| CEE - 10 challenges for the new decade |
| No.5 Euro Adoption |
Croatia seems set to enter ERM-II in July. Adoption of the euro can be expected in 2023-24 at the earliest, with the final timing depended on post-COVID-19 economic and fiscal adjustment. Hungary and Romania enjoy a high level of public support for euro adoption, but lack the preparation.
Slovakia and Slovenia are so far the only two CEE countries that have fully integrated into the EU in the sense that they have become members of the Eurozone. After the Baltics joined the Eurozone in 2011-15 and the UK decided to leave the EU, the weight and voice of non-euro countries has declined. We expect that, during this decade, at least one country, Croatia, will become a new member of the Euro Area. Croatia’s strong aspiration for euro adoption should be confirmed very soon by entering ERM-II, where it is likely to stay for at least two years before the final assessment of Maastricht criteria is conducted.
Aside from Denmark, which has been an ERM-II member for over 20 years, but with little aspiration for euro adoption, eight other countries have successfully participated in ERM-II and adopted the euro. The average time spent in ERM-II is four years and eight months, though the sample is split into two camps, one where the process has been pretty straightforward and lasted approx. three years, the other comprising the Baltic countries, where the process was longer and impacted by the global crisis trends. Aside from Greece and Slovakia, where central exchange rates were revalued once and twice, respectively, all other countries experienced very stable rate developments inside ERM-II.
Convergence supports euro adoption
Croatia is not only keen on euro adoption, but also seems to be ready in economic terms. In 2019, Croatian GDP (measured in PPS) stood at 60% of the EU15, thus landing just under the average convergence level of the eight member states that have adopted the euro most recently (i.e. 62%). As supported by recent research from the CNB, the relatively high degree of synchronization between the domestic and EA economic cycles (similar findings also apply to Bulgaria and Romania) is encouraging, suggesting only modest drawbacks of giving up monetary sovereignty.
Since entering ERM-II, all eight countries have converged, apart from Greece, which has been hit hard by its debt crisis, and Cyprus, which was already relatively developed at the time of ERM-II entry. Looking at past experience, the convergence story was stronger in GDP terms than in inflation terms, implying that fears of rapid price increases upon adoption seem overdone.
Other CEE countries lack necessary preparation
The highest expectations of early euro adoption are obviously in Croatia and Bulgaria, two countries that have made euro adoption a strong political goal and taken concrete actions to achieve it. In Croatia, more than 50% of citizens expect euro adoption to take place within five years. In other CEE countries, expectations are not very high for the next five years, but the vast majority expect that it might be adopted in this decade. Rather high expectations are witnessed in Romania, followed by Hungary, where citizens are the most positive about the benefits of the euro. Unfortunately, both countries lack the necessary preparation and Romania does not meet any of the Maastricht criteria at the moment.
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CEE Challenges for the new decade:
No1. Demography
No.2 Going Green
No.3 Rule of Law
No.4 Healthcare
No.6 Labor Market
No.7 Education
No.8 Regional Development
No.9 Capital Markets