Portal to the Economy of the Euro

EURO AREA COUNTRIES: background statistics 2010
Country capital joined 1 Jan 1999 unless otherwise stated	Population thousands	GDP EUR bn	GDP per capita EUR	Area sq km
Belgium Brussels	10 828	352	32 500	30 520
Estonia Tallinn, 2011	1 340	14.5	10 800	45 200
Germany Berlin	81 760	2 499	30 550	357 868
Ireland Dublin	4 450	154	34 600	70 282
Greece Athens, 2001	11 306	230	20 350	131 957
Spain Madrid	47 020	1 063	22 600	504 782
France Paris	64 710	1 948	30 100	543 965
Italy Rome	60 400	1 549	25 650	301 245
Cyprus Nicosia, 2008	802	17.5	21 800	9 251
Luxembourg	502	41.6	82 850	2 586
Malta Valetta, 2008	416	6.2	15 000	316
Netherlands Amsterdam	16 577	591	35 700	41 526
Austria Vienna	8 373	284	33 900	83 885
Portugal Lisbon	10 637	173	16 200	88 940
Slovakia Bratislava, 2009	5 424	65.9	12 150	43 035
Slovenia Ljubljana, 2007	2 054	36.1	17 550	20 253
Finland Helsinki	5 351	180	33 700	338 145
Euro area	331 950	9204	27 750	2 614 000

For comparison:
European Union	501 260	12 280	24 500	4 325 000
USA	308 745	11 058*	35 800	9 827 000
Sources: Eurostat, Economist, US BEA, Wikipedia *converted at average 2010 exchange rate USD1.3257

Other areas/countries where euro is used:

French overseas departments and territories: French Guiana, Guadeloupe, Saint Barthelemy, Saint Martin, Martinique, Reunion, St Pierre-et-Miquelon, Mayotte.
Portugal’s Azores and Madeira islands.
Spain’s Canary Islands and North African communities
The four small European states of Andorra, Monaco, San Marino and Vatican
Kosovo, Montenegro (euro adopted unilaterally). Various other Balkan countries use the euro unofficially

Countries which peg their currencies to the euro:

EU member countries: Denmark, Bulgaria, Latvia, Lithuania
Fourteen central and west African countries which formerly pegged their currency, the CFA franc, to the French franc, now peg it to the euro
French overseas territories
Former colonies Cape Verde (Portugal), Comoros (France)
Bosnia-Herzegovina, Macedonia, Morocco

The ECB has stated that it neither encourages nor deters third countries from using the euro. The European Commission has encouraged countries to use the euro as a means to achieve economic stability.

Up to 20 countries may join: Euro 17 may become Euro 37, eventually

The euro was designed to be the single currency for all EU members. Each new member is obliged to replace its own currency by the euro as soon as it meets the convergence requirements. But no time-path has been specified.

Of the twelve new Member States which joined the European Union since 2004, five have entered the euro zone and adopted the euro: Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009) and Estonia (2011).

Seven of the twelve new EU member countries still have to join the euro area. In contrast to the UK and Denmark no one has an opt out. Nor did any of them request one. Three of the older EU members still remain outside.

In addition there are eight countries which are candidates or potential candidates for EU membership, and hence euro zone membership. By the end of the next decade euro zone membership could conceivably exceed 30 countries.

Euro membership kicked into the long grass

European officials implicitly assumed that all new members would gladly introduce the euro and work assiduously towards this goal. In a number of new EU members this has not been the case. Acceptance rates for the euro among populations of new members often ran at less than 50%. The political elites also became more sceptical. Other goals, especially rapid growth, were given priority.

Everything seemed to be going so well: vibrant growth, massive capital inflows, burgeoning living standards. The advice of the IMF and others to adopt the euro as soon as possible was disregarded. In various countries euro membership was kicked into the long grass.

Financial shocks of 2008 and 2010

The recession which engulfed Europe late in 2008 sunk plans of some countries for an early entry into the euro zone. Their economies suffered a severe contraction, exchange rates and budgets came under intense pressure, interest rates soared. The convergence requirements could no longer be respected.

