March of the "funny money"

Reprinted in today's International Herald Tribune, from the New York Times is an article that tells us that that enthusiasm for joining the euro has cooled markedly amongst some of the ten recent accession countries.

When the ten joined last May, there was heady talk about advancing swiftly to the next step in European integration: the euro. But now several countries have pushed back their timetables for joining until the end of the decade, while they struggle to clean up their debt-stained public finances.

As the dates keep slipping, many are wondering how the newcomers will ever meet the economic preconditions for adopting the currency.

Cited by the IHT, Katinka Barysch, the chief economist at the Center for European Reform, says: "There was an unjustified optimism about these countries joining the euro. It was originally thought they would join the euro two years after joining the EU. Now it's clear that won't happen."

It seems, though, that it is not just meeting the entry criteria that is giving some countries second thoughts. Central Europeans see no appeal in shackling their fast-growing economies to the lumbering giants of Western Europe, while the strong euro (or weak dollar) has hobbled their exports - a fact not lost on the new members, with their export-driven economies.

Then there is the inability of existing members to meet the requirements of the Growth and Stability Pact, and the refusal of Germany and France to conform, on top of the news that Greece fudged its figures in order to join.

Chickens are coming home to roost in a big way, when some of the new entrants are also complaining about the "one-size-fits-all" interest rates. The ECB is keeping interest rates at historically low levels to prop up the fragile recoveries in Germany and France, but that would be entirely the wrong strategy for Poland, with its brisk growth and ballooning deficits. "If Poland had euro-zone interest rates, inflation would go through the roof," Barysch says.

However, it seems that Estonia, which has already tied its currency to the euro, together with Lithuania and Slovenia, which have done likewise, are still prepared to take the plunge.

But Hungary is also looking to an early entry. In 2003, when the central bank modestly devalued the forint, and traders promptly dumped the currency, and since then the currency has fluctuated wildly, unnerving Hungarian exporters and government officials. As a result, "Hungary can no longer afford to have its own funny money," says Peter Akos Bod, a former central bank president.

Nice comment that. Now he is looking to have someone else's "funny money".