Gertrude Tumpel-Gugerell: A case for rapid euro adoption
Introduction for panel discussion by Ms Gertrude Tumpel-Gugerell, Member of the Executive
Board of the European Central Bank, at the Austrian National Bank Conference on European
Economic Integration on "The Euro's Contribution to Economic Stability in CESEE", Vienna,
16 November 2009.
* * *
Ladies and gentlemen,1
It is a pleasure to be at this conference among such distinguished panellists to speak about
the European economic integration and the adoption of the euro. For us at the ECB, the topic
of the optimal timing of euro adoption for the EU countries in Central and Eastern Europe
(CEE) that have not yet done so is very important. According to the Maastricht Treaty, all EU
countries are called upon adopting the euro at some stage. So it's not a question of if, but
rather on when to join.
However, to ensure that the monetary union is working smoothly, it is essential - and the
Maastricht Treaty has foreseen this - that the countries joining the euro area have achieved
a sufficient degree of sustainable convergence. This is first of all in the interest of the country
concerned. Moreover, sustainable convergence is a cornerstone of the European Monetary
Union on which the success story of the euro is built. Since its introduction back in 1999, the
euro has become one of the major currencies of the world. The low inflation environment in
the euro area can be largely attributed to the well anchored inflation expectations and the
high credibility of the ECB's monetary policy strategy to ensure price stability over the
medium-term. During the global financial crisis, it became apparent that the euro has been
an important shelter for the euro area countries to protect them against what otherwise may
have resulted in an exchange rate and balance of payments crisis. This led to the
widespread perception that the euro area is a safe haven.
Let me in the following speak about the economic situation in the CEE countries and their
prospect on joining the euro.
The CEE countries have been strongly hit by the financial crisis
Following the bankruptcy of Lehman Brothers, the CEE countries have been strongly hit by
the global financial crisis, although at varying degrees across countries. Due to the slump in
global activity, heightened risk aversion by international investors and a de-leveraging by
financial institutions, most CEE countries have seen a significant weakening of export
demand and a substantial worsening of their external financing conditions. It seems that
financing difficulties have been particularly severe in those countries that had accumulated
large imbalances during pre-crisis times and whose debt structure was characterised by
significant currency and maturity mismatches. In some countries balance sheet effects
associated with large exchange rate depreciations posed a risk to financial stability.
The financial crisis reversed some of the impressive progress that the CEE countries had
already made in terms of convergence. In the years preceding the crisis most CEE countries
were growing rapidly. However, excessive credit growth, substantial wage increases and
house price bubbles, contributed to the overheating of some of the economies. This in turn
led to a widening of the positive output gap and a non-sustainable deterioration of the current
account position. Moreover, the overheating pressures in some countries translated into
rising inflation and led to a real appreciation of their currencies, which in turn aggravated the
external imbalances further.
To dampen the impact of the crisis, national authorities have adopted a number of policy
measures, which however differed significantly across countries, depending on the room for
manoeuvre to adopt supportive monetary and fiscal policies in the various countries.
Substantial EU and ECB support to weather the crisis
Also the international and European community provided substantial financial support to
some countries in the region. The EU supported some CEE countries via the medium-term
financial assistance (MTFA) facility, in conjunction with the IMF programmes. This MTFA
facility was substantially increased during the crisis and also the EU structural funds have
helped to cushion the impact of the crisis.
Let me also emphasize the support from the ECB, contributing to the stabilisation of financial
markets in the region. Many banks in the CEE countries are owned by euro area banks.
Therefore, the CEE countries benefited strongly from the ECB's enhanced credit support
policy and the unlimited provision of liquidity to euro area banks. On top of this, the ECB has
offered some of the national central banks repo lines to meet euro liquidity needs.
Overall, we can say that European authorities and institutions have supported the CEE
countries to weather the crisis.
Need to return to a sustainable convergence process
The financial crisis has clearly shown how important it is generally for any country in the EU
to embark on policies aimed at sustainable growth paths. This includes sound economic
policies, enhanced economic flexibility and the building-up of fiscal buffers in normal times.
Also the regulatory framework for financial markets has to be adjusted at the national and
supranational level such as to ensure economic and financial stability.
The need for such policies and the need for pursuing a regulatory reform agenda, certainly
applies to all EU countries, not just the CEE countries. That said, there have been some
proposals that a rapid euro adoption could help the CEE countries to overcome the impact of
the crisis more quickly. On this, let me stress that policies to overcome the financial crisis
and the adoption of the euro are two distinct issues that need to be clearly separated.
