The euro in central and eastern Europe
Opening remarks by Ms Gertrude Tumpel-Gugerell,Member of the Executive Board of the European Central Bank,Panel Discussion Euro Finance Week, 27 October 2003 Deutsche Bank, Frankfurt am Main.
Ladies and Gentleman,
It is a pleasure for me to share with you some thoughts on the role of the euro in central and eastern Europe. As you are aware, central and eastern Europe includes the eight acceding countries that are expected to join European Union on May 2004 and the two additional countries that are currently negotiating EU membership. But the borders of the region extend beyond those of these countries. Central and eastern Europe seen in a broader geographic context also includes the western Balkans as well as the countries of the European part of the Commonwealth of Independent States, such as Ukraine or Russia. Together with the other regions of the immediate vicinity of the euro area, it is part of what is sometimes referred to as the "euro time zone".
Against this backdrop, the use of the euro in central and eastern Europe is characterised by two main features. On the one hand, the international role of the euro, that is its use outside the euro area, is most visible in this region. On the other hand, the euro is the currency that the acceding countries, after EU membership, aim at adopting, upon fulfilment of the convergence criteria in a sustainable manner. Let me elaborate on each of these two points in turn.
The international role of the euro, that is its use outside the euro area, is most apparent in central and eastern Europe.
In the region, the euro is used both by private agents as well as by public authorities. Consider private agents first. Interestingly, central and eastern Europe is the only region in the world where the euro is significantly used as a parallel currency, that is a currency to carry out transactions or save, alongside domestic currencies. There is an estimated €38 billions' worth of euro banknotes in circulation outside the euro area. Of this amount, an important share is thought to be circulating in central and eastern Europe, in particular in the western Balkans. This hypothesis is supported by data on the shipments of euro banknotes in early 2002, as well as by estimates from central banks in the region.
Note that, not only is the euro used in paper form, but also in scriptural form. In the most countries of the western Balkans it is the very bulk of bank deposits which is denominated in euro. In most acceding countries, the euro is the most important foreign currency in which deposits are denominated. Interestingly, these deposits have significantly increased in the wake of last year's cash changeover, when households were encouraged to deposit Deutsche Mark banknotes, previously held "under the mattress", with banks.
Moreover, the euro is used in central and Eastern European financial markets. For instance, in a number of countries, including the Czech Republic, Hungary and Slovenia, the euro accounts for a high share of foreign exchange turnover. This may even suggest that the euro plays a so-called "vehicle" role there. This means that the euro may be used to exchange two third currencies, like the domestic currency into another currency of the region. The euro is also used as a financing currency. Indeed, countries in the region have been active issuers of bonds in euros. Since the advent of the euro in 1999, total issuance by these countries has amounted to more than €30 billion. Bond issuers have included private companies and sovereigns alike.
This leads me to the other users of the euro in central and eastern Europe, namely public authorities. Governments and central banks in the region use the euro for a wide array of purposes. First, the euro is the dominant anchor currency for their exchange rate policy. Indeed, almost all countries involved in the accession process have an exchange rate regime with a reference to the euro. In the western Balkans, a number of countries have a hard peg to the euro, such as Bosnia and Herzegovina, which operates a currency board, or Kosovo and Montenegro, two territories that have unilaterally adopted the euro as legal tender. More recently, Russia's authorities announced a switch from a tightly managed float, based exclusively on the US dollar, to a managed float focusing on the real exchange rate, based on a basket where the euro also plays a part.
Given the strong orientation of exchange rate policies to the euro, it comes at no surprise that the euro is also used as a reserve currency in central and eastern Europe. Country-by-country data on the currency composition of foreign exchange reserves are available for a few countries only. However, according to a recent survey of central banks, the share of the euro in the reserve holdings of countries located in so-called "emerging Europe" amounted on average to around fifty percent. Note that, according to this survey, the share of the euro is not higher in any other region of the world. Moreover, in line with the role played by the euro in their reserves, there is evidence that a number of central banks in the region, such as that of Hungary or Romania, use it as an intervention currency to manage the domestic currency's exchange rate in the foreign exchange markets.
In my view, two factors underpin the role played by the euro in the exchange rate policy of central and eastern European countries. First, in economic terms, this role is in line with the trade orientation of these countries to the euro area. Data available for a number of countries, such as Bulgaria or Poland, suggest that the euro is even used as an invoicing or settlement currency in these countries' international trade transactions with the euro area. More recently, there has been a debate on the possibility that oil imports from Russia be invoiced in euro, which has taken place in the context of the trade relations between Russia and the EU. As far as the acceding countries are concerned, the role of the euro is in line with their goal to adopt the euro. This leads me to my second point.
The euro is the currency that the acceding countries, after EU membership, aim at adopting, upon fulfilment of the convergence criteria.
Countries joining the EU are bound by the Treaty obligation to strive towards the eventual adoption of the euro upon fulfilment of the convergence criteria. Adopting the euro is at the same time a Treaty obligation and a policy ambition. The monetary integration of the acceding countries will proceed in several distinct steps, starting with membership in the European Union, then participation in the so-called Exchange Rate Mechanism (ERM) II and ultimately entry into the euro area.
All steps in the process of monetary integration of acceding countries should be taken on the basis of sound economic principles, taking into account country-specific circumstances, while being in line with the multilateral nature of decision-making within the EU. The overall goal of this process is to foster macroeconomic stability in the new Member States, thus contributing to sustainable economic growth and real convergence.
Economic conditions among acceding countries differ considerably in nominal, real and structural terms. It is thus evident that there is no single path that can be considered generally appropriate for all countries. Rather, as foreseen in the Treaty, the acceding countries' readiness for eventual participation in the monetary union will have to be assessed on a case-by-case basis.
Participation in ERM II may contribute to anchor expectations and support the implementation of sound macroeconomic and structural policies, thus fostering real and nominal convergence. However, participation in ERM II must be compatible with all other elements of a country's macroeconomic policy framework, in particular with the monetary, fiscal and structural policies.
In their own interest, the acceding countries should be careful not to rush too quickly into the euro because of possible economic costs for their countries. But at the same time, there is also no reason to postpone adoption of the euro once all of the necessary conditions are met and the convergence criteria are fulfilled in a sustainable manner.
Integration into the monetary union represents a key step towards full economic integration within the EU and has the potential to deliver considerable economic benefits. In particular, it helps countries to reap the full benefits of the Single Market, as it works in parallel with the free movement of goods, persons, services and capital, favouring an efficient allocation of resources. It also implies the full elimination of possible exchange rate pressures and integration into a durable framework for monetary stability.
Many thanks for your attention.