By the start of 2010 the economies were stabilising and the financial stresses diminished. Austerity measures improved state finances. None of the countries which pegged their currencies to the euro were forced to devalue. The rating agencies began upgrading their credit ratings. Euro zone membership again became conceivable.

The sovereign debt crisis which erupted in 2010, however, added further complications. Some saw EMU as fundamentally flawed, possibly breaking up. These countries decided not to bother to even set up a timetable for joining (e.g. Czech Republic, Hungary, Poland). Others remain in favour of joining (e.g. Lithuania, Latvia, Bulgaria).

A particular problem, however, is presented by the euro zone's bailout funds to which all euro zone countries are contributing. Poorer countries object to contribute funds for the bailout of richer countries which pursued imprudent fiscal policies.

Convergence assessment and requirements

(see below for current state of convergence of EU countries outside euro zone)

Convergence criteria assessment: two convergence reports are prepared to assess whether a country fulfils the convergence criteria, one by the European Commission, the other by the ECB.

Reports are submitted to European Parliament for consultations
Reports are discussed by Heads of State of EU governments
EU Ministers of Economic Affairs and Finance, on the recommendation of the European Commission, decide whether the candidate country may join the euro zone.

Timing: EMU accession is generally discussed as starting on 1 January of any year. EMU itself got underway on 1 Jan'99. But there does not seem to be an overriding obligation for membership to start at the beginning of a year.

Convergence requirements

Not all the existing EMU members passed all the convergence requirements. Ultimately the decision about who joined was political. But the EU and the ECB have indicated that for new members the convergence requirements would be strictly imposed, if only for the sake of non-discrimination.

Inflation: the gliding 12-month annual average increase in consumer prices may not exceed that of the 3 EU member states with the lowest inflation rates by more than 1.5 percentage points.

In the 12 months to Sep'11 the three with the lowest inflation rates were Ireland with 0.6%, Sweden with 1.6% and Czech Republic with 1.9%. These three average 1.4% and, with the addition of 1.5 percentage points, the bar is currently set at 2.9%.

Long term interest rates: may on average not exceed the long term interest rates in the 3 EU member states with the lowest inflation rates by more than 2 percentage points during the year preceding assessment.

In the 12 months to Sep'11 the average long term interest rates in the three countries with the lowest inflation rates were Ireland with 9.44%, Sweden with 2.89% and Czech Republic with 3.74%. These three average 5.36% and, with the addition of 2 percentage points, the bar is set at 7.36%.

Budget deficit: general government deficit may as a general rule not exceed 3% of GDP.

Public sector debt: general government debt may as a general rule not exceed 60% of GDP.

Exchange rate: participation in Exchange Rate Mechanism (ERM) and currency must have observed the normal fluctuation band (normally +/- 15%) in ERM for a minimum period of two years without devaluation.

Talks regarding the parity at which a candidate country's currency will enter the ERM II, and subsequently be converted into EUR, will be held between on the one hand the applicant country and its central bank and, on the other hand, the ECB, the European Commission, the EU's finance ministers and the governors of the euro zone’s national central banks. The final decision will be made by the heads of state.

Central bank independence: free from all political interference in conducting monetary policy.

“Other factors”: the treaty also mentions other factors that should be taken into account: integration of markets, current account balances, unit labour costs and other price indices. But no further details are provided.

Current State of Convergence Requirement Blue entry: complies with convergence requirement; red entry: not
	Inflation y/y	Long term interest rate	Budget balance	Public sector debt	ERM II m’ship	Earliest entry*
	12 months to Sep'11		2010**	2010**
Requirement	max. of 2.9%	max. of 7.36%	max. 3% of GDP	max. 60% of GDP	two years

Denmark	2.7	2.90	2.7 deficit	43.6	yes	2014
Sweden	1.6	2.89	0.0	39.8	no	2017
UK	3.2	3.23	10.4 deficit	80.0	no

Bulgaria	3.8	5.49	3.2 deficit	16.2	no	2015
Czech Republic	1.9	3.74	4.7 deficit	38.5	no	2017
Latvia	3.6	6.61	7.7 deficit	44.7	yes	2014
Lithuania	3.8	5.11	7.1 deficit	38.2	yes	2014
Hungary	4.0	7.37	4.2 deficit	80.2	no	2022
Poland	3.5	5.95	7.9 deficit	55.0	no	2015
Romania	6.9	7.05	6.4 deficit	30.8	no	2017
This is the earliest date at which entry appears possible under current circumstances. Circumstances will change. Countries may not adopt euro at the date indicated. *Eurostat calculations, April 2011.

