SAIS Next Europe

« Previous Post | Next Post »

Joining the Euro Club

By Miljana Vujosevic

The current financial crisis poses one of the greatest threats for Europe since the adoption of the euro as a common currency in 1999. With more and more European countries being affected, one has to wonder how Eurozone countries are faring as compared to their non-euro counterparts. Denmark, for example, has thus refused to replace its krone with the euro and is finding it difficult to cope in the midst of the crisis, prompting Danish leaders to more readily accept the notion of converting to the euro. Similarly, Iceland's problems with the krona have exacerbated the crisis within the country, leading many analysts to suggest that adopting the euro would help Iceland stabilize its economy.

Eastern Europe is probably one of the hardest hit regions in Europe with respect to the crisis. Countries such as Hungary, Romania, Poland and Ukraine are unique as many citizens have become accustomed to borrowing in foreign currencies such as the euro or the Swiss franc. The central bank of Hungary reported that nearly 90 percent of consumer borrowing is denominated in Swiss francs or euros, as opposed to the Hungarian currency, the forint. The onset of the crisis in Europe has caused banks and companies to sell local currencies to pay for these foreign loans, leading to sharp drops in the value of these currencies. Poland's currency, the zloty, has depreciated relative to both the dollar and the euro, including a 30 percent decline against the dollar in October alone.

Some argue that the rapid decline of such local currencies might benefit these countries, as exported goods become relatively less expensive abroad. However, such benefits are likely to be small relative to the systemic nature of the current situation. Is it possible that adopting the euro prior to the crisis might have served to insulate these countries from such deleterious effects? Will the crisis result in the unintended effect of a more universal adoption of the euro by European countries and a swelling of the Eurozone?

Miljana Vujosevic is a graduate student in the Asia/China Studies program at the Johns Hopkins University Paul H. Nitze School of Advanced International Studies (SAIS) in Washington, D.C.

Email the Author | Email This Post | | Digg | Facebook

The views expressed are those of the author and do not necessarily represent those of the Johns Hopkins University.

Comments (2)

ball3991 Author Profile Page:

These countries would have joined the Euro upon accession were it possible. Most are quite a ways from meeting the Euro Zone criteria. It certainly would have slowed the effects of the crash- right now many of these people are stuck in their own version of the subprime crisis- paying for a fixed loan with a depreciating asset- their currencies.

Axciom_ Author Profile Page:

The economic downturn is going to continue for the next 5 years globally. After which the growth will be at best an anemic pace for next few years.

That will present savvy investors great bargains in Europe especially in the Mediterranean belt, Denmark, Netherlands, Belgium, Switzerland, Sweden & maybe France.

I can see a scenario when US Dollar and UK Pound Sterling can be almost at par with each other 6 to 7 years from now. That will make investing in UK like buying peanuts, if not exactly a cakewalk.

The key is keeping investment gene on a leash till the opportunity is ripe 5 to 7 years down the line.

PostGlobal is an interactive conversation on global issues moderated by Newsweek International Editor Fareed Zakaria and David Ignatius of The Washington Post. It is produced jointly by Newsweek and, as is On Faith, a conversation on religion. Please send us your comments, questions and suggestions.