Eastern Europe Needs the Euro
Anders Aslund l CASE l February 2010
The global financial crisis has had severe repercussions in the new Eastern European EU-member states, as well as in the three former Soviet Republics of Belorussia, Ukraine, and Moldavia. The following lessons can be drawn from the manner in which the crisis impacted these Eastern European countries:
- If a currency peg is to be used in this region, then it should be in the dominant currency in use within the country in question. The financial crisis clearly showed a dollar-pegged currency should not be employed.
- The euro needs to be introduced swiftly in as many Eastern European countries as possible, even if the respective countries’ central banks lack credibility (in particular Estonia, Latvia, Lithuania, Bulgaria, as well as Bosnia and Herzegovina). The time spent in ERM II should be significantly reduced. ERM II refers to the mechanism used since 1999 to coordinate the exchange rates in various EU countries, as it regulates the allowed fluctuation in the exchange rates to the euro.
- Inflation targeting has proven very effective in countries such as Poland and the Czech Republic, therefore inflationary policy should remain a focus of any fiscal policy even subsequent to EU accession.
- Moreover, adoption of the euro has proven a highly effective financial instrument in eurozone countries such as Slovenia and Slovakia, as well as in Montenegro and Kosovo, which adopted the euro unilaterally (tying a “smaller, weaker” currency to a “stronger” reserve currency).
- Despite the crisis, all countries of Eastern Europe (with the exception of Hungary) pursued decent fiscal policies.
- Finally, the crisis has demonstrated that it is detrimental for any country to tolerate large domestic loans in foreign currency.
However, one of the major pillars of crisis management in Western Europe failed to perform an analogous role in Eastern Europe: the European Central Bank (ECB). By failing to support non-euro EU countries properly during the crisis, the ECB contributed to further divisions between the eurozone and neighboring countries. It was only thanks to the activities of multinational banks in the region that Eastern European countries indirectly benefited from ECB’s measures, but Eastern Europe needs more support urgently. Most importantly, the ERM II process needs to be reformed, so that as many Eastern European states as possible can swiftly and effectively adopt the euro. The financial crisis demonstrated how crucial access to liquidity through the ECB is to avoiding economic difficulties.
This summary was prepared by the Atlantic Community Editorial Team from "The East European Financial Crisis" published here by CASE.