Poland under euro-friendly management, but adoption "not on agenda"

The Civic Platform led government, which in Nov’07 took over from the euro sceptic government led by the Law and Justice Party, made EMU membership a priority. In Sep’08 PM Donald Tusk announced a 2012 target date for EMU membership, which required joining ERM II some time in the course of 2009.

In Jul'09, however, Poland dropped the 2012 target because of its rapidly deepening budget deficit. This was followed in 1 Feb'10 with a draft plan to cut the budget deficit to the required 3% by 2012 (from 7.3% in 2009) to enable euro adoption 2014 or 2015.

All changed again after the euro zone's sovereign debt crisis intensified. Poland's population became less enamoured with the euro. A Mar'11 poll indicated that 60% oppose adopting the single currency.

PM Tusk said end 2010 that euro adoption "isn't on the agenda". Central bank Governor Belka said in Jun'11 Poland should not set a target date, that EMU was an "unfinished project". For Finance Minister Rostowski euro adoption may take long time, unlikely before 2019.

Czech Republic has not set a euro adoption date

Already in 2006 the country abandoned 2010 as the target for EMU entry. No new date was set. The country’s president, Vaclav Klaus, regularly proclaims that he sees no merit in the single currency. General elections were held 28 May'10. Both leading parties mentioned 2015 and 2016 as possible entry dates.

But subsequently PM Necas said that his government won't set a target date for euro adoption during the current parliamentary term which ends 2014. The government intends to delay euro adoption for as long as it is beneficial to retain the koruna. He stated that "nobody could force us into the euro", that "de facto we have an opt-out".

A Mar'11 survey indicated that only 20% Czechs approve the euro, a record low. For Czech central bank Governor Singer the turmoil in the euro zone has brought loss of credibility and made fast adoption of euro unattractive. He considers Czech inflation expectations well anchored and monetary policy had little to gain from joining euro zone.

Hungary's new constitution declares forint legal tender

In 2008 Hungary failed all convergence requirements, the only country that did so. In spite of this the government, back in Jul’08, finalised a draft plan for euro adoption, raising speculation of ERM II membership in 2009 and EMU entry in 2012. But the Oct'08 financial crisis sunk that plan.

Apr'10 legislative elections brought the centre-right Fidesz party to power with a large majority. The government indicated that euro adoption was not realistic before end of decade. Moreover, a new constitution was approved by parliament in Apr'11 which declared the forint as Hungary's legal tender, thus requiring a 2/3rd majority to adopt the euro. Some consider this a de facto opt-out from the euro zone. Central bank's independence has also been curtailed in contravention of EU rules. Euro adoption appears a distant prospect.

Initial plans by Estonia, Latvia and Lithuania to achieve EMU membership already by 2007 or 2008 were wrecked by their failure to control inflation (in Lithuania by a mere 0.1 percentage point). Once corrected, and providing budget deficits were under control, entry could have been achieved quite rapidly as they had all been in ERM II by more than the prescribed two years.

But the global recession hit the Baltics particularly hard. Street riots broke out in some Baltic countries, protesting against austerity measures. Various financial commentators initially believed that devaluations were inevitable because of the severity of the recession and the deep current account deficits of these countries.

The currency pegs, however, held thanks to financial assistance from the IMF and various other sources such as EBRD, ECB, World Bank and European Investment Bank. Instead there has been an "internal devaluation": wages and salaries have been reduced, sharply for some. Moody's in Mar'10 raised credit rating of all three Baltic countries based on success achieved in surmounting recession and cutting wages to restore competitiveness.

Latvia in particular was in the firing line in 2008 and had to call on the IMF for assistance. Against initial advice from the IMF the lat's peg to the EUR was maintained, but a draconian austerity regime was introduced. S&P cut Latvia's credit rating to junk. Latvia's plan to adopt the euro in 2012 was abandoned.