On the one hand, policies to overcome the crisis - such as large fiscal measures - were
clearly needed and have been put in place in all EU countries. Now that the worst of the
financial crisis seems to be over, we have to return to sustainable policies and must advance
with the regulatory reform agenda as spelled out by the G20.
On the other hand, the financial crisis has not changed anything with respect to the
procedure governing the euro adoption process. Before joining the euro area, countries need
to ensure that the right accompanying policies are implemented and that the structure of their
economies ensures a high shock absorption capacity. In particular, the economies need to
be sufficiently flexible to cope with the more limited range of economic policy instruments
once they enter the euro area. While the CEE countries have already made good progress in
this respect before the crisis, further efforts are needed. The financial crisis has hit the CEE
countries in a severe way and, therefore, required a forceful policy response. Once the crisis
is over, a return to sustainable policies is absolutely essential for the further convergence
process. A sufficient degree of sustainable convergence is crucial for the CEE countries, to
be able to reap the full benefits of euro area membership. Otherwise, the single monetary
policy of the euro area might not be suitable, thereby bearing the risk of boom-bust cycles
and high inflation volatility in the country concerned.
All this underlines the importance of a credible euro adoption strategy. I should emphasize
that entering the euro area prematurely - that is before reaching a sufficient degree of
convergence and economic flexibility - would not be a panacea for the CEE countries to
overcome the crisis impact. On the contrary, a premature entry into the euro area would
deprive the countries from important adjustment tools and would therefore not be in the
interest of the country joining.
A credible euro adoption strategy is important
A credible euro adoption strategy helps stabilising the economies, as it provides an important
anchor for policymakers. As already mentioned before, a credible strategy requires in
particular responsible macroeconomic policies and advancements in structural reforms.
One essential element of the countries' euro adoption strategies relates to the credibility of
timetables. At the time of EU accession most countries had announced to join the euro area
as soon as possible. We all know that this was based on assumptions at the time of the
accession. The recent financial crisis has impacted the convergence progress and has
moved the euro adoption further into the future. Therefore, individual countries' timetables
have to be carefully looked at and adjustments may be necessary.
Let me emphasise that an overly ambitious timetable for adopting the euro can be rather
costly for the country concerned. This may encourage market participants to pursue
strategies which may prove to be risky if the timetable turns out not to be achievable. We
observed this in some CEE countries, which for example allowed the emergence of
unsustainable credit growth and a large share of loans denominated in euro.
A look beyond the EU borders
The financial crisis also took its toll outside EU borders. Many non-EU emerging European
economies, including EU candidate and potential candidate countries, recorded a strong fall
in external and domestic demand, amid mounting concerns over financial stability and
increased uncertainty about the availability of external financing.
While policymakers in these countries currently focus rather on the entry into the EU and not
on euro adoption, the need for sustainable convergence is still high on their agenda. Overall,
non-EU emerging European economies are in the early stages of catching-up in income
levels with those of the EU. Ensuring a smooth process of real and nominal convergence is
therefore a key priority in the region. Moreover, the risks of boom-bust cycles in credit or
asset prices have been amply illustrated by the recent developments, whereby countries with
sounder fundamentals were generally less affected by the crisis. Rapid and determined
international policy actions, including support from European institutions via Macro-Financial
Assistance (MFA) and Instrument for Pre-Accession Assistance (IPA) funds have contributed
to bringing confidence back.
Moreover, I have to mention an issue of relevance for some economies in the region, namely
the official, unilateral use of the euro. As you all know, unilateral euroisation is not in line with
the provisions of the Treaty. And as the recent intensive financial pressures experienced by
the unilaterally euroised economies (in particular Montenegro) have also illustrated, the
unilateral adoption of the euro is not the magic tool that automatically provides protection
against the impact of external shocks.
Concluding remarks
Let me conclude my remarks. The CEE countries have already made significant progress
with respect to their catching-up with the euro area. However, some of the countries have
been severely hit by the financial crisis. This clearly has an impact on the state of the
convergence process of the CEE countries and has potentially moved euro adoption further
into the future. The timetables of the euro adoption have to be carefully assessed, given
particularly the large uncertainties that are associated with the current economic and
financial situation.
One thing, however, needs to be very clear. The financial crisis has not changed our policy
for adopting the euro. Therefore, to prematurely adopt the euro, in particular if not
accompanied by a sufficient degree of sustainable convergence, is certainly not a solution to
overcome the impact of the crisis. Only a credible euro adoption strategy helps stabilising the
economies, also with respect to the crisis impact. Achieving sustainable convergence can be
seen as an important anchor and an opportunity for the CEE countries to adopt economic
policies that will eventually lead to the successful adoption of the euro, hopefully not in the
too distant future.