If you think the economic news is grim in the US, the UK or Germany, spare a thought for the small Baltic states of Estonia, Latvia and Lithuania. All face the prospect that their gross domestic product will collapse this year by 10 to 12 per cent. Moreover, all operate a so-called currency board regime, or peg, which restricts the movement of their currencies against the euro and prevents them from stimulating economic recovery by means of exchange rate depreciation.
One answer, as the International Monetary Fund pointed out a few weeks ago, would be for the European Union to relax its rules and let the Baltic states swap their currencies for the euro without formally joining the eurozone. This would in principle ease their foreign debt problems and restore confidence among foreign investors. The alternative – severe government austerity programmes, followed by a sharp drop in living standards, social unrest and political instability – seems far too harsh and risky a solution.
But the EU’s authorities, especially the European Central Bank, are dead against unilateral adoption of the euro by any EU member-state. One can see why. If the experiment went wrong, there would be a danger of contagion spreading to the 16-nation eurozone itself. The guardians of European monetary union, a project only 10 years old and one that is central to the notion of ever closer European integration, are simply not prepared to take the risk.
Across central and eastern Europe, however, the voices speaking up in favour of a rapid, unorthodox switch to the euro are getting louder. Today it’s the turn of Ludek Niedermayer, a former deputy governor of the Czech central bank, who writes: “Unilateral adoption of the euro would be extraordinary. But so too is the economic crisis. Tolerating such a move would not reduce, but rather boost, the EU’s credibility.”
What almost no one has bothered to mention so far in this debate is that two places in central and eastern Europe already use the euro without being formal eurozone or even EU members. They are Montenegro and Kosovo, which unilaterally adopted the euro on January 1, 2002, at the same time as France, Germany and other founder-members of the eurozone. This has given Montenegro and Kosovo some protection against the whirlwinds whipped up by the world economic crisis.
Amazingly, though, Montenegro’s authorities – or, at least, the chief economist at its central bank – do not recommend unilateral adoption of the euro by the Baltic states and others. Such a step would risk incurring the wrath of EU policymakers and even the denial of various EU funds and grants, the Montenegrins caution.
To summarise: a country that is outside the EU and outside the eurozone, but uses the euro, is telling countries that are inside the EU but outside the eurozone not to use the euro, while the EU and eurozone let countries that are outside themselves use the euro but won’t extend the privilege to countries inside the EU but outside the eurozone.
There are the makings of a good farce in this – if we weren’t all losing our money.
Across the globe: Gideon Rachman and his FT colleagues debate international affairs on