Bengt Dennis, an advisor to the Latvian government and former governor of the Swedish central bank, said in Jun'09 that it was no longer a question of whether Latvia would devalue but when. The government, however, insisted that the peg would hold. And it did.

The countries 3-party coalition government increased its seats substantially in the Oct'10 elections in spite of enforcing draconian austerity which raised unemployment to 20% and reduced wages by 14%. Government plans to cut budget deficit to 2.5% by 2012 to qualify for euro zone membership at the start of 2014. But doubts have since crept in as sovereign debt crisis intensified. Central bank Governor Ilmars Rimsevics said in Jun'11 that euro should not be introduced "at any price".

Lithuania targeted 2012 for euro adoption. But its deep budget deficit was unlikely to be sufficiently contained by 2011 to make this possible. 2014 is now the target date. Fitch on 8 Mar'10 raised Lithuania's rating on its successful implementation of austerity. Moody's followed in Mar'10

PM Kubilius said in Sep'10 that the government has "a very clear goal to join the euro as soon as possible". Major hurdle currently is the budget deficit which amounted to 7% of GDP in 2010. Government planed to reduce it to 5% in 2011. Target date for adopting euro is 2014, but doubts have crept in as sovereign debt crisis intensified. Central bank Governor Vitas Vasiliauskas said in Jun'11 that goal of adopting euro in 3 years "not something to kill yourself over."

Estonia, early in 2009, asked the European Commission and the ECB to conduct an extraordinary assessment of its entry terms, hoping to adopt the euro in 2010. The response from the EU was negative.

Estonia then shifted the target entry date for euro adoption to 1 Jan'11. In spite of a precipitous slide in its GDP, austerity measures ensured that the public sector deficit remained below the 3% limit.

Estonia's government said in May'10 that it remained determined to join the euro zone in 2011 in spite of the Greek debt crisis. The European Commission reported 12 May'10 that Estonia passed the tests to join.

Estonia received the final go-ahead for adopting the euro when the EU finance ministers on 13 Jul'10 approved the conversion rate of 15.6466 Estonian Kroon (EEK) to the EUR. The Kroon had been pegged to the EUR at this rate since the start of the euro zone in 1999. Standard & Poor raised Estonia's sovereign credit rating to A (from A1) on 10 Jun'10.

After a government publicity campaign 54% of Estonians in Nov'10 supported adopting the euro, up from 47% in Dec'09. Estonia adopted the euro 1 Jan'11.

Denmark, the reluctant European:

The country joined the then EEC in 1973 for economic reasons. Danes considered themselves Danes first, Scandinavian second and European a distant third. Proud of their welfare state, seen as distinctly Scandinavian, the electorate rejected the Maastricht treaty in 1992 and approved it only a year later after opt-outs were granted, including one for EMU.

Seven years on the euro sceptic electorate rejected EMU membership in a referendum (held in September 2000). 53% voted no, 47% yes.

The government then and now is still strongly in favour of EMU membership. Indeed then PM Anders Rasmussen said in May'09 that he was keen to get rid of Denmark's opt-outs and adopt the euro, but would only call a referendum if a "yes" was assured.

The matter gained some prominence late in 2008 as the turmoil in world financial markets intensified. Pressure on the krone forced the central bank to substantially raise interest rates, bringing with it higher mortgage rates. With the cost of staying outside the euro zone becoming more apparent, opinion polls became (temporarily) more favourable to the euro.

Denmark has mostly fulfilled all the convergence requirements with large margins to spare and could have joined at relatively short notice. Moreover, being a member of ERM II, and with the DKK tightly pegged to the EUR, Denmark already assumes the monetary policy of the ECB without being represented.

PM Lars Rasmussen (successor to Anders Rasmussen) said in Oct'09 that because of Denmark's swelling budget deficit, his country would not meet the euro area's entry conditions for a number of years. The referendum previously pencilled in for 2011 was postponed. The government decided to wait until Denmark's budget deficit complies with the Maastricht requirement. (In fact it already fell below 3% in 2010) .

