UNILATERAL EUROISATION VERSUS MAARSICHT CRITERIONS

[John S]

WORKSHOP: TRANSFORMATIONEN. WISSENSCHAFT UND GESELLSCHAFT IM NEUEN EUROPA. Group: Transformation/Integration

Michał Szostkowski, Europa Fellows - MBA

UNILATERAL EUROISATION VERSUS MAARSICHT CRITERIONS
(ABSTRACT)

This paper is focused on the discussion about problem of unilateral euro-isation, which is rising in few Central and Eastern European countries according to EU enlargement process and exchange rate policy conducted by central banks in mentioned region. The debate in this matter seems to be very controversial due to economic, legal, as well as political consequences. It is occurred that euro-isation could cause unexpected threats. Also benefits are not so obvious and clear as some academics present.

Defining unilateral euro-isation it should be emphasised the term "unilateral". It means that countries introduce euro as legal tender under their own steam staying at the same time out of European Monetary Union. In this moment appears the legal aspect of such unilateral decision. We could ask the question: Is euro in a given country legal or quasi-legal tender?
A unilateral euro-isation occurs in two forms. The first one is connected with a currency board that means fixed rate exchange policy. In other words, national currency has permanently conversion rate against another, in this example against euro. The second solution involves take over the euro and means replacement of the national currency.

EU-candidates countries posses various exchange rate systems. Number of them has implemented fixed exchange rate policy by currency board introduction. Such scheme is well known for economic practices in Hong-Kong and Argentina. On the European continent for example, the national currencies in Estonia and Bulgaria are fixed against euro, and Lithuanian lit against American dollar. The currency board was also introduced in few Balkans countries. The DM-take-over as national legal tender in Kosovo or Montenegro was the worldwide sensation. The second group of countries such as Poland, Czech Republic and Hungary belongs to floating exchange rate followers.

Accessing countries that after integration with EU would like to joint to Euro-Zone usually should fulfill the convergence criterions included in the protocol to the Maastricht Treaty which relate to inflation and long-term rates, budget deficit, public debt and exchange rate stability in the confines of ERM II. It would appear that the situation is clear in the first group mentioned countries. Due to their fixed exchange rates against euro these policy will stay constant till the moment when euro replace national currencies. The other countries will be obligated to the fulfillment of mentioned criterions. If Poland will stay the member of EU in 2004, the optimistic scenario of Euro-Zone accession is 2006, but on the condition, that during last two years before the exchange rate of Polish zloty against euro will fluctuate no more than the permitted +/- 15% margin. After that Polish zloty will be replaced by euro.

Bratkowski and Rostowski (2001) have proposed other scenario of euro introduction. In the last few months their version due to its controversy is strongly discussed in the scientific economic environment. The idea of unilateral euro-isation has its followers as well as opponents. In opinion of Bratkowski, who is one of originators of such controversial solution, the unilateral euro-isotion would protect Polish economy against potential financial crises, because will eliminate speculative behavior referring to our national currency. He also stress that introduction of euro will push Polish economy under pressure of quick structural reforms. Bielecki, director in the European Bank for Reconstruction and Development, also supports the latter claim. Balcerowicz, the President of National Bank of Poland does not exclude mentioned version of the way to euro.

Aside from Poland, the problem of unilateral euro-isation is strongly discussed also in other Central and Eastern European countries such as: Czech Republic and Hungary. To the mostly quoted potential benefits that would follow from unilateral euro-iasation belong such as:
§ The reduction of transaction costs with benefits of ensuing greater trade and investment integration
§ Lower interest rate that would follow from the adaptation of stronger and more credible currency
§ The avoidance of exchange rate fluctuations and of vulnerability to speculative capital in- and outflows that would generate financial crises.
However, the unilateral euro-isation entails also costs and threats. The most important of them are presented below:
§ For establishing the currency board or to replace the national currency by euro are needed huge currency reserves
§ Trends in real revaluation of currencies (in many transition economies) and their potential fixed exchange rate against i.e. euro may fuel inflation
The net benefits of unilateral euro-isation due to various economic fundamentals in the given countries, especially different exchange rates regimes seem to be very controversial and require advanced scientific researches, all the more the Argentinean case study of dollar-isation showed how illusory have became the ideas of originators.

