Most recent Economic Perspectives for Central and Eastern Europe
Euro adoption: the long path ahead
While Central and Eastern European economies (CEE) are all member states of the European Union, the adoption of the single currency – to which they all pledged during the EU accession – has so far been completed only in Slovakia and Croatia. Other CEE countries are at varying stages of domestic discussion, with the exception of Bulgaria which is in the final phase of the EMU accession.
Renewed euro discussion in the Czech Republic
At the beginning of 2024, after several years of silence, the heated discussion about the euro erupted in the Czech Republic, as President Petr Pavel vocally supported EMU accession. In general, the main arguments in favour and against the euro remain broadly unchanged; on the one hand, there are undisputed benefits of the single currency for the heavily export-oriented Czech economy (exports to the euro area account for 65% of total) in terms of lower transactions costs. On the other hand, there are potential costs and risks, including the absence of independent monetary policy in the times of asymmetric shocks, as well as the loss of the koruna as an effective shock-absorber.
All arguments considered, euro adoption involves a large number of often contradictory impacts, which are burdened with a large degree of uncertainty. Importantly, from an economic point of view, the euro does not yield a clear positive or negative economic effect on the aggregate level. Furthermore, it should be stressed that neither the benefits nor the costs are so large as to make the adoption of the euro a paramount decision for the overall economy.
Ultimately, euro adoption is a political decision. Prime Minister Petr Fiala has recently stated that his government will not take any steps to join the euro area, pointing to different priorities. However, there are some opposing views within the coalition, namely from the Mayors and the Pirates parties, asserting that the Czech Republic should at least join the Exchange Rates Mechanism II, the so-called 'waiting room' for the euro. This should pose no major technical problems for the Czech Republic.
There are nonetheless several unknowns related with the entrance of ERM II. Croatia’s and Bulgaria’s experience imply a need for the simultaneous entrance of the Banking Union, which is seen as suboptimal given the strength of the Czech banking sector and strict regulation with a solid track record. At the same time, entering the euro ‘waiting room’ without a specific target date is also mostly considered to entail unnecessary risks.
Overall, our view is that the current government is unlikely to make major steps towards EMU accession, partly due to consistently low support for the euro among Czechs (see figure CEE1 and CEE2). Next parliamentary elections are held in late 2025, implying that euro adoption is, if made priority by the next government, technically possible at the earliest in 2029 but more realistically through the 2030s.
Bulgaria on the track for euro adoption
The euro adoption process is at a more advances stage in Bulgaria. The Lev has been pegged to the euro since its introduction back in 1999. Under the currency board regime, the economy has seen a significant euroisation. Bulgaria achieved considerable success when it became a member of the banking union and entered the ERM II mechanism in 2020, signaling a firm intention to adopt the euro. As for now, the country meets most of the admission criteria: budget deficit, public debt, exchange rate stability, long-term interest rate and legislative compatibility. On the other hand, headline inflation currently remains the major obstacle to fulfill Maastricht criteria.
The good news is that inflation in Bulgaria is decelerating. It is however still unlikely that inflation will meet the Maastricht limit by mid-2024. Therefore, the government prefers a convergence report to be drawn up based on the autumn inflation figure, when it is expected to approach the required annual average rate. If this is the case, the European Commission could make a recommendation for a specific admission date, which is usually around six months after the report. Anyway, since there are still too many political unknowns and large uncertainty in this equation, it is difficult to predict the specific date of Bulgaria's admission. Given the government's determination to fulfill this commitment, the earliest possible opportunity is seen soon after January 1, 2025.
Hungary and Poland: no current ambition to join the euro area
Meanwhile in Hungary, domestic discussion about euro adoption remains silent. It is worth noting that the adoption of the euro has been a topic of discussion since the country's accession to the EU in 2004, yet the government has not pursued the goal actively. As of 2024, there is no target date, and the forint is not part of the ERM II. According to the finance minister, Mihály Varga, Hungary should adopt the euro only when the economy is well prepared, i.e., Hungary reaches about 90% of the EU's average level in terms of economic development (currently standing at some 77% of EU average).
On a similar note, central bank governor, Gyorgy Matolcsy, reiterated Hungary should not consider adopting the euro before 2030, as joining the single currency zone before its economy is duly prepared would backfire. This stands with a sharp contrast with the formidable support of the euro among Hungarian population. According to the latest Eurobarometer survey, 66% of Hungarians are in favour of euro adoption, up from below 50% a decade ago.
Finally, Poland also committed to joining the euro as part of its EU accession, but progress has stalled over the last decade. After the previous right-wing government engaged in years of political friction with Brussels on major rule-of-law issues, the new Prime minister Tusk campaigned on the need for Poland to get closer to Europe. However, joining the EMU was not part of his platform. Importantly, not all parties of his coalition agree on this crucial issue. Furthermore, the current government would need to change the constitution that requires a two-thirds parliamentary majority which the coalition does not have. Last but not least, a significant majority of Poles still oppose to give up the zloty. The EMU accession thus seems to be the long-term goal at best for Poland.