The financial challenges facing some countries in eastern Europe, particularly those such as the Baltic states with large external financing requirements, fixed exchange rates and high levels of euro-denominated debt on their balance sheets, have raised the issue of whether early euro adoption would represent an effective policy remedy or "exit strategy". Indeed, a recent leaked paper from within part of the IMF reportedly advocated that option.
However, Fitch notes that the policy of the ECB, EC and the EU is that a country can only adopt the euro once it has met the Maastricht convergence criteria covering price stability, long-term interest rates, budget deficits, government debt and exchange rate stability within the Exchange Rate Mechanism (ERM II). Despite EU concerns about the problems faced by some countries in eastern Europe, its willingness to provide substantial financial assistance and the possible political attractiveness of a "quick fix", Fitch does not expect a relaxation of EU policy on joining the euro area.
In Fitch's view, macroeconomic imbalances, the scale of recent boom and busts and question marks over whether countries can restore competitiveness within the constraints of their fixed exchange rate regimes make the idea of convergence as relevant as ever. Fitch believes that the EU authorities remain disinclined to "premature" euro adoption for fear that a country might subsequently find itself unwilling or unable to bear the economic and political cost of adjustment within the euro area, and even possibly seek to leave it, triggering contagion to other countries within the single currency. Current pressures facing some existing euro area members underline the argument. Fitch notes that the EU also opposes unilateral euroisation (as in Montenegro and Kosovo).
Overall, despite some reservations about the adjustment challenges they would face, Fitch believes that joining the euro would be a net positive for eastern European countries as it would render the risk of balance of payment and currency crises negligible. The agency's long-standing position is that euro adoption can lead to one- or two-notch upgrades of foreign currency Issuer Default ratings. "If there were an unexpected relaxation of EU policy that opened the way for early euro adoption, then Fitch would expect to respond by taking some positive rating actions on the countries concerned," said Mr Parker. However, unilateral euroisation would be far less advantageous as it would not bring access to ECB liquidity or influence on ECB decision-making, and would lead to a loss of "goodwill" with key EU policy makers.
Fitch's latest forecasts for euro adoption are (January) 2013 for Estonia, Lithuania and Poland; 2014 for the Czech Republic, Hungary and Latvia; and 2015 for Bulgaria and Romania. For the Baltic states, budget deficits are surpassing inflation as the toughest constraints on meeting the Maastricht criteria. Timetables for all countries are uncertain, and both later and early dates are possible. Not least because they may depend partly on interpretation of the criteria: even if inflation is below the reference rate is it a "sustainable" price performance if abetted by an extreme recession, is a budget deficit above 3% permissible if "only exceptional and temporary", and is an IMF programme consistent with ERM II membership "without severe tensions"?