PM Rasmussen said in Mar'11 that his country would have more clout in EU affairs if it adopted the euro. His successor PM Thorning-Schmidt is of the same opinion (Denmark assumed the 6-months rotating presidency of the EU in Jan'12.) Danish opposition to adopting euro rose to record high in Oct'11 on intensifying sovereign debt crisis. One Oct'11 poll found 65% opposed, 29% in favour, 6% undecided.

Viewed longer term it is hard to envisage Denmark remaining outside. Once it joins it will probably be at the central parity in the ERM II of DKK 7.46 to the euro (unchanged since the start of EMU).

Sweden refused to take the plunge

Sweden too is a reluctant European. It joined the EU only in 1995 after a divisive debate with just 52% in favour. A majority subsequently became hostile to the EU, deeply resenting "interference from Brussels". The government then decided against joining EMU from its inception.

But it has no opt-out. Some even wonder whether it can continue as a member of the EU without honouring the basic agreement it entered into. Others have argued that as euro zone membership requires a prior stay in ERM II, by simply staying outside, a loophole of sorts exists which can be exploited.

A former PM, Göran Persson, proclaimed that it was "impossible" for Sweden to say no to the euro. Thus, the Persson government in September 2003 held a referendum on the subject. In spite of an intense publicity campaign by the government, business and the media, 56% of the electorate voted no, only 42% yes. Turnout exceeded 80%.

This reflected the people’s attachment to their Swedish identity and their opposition to relinquishing more sovereignty to EU institutions. There was also a pragmatic consideration. If staying out turned out to be a mistake, they could always vote themselves in at a later stage.

In 2006 the European Commission’s then monetary affairs commissioner Joaquin Almunia said the EU could take legal action against Sweden for not joining in spite of meeting the economic criteria, but that it was neither necessary or desirable.

Sweden’s political parties agreed not to discuss the issue before the general elections 19 Sep'10. During the financial crisis opposition briefly narrowed. In the spring of 2009 the polls showed a modest majority in favour (May'09: 51% yes, 49% no). But by the summer of 2010 the polls again showed a large majority opposed (Jun'10: 28% yes, 60% no).

In recent years Sweden passed most convergence tests. The Riksbank has a 2% inflation target and enjoys high credibility. Budgets were in large surplus and the public debt is low. Swedish bond yields are close to Bund yields. The krona, however, has fluctuated quite widely against the euro.

Sweden's centre-right government was in favour of joining the euro zone, in part to boosts its influence in the EU. But public opinion became increasingly hostile to the euro: Dec'11 poll: 88% against (Nov'10 poll: 58% against).

Some consider that once Denmark and all the Baltic countries have joined, Sweden, then surrounded by euro-using countries (apart from Norway), may be more receptive to the idea of also joining.

“Fog over channel, continent cut off”

The UK, even today, has not yet fully accepted that it is just another European country. Its imperial past lingers, as does its kinship with the US and its self belief (going back to the Book of Martyrs of 1563).

Ex-PM Tony Blair was an ardent protagonist of the UK joining the euro zone, in order to better shape the future of the EU in the UK’s image. Yet during his decade long reign (1997-2007) he singularly failed to persuade his electorate and his chancellor Gordon Brown (who set five ill-defined economic tests to be passed before the UK could join).

In recent years the subject has rarely been broached. Having taken over the post of PM, Gordon Brown indicated no wish to reopen the euro debate.

The Conservative Party, which came to power in May'10 in coalition with the Liberal Democrats, is firmly opposed to EMU membership. Though the Liberal Democrats are in favour, they have for now accepted the position of the Conservatives.

A poll conducted in May'09 indicated that the proportion of people that think UK's membership of the EU is "a good thing" declined to 31% from 43% in 1984.

Euro zone membership for the UK seems further away than ever. Some believe that if a period during which the British economy performs poorly coincides with a period during which the euro zone economy performs well, the subject may again be broached.

Independent monetary policy put to good use: By staying out of the euro zone the UK and Sweden retained control over their monetary policy. They have made good use of it as a counter-cyclical tool. During the years of robust growth the pound and krona were strong against the euro, dampening inflationary pressures. During periods of weak or negative growth the currencies depreciated against the euro, providing their exporters and domestic producers with a competitive advantage.

