Vol 1, No 16
11 October 1999
M O N E T A R Y U N I O N:
After the First Wave
This is a continuing series in Central Europe Review, providing an expanding guide to the commercial and cultural implications of European Economic and Monetary Union for Central and Eastern Europe. Read the first article in the series and the second.
This article looks beyond the first wave of countries joining Economic and Monetary Union (EMU) and considers the plans for Central Europe. But to look forward, we must first look back.
There are four members of the EU who have not joined in the first wave that commenced in January 1999: Denmark, Greece, Sweden and the United Kingdom. Each had its reasons for not joining.
Denmark obtained an opt-out of the Maastricht treaty on the issue of EMU membership after first refusing to accept Maastricht in 1992, when it was first put to the electorate in a referendum. There is a significant reluctance amongst the Danes to become part of EMU, and politicians are struggling to sell it to them. Whilst Denmark is one of four nations outside of EMU, this is sustainable. If two of the other three decide to join, it is unlikely that Denmark will be able to remain within the EU without also joining.
Greece failed to meet the entry criteria for the first wave of EMU. These were designed to ensure economic stability and a relatively strong euro. Greece has since met all of the criteria, and the Greek application to join is currently under consideration.
Sweden also failed to meet the entry criteria; however, since the main reasons for failure - independence of the central bank and membership of the Exchange Rate Mechanism (ERM) - were within political control, this is considered to be less of a problem. Like Denmark, it is unlikely that Sweden would be able to remain outside of EMU without the support of the other four.
Whilst the majority of the electorate remain 'euro' sceptical, it is reported that many Swedish companies are adopting the euro as their trading currency. This is also reported in Norway, which voted against membership of the EU and is therefore unable to join EMU. This adds commercial pressure to the attempts by the Swedish government to convince the electorate.
In the UK, the electorate are equally sceptical. The current government has ruled out membership within its life, leading to speculation that the next election will be fought over the issue of EMU membership. The government has set a number of economic tests that must be met before the issue is put to a referendum. In practice, these tests equate to harmonised economic cycles with the EMU region. With the various component economies within EMU still moving in different cycles, this should not prove difficult.
With Greek membership of EMU highly likely, Britain's decision could swing the balance for both Denmark and Sweden. This would give a three-wave implementation of EMU: the first wave being the existing members; the second wave being Greece; and the third wave, Denmark, Sweden and the UK. This scenario is, however, complicated further by the position of the potential new entrants to the EU from Central Europe.
In 1997, the list of potential new entrants was subdivided into the Czech republic, Cyprus, Estonia, Hungary, Poland and Slovenia in one group and all other applicants in the other. The war in Kosova and the relative progress made by each negotiating team have subsequently split the groups further. According to the latest survey by The Economist Intelligence Unit, (October 1999), Hungary, Poland and Cyprus now form the leading pack with possible entry as early as 2003.
Of these three, Hungary is the furthest ahead and is following a macro economic policy aimed at participation in EMU. Cyprus has already pegged the pound to the euro and could therefore qualify for membership of EMU at the same time as joining the EU. Poland retains a more cautious approach with participation in the new ERM planned to follow EU membership, before joining EMU.
For the next group with an estimated earliest membership date of 2004, Estonia, is aiming to join EMU at the same time as the EU; Malta remains undecided; the Czech Republic is aiming its macro economic policy at early EMU membership and Latvia has also indicated it is likely to combine membership of both organisations.
Of the remaining countries within Central Europe that are interested in EU membership, Slovenia, Lithuania and Slovakia may join as early as 2005, whilst Bulgaria and Romania are considering 2008 with the support of France and the UK. The position of Turkey remains uncertain. Of the first five, only Slovenia and Lithuania have a policy on EMU membership, hoping to combine this with EU membership. In Bulgaria, the currency remains pegged to the Deutschemark and, therefore, the euro.
If the EMU membership of Denmark, Sweden and the UK are delayed beyond 2002, then they may find themselves in one of the Central European EMU waves. These are likely to consist of Hungary and Cyprus in 2003; Czech Republic, Estonia and Latvia in 2004 and Slovenia and Lithuania in 2005.
Robert Smith is an independent management consultant.
Further articles by Robert can be found at www.evergreeneuro.com
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