Slovenia joined the euro on 1 January – the first of the ten 2004 accession nations to gain membership – just as the rest of Europe seems to be losing faith. Is the euro in crisis?
Are Slovenes happy with the move?
The politicians certainly are. The New Year currency changeover went very smoothly, but – as in the 12 original countries five years ago – ordinary people suspect that unscrupulous traders are grabbing the opportunity to push up prices, especially in cafes and restaurants. What’s more, the Slovenes’ excitement isn’t shared by the rest of eastern Europe. While Britain, Denmark and Sweden can keep their own currencies for as long as they like – and look ready to do so – the 12 newest members are legally obliged to join the euro once they meet the agreed convergence criteria covering items such as budget deficits and inflation. Worryingly for Brussels and Frankfurt, few of them appear to be in much of a rush.
Why the lack of enthusiasm?
A mixture of reasons. In some countries, notably Poland, a wave of nationalist sentiment has seen euro membership (and EU membership) become a hotly contested political issue. Other countries, such as Slovakia and Estonia, question whether a one-size-fits-all monetary policy set in Frankfurt – largely for the benefit of western Europe’s mature, low-growth economies – can really be the best way forward for relatively poor but phenomenally high-growth economies still emerging from decades of communism. Estonia, for example, has delayed its entry target from 2008 to 2010, while the only two countries that look like joining next year are tiny Cyprus and Malta.
Is this bad news for the euro?
The euro has had a bad press lately. In France, politicians of all stripes have used the single currency as a scapegoat for economic woes. Half of Germany’s population wants the Deutschmark back, and a poll shows 64% of Italians unhappy with the euro. But while the eurozone has enjoyed lower growth than Britain over the past five years, it’s unclear how much of the difference – if any – is due to the currency, rather than to Europe’s sclerotic labour markets and conservatism. Indeed, an OECD report has found the most surprising thing about the euro is how little difference it has made to the economy.
What’s the pro-euro case?
The official EU line is that the euro has brought stability by making both imports and travel cheaper, increasing trade and investment within the
zone and boosting price transparency and competition. And whatever opinion polls might suggest, the people of Europe want to get their hands on their new currency: the total value of euro banknotes in circulation has surged from 221 billion euros five years ago to more than 600 billion today. That’s about twice the value of the national currencies in circulation in 2001 and means that for the first time there are now more euros in circulation than US dollars. According to the ECB, up to 20% of that money is used outside of the euro area, confirming the euro’s status as an international currency.
And is that bad news for the dollar?
Yes. While few economists expect a huge shift out of the dollar as the world’s reserve currency of choice, a steady decline in its value (it fell 11% against the euro in 2006) and the mammoth US trade deficit have affected its reputation as a safe haven. As a result, some central banks and finance ministries (such as the cautious Swiss) are moving towards diversifying their assets and transactions into euros. The most high-profile example is Iran, which last month said it would be using the euro, not the dollar, for all foreign trade deals, including oil. The furore over its uranium enrichment programme meant the move was seen as a political gesture and didn’t unduly worry the forex markets.
Are other countries following Iran’s lead?
Other oil-rich nations, such as the United Arab Emirates, a close US ally, have switched. The UAE holds 98% of its $25bn of reserves in dollar investments, but is moving 8% into euros. More widely, the Bank of International Settlements (the Basel-based central bankers’ central bank) reports that Russia and the Opec nations cut their dollar holdings from 67% to 65% of the total in the second quarter of 2006, while the euro’s share rose from 20% to 22%. Modest perhaps, but the figures reflect a marked shift in sentiment in global financial circles.
So is talk of a euro crisis overdone?
After a shaky start, the euro is recognised as a solid currency – a worthy successor to the old Deutschmark as a bulwark against inflation. A recent BIS paper by Gabriele Galati and Philip Wooldridge calculated that the overall world share of euro-denominated holdings was 25% in 2005-2006, against a figure of 20%-22% for the euro’s predecessor currencies in 1995-1996. In other words, world governments and central banks are choosing to hold slightly more of their reserves in the European currency – hardly the sign of a crisis. It might be unloved by its users, but the euro is definitely here to stay.
Who uses the euro?
As of 1 January, 13 of the EU’s 27 members use the euro as their currency after Slovenia ditched the tolar. The switch won’t make much difference to the eurozone: Slovenia accounts for just 0.3% of the bloc’s GDP, and adds a modest two million people to the 315 million Europeans who already use the currency every day. (The EU total is 490 million, after Romania and Bulgaria joined this month.) However, Slovenia’s move is still a significant moment. It is the first of the ten countries that joined the EU in 2004 to be accepted into the currency club, and the first ex-communist member state to adopt the currency. In addition, non-EU members Montenegro and Kosovo use the euro, as does Monaco.