Points of discussion:
1. Euro replaces Polish Zloty in the confines of unilateral euro-isation before integration with EU. What is your point of view in this matter?
2. Which way to the EMU (European Monetary Union) should be chosen by Central and Eastern European Countries: through Maastricht Criterions or unilateral euro-isation?
3. Is unilateral euro-isation politically and legally correct?
4. What other implications cause unilateral euro-isation to happen?

Bibliography:
Słojewska A.: Euro wymusi reformy, Rzeczpospolita Nr 248, 2001.
Bratkowski A., Rostkowski J.: Albo kryzys walutowy, albo recesja, Rzeczpospolita Nr 35, 2001.
Bratkowski A., Rostkowski J.: Dlaczego jednostronna euroizacja ma sens w przypadku Polski i niektórych innych krajów kandydujących, materiały pokonferencyjne, Konferencja Naukowa NBP "Polska droga do euro", Falenty 2001.
Coricelli F.: Systemy kursowe przy do chodzeniu do UGW: niektóre argumenty na rzecz wczesnego wprowadzenia euro, materiały pokonferencyjne, Konferencja Naukowa NBP "Polska droga do euro", Falenty 2001.
Dietz R.: Unilateral Euroisation: a misguided idea, in Discussion Paper Series No 8, (eds) Centre for New and Emerging Markets of London Business School.
Gabrisch H.: The Shock of Unilateral Euroisation on EU Candidate Countries, in Discussion Paper Series No 8, (eds) Centre for New and Emerging Markets of London Business School.
Gligorov V.: Euro in the Balkans, in Discussion Paper Series No 8, (eds) Centre for New and Emerging Markets of London Business School.
Gomułka S.: Polska droga do euro - przegląd opcji, materiały pokonferencyjne, Konferencja Naukowa NBP "Polska droga do euro", Falenty 2001.
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Lutkowski K.: W poszukiwaniu optymalnej strategii dla Polski na drodze do euro, materiały pokonferencyjne, Konferencja Naukowa NBP "Polska droga do euro", Falenty 2001.
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Rostkowski J.: Do waluty na skróty, Euro zamiast złotówki - jak najszybciej, Polityka 41/2001.
Wójcik C.: A Critical Review of Unilateral Euroisation Proposals. The Case of Poland, in Discussion Paper Series No 8, (eds) Centre for New and Emerging Markets of London Business School.
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[Olivier]

We could ask the question: Is euro in a given country legal or quasi-legal tender?

yes, in the Balkans. But we don't speak a lot about what happens in Bosnia, Montenegro... since the euro has become the official currency there.

A unilateral euro-isation occurs in two forms. The first one is connected with a currency board that means fixed rate exchange policy. In other words, national currency has permanently conversion rate against another, in this example against euro.

This is the case in Lithuania, I've read...

EU-candidates countries posses various exchange rate systems. Number of them has implemented fixed exchange rate policy by currency board introduction. Such scheme is well known for economic practices in Hong-Kong and Argentina. On the European continent for example, the national currencies in Estonia and Bulgaria are fixed against euro, and Lithuanian lit against American dollar.

No, no, Lithuania has switched the link witjh the dollar for a link with the euro the day 1$=1€ a few months ago.

The argentina example is not very encouraging.

<§ For establishing the currency board or to replace the national currency by euro are needed huge currency reserves>>

Yes, and I wonder what would be the origin of the bills and coins... from the ECB reserves?
(Those too many coins France has in stock? )

Points of discussion:
1. Euro replaces Polish Zloty in the confines of unilateral euro-isation before integration with EU. What is your point of view in this matter?

The polish ecnomy should be ready. The people needs informations campaigns like we all had in 2001...

Which way to the EMU (European Monetary Union) should be chosen by Central and Eastern European Countries: through Maastricht Criterions or unilateral euro-isation?

Maastricht criteria! The stability of the euro is in question!

3. Is unilateral euro-isation politically and legally correct?

I think yes as soon as the exchange rate has been decided.

4. What other implications cause unilateral euro-isation to happen?

The funds have to take the way of the banks and the shops... A logistic plan is needed !

[Olivier]

Would it be different for Sweden?