IMF Economic Forum:Adopting the euro: how to pick the right strategy
| Author | Camilla Andersen |
| Position | IMF External Relations Department |
| Pages | 162-164 |
Page 162
Unlike the United Kingdom and Denmark, which have an opt-out option, the new member states all have an obligation to adopt the euro, although it is up to each country to decide on the timing. Countries must first fulfill the four criteria set out in the Maastricht Treaty-one of which is a minimum two-year stay in ERM2, the exchange rate mechanism that links the currencies of prospective euro area members to the euro. Some countries have indicated they intend to join ERM2 as quickly as possible. Still, January 1, 2007, in Wijnholds' view, is probably the earliest realistic date for any new member to adopt the euro.
There are two views on how to approach ERM2, Wijnholds said. It is seen either as a waiting room, where the attitude is "Let's get it over as quickly as possible because . . . you might be subject to capital flows that could be quite disruptive" or a workout room, where "you build up muscle to be strong when you enter the euro zone as a full- fledged member." The view of the ECB is that countries should undertake necessary major adjustments of their economies before they join ERM2, he said. Page 163
One question often asked about ERM2 is how much exchange rates will be allowed to diverge from the central parity, Wijnholds said. It has now been clarified that the standard fluctuation band of ±15 percent will apply. An important caveat remains, however: When it comes to deciding on adoption of the euro, countries need to participate in ERM2 for a period of at least two years prior to the convergence assessment without severe tensions, in particular, without devaluing against the euro.
The World Bank's Bokros focused his remarks on what the new member states must do "to put their house in order" before joining ERM2. Currently, patterns of economic growth in the Baltic countries (Estonia, Latvia, and Lithuania) and the Visegrad countries (Poland, the Czech Republic, Hungary, and Slovakia) differ greatly, he said. The Baltics experienced a recession in 1999 following the financial crisis in Russia. But since 2000 all three countries have enjoyed rapid growth. In contrast, Poland and Hungary grew rapidly until 2000, but have since slowed markedly. The same pattern applies to Slovenia. In the Czech Republic and...
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