EU COUNTRIES NOT IN EURO AREA background statistics 2010
Country capital	Population thousands	GDP* EUR bn	GDP per capita EUR	Area sq km
*New member countries:*
Bulgaria Sofia	7 577	36.0	4 750	110 994
Czech Republic. Prague	10 512	145.1	13 800	78 864
Latvia Riga	2 249	18.0	8 000	63 700
Lithuania Vilnius	3 329	27.4	8 250	65 200
Hungary Budapest	10 014	98.4	9 850	93 030
Poland Warsaw	38 164	354.3	9 300	312 683
Romania Bucharest	21 466	121.9	5 700	237 500

*Old member countries:*
Denmark Copenhagen	5 547	234.4	42 250	43 075
Sweden Stockholm	9 348	346.1	37 050	449 964
UK London	62 042	1 694.5	27 300	242 534

Total	170 248	2 813.0	16 600	1 699 000

for comparison:
Euro area	331 950	9204	27 750	2 614 000

European Union	501 260	12 280	24 500	4 325 000

USA	308 745	11 058*	35 800	9 827 000
Sources: Eurostat, Economist, US BEA, ECB, Wikipedia NOTE some totals may not add due to some data nonuniformity *converted at average 2010 exchange rates

Five candidates:

Croatia's entry talks were stalled because of border dispute with Slovenia and Croatia's planned entry date of 2011 was missed. After agreement in Sep'09 that the dispute, concerning the maritime border in the northern Adriatic Sea, will be settled through binding international arbitration, accession talks resumed.

Accession negotiations were completed in Jun'11 and the European Commission subsequently presented a favourable Opinion. The Accession Treaty was signed 9 Dec'11. Ratification may take 18 months and Croatia may become the EU's 28th member 1 Jul'13. In the 22 Jan'12 referendum Croatia voted to join the EU by a 66% majority.

Iceland's parliament narrowly voted on 16 Jul'09 to apply for EU membership. EU leaders at their Jun'10 summit decided that membership talks should open. EU is keen for the highly developed country to join.

As Iceland is a member of the European Economic Area it already observes two-thirds of EU laws. If successful and if approved by a subsequent national referendum, Iceland may become the EU's 29th member and may in due course adopt the euro. Polls, however, indicate population consistently opposed. Mar'11 poll found 56% opposed, 30% in favour (14% not sure). If talks succeed Iceland will vote in 2013.

Macedonia's entry talks are blocked by Greece which objects to the country using "Macedonia" as its name, claiming it implies a territorial claim on a neighbouring Greek province of the same name.

The European Commission in Apr'11 demanded that Macedonia resolves its dispute with Greece, continues with its reform programme and battles organised crime in order to advance towards EU membership. Progress is to be reviewed in the autumn.

Montenegro became a candidate country in 2010. Accession negotiations are to get underway before end 2011.

Turkey's membership is still firmly opposed by various EU countries (e.g. Germany, France, Netherlands). Turkey also appears to have lost some interest and has in recent years concentrated on cultivating links with countries in its neighbourhood. Negotiations have been moribund for some time with little prospect of a new start.

Four potential candidates:

In addition to the five candidates there are four potential candidate countries, promised the prospect of membership “when they are ready”: Albania, Serbia and Kosovo. The fourth country, Bosnia & Herzegovina, was a candidate country, but political difficulties have intervened following elections in 2010.

Assuming most of these countries do eventually enter, the EU will have close to 35 members with a population of 600 million (nearly twice that of the US). Most, if not all, may in time join the euro zone.

EU's eastern not so near neighbours:

Further east Georgia, Moldova and Ukraine have expressed an interest in joining, but the EU has grave reservations. Still, the EU announced 6 May'09 that it will launch an "Eastern Partnership" to boost economic and political ties with Ukraine, Georgia, Azerbaijan, Armenia, Moldova and Belarus. It involves EUR600bn in aid for social and economic programmes. Formal meetings of heads of state are to take place every two years.

EU's western near neighbours:

In the west, in contrast, little interest was shown by Liechtenstein, Norway and Switzerland even though they would have been very welcome.