, stated that the country would not adopt the euro until there is a stable situation in the Eurozone and it is clear the group is ready for expansion. Similarly, Latvia’s Prime Minister, Valdis Dombrovskis, also backed away from switching to the euro in 2014. Dombrovskis attributed Latvia’s decision to the Eurozone’s failure to control member countries that choose to violate rules on budget deficits, debt, and inflation. If Eurozone countries do not bring their deficits and debts under control, the need for more bailouts would hurt fiscally conservative countries like Latvia.

The decisions by Bulgaria, Lithuania, and Latvia are not evidence that EU member countries find a single, common currency undesirable. Rather, the decisions reflect concern about their liability for future bailouts of weaker countries, and the uncertainty surrounding the Eurozone’s resulting move toward tighter financial integration among members. Bulgaria, Lithuania, and Latvia’s desire for a common currency is demonstrated by the fact that these countries currently tie the exchange rates of their national currencies to the euro. This allows the countries to experience many of the benefits that come from participation in the Eurozone’s monetary union, while avoiding many of the problems associated with bailouts and the loss of control over their own financial decisions.

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