When Should We Introduce the Euro?

The experiences gleaned from Greece, Spain and Portugal serve as a clear warning about what happens when a country adopts the common currency ill-prepared.

Photo: ANP via AFP

Should we introduce the euro? For Hungary, the key requirement is to continue structural reforms to enhance competitiveness. Once inside the eurozone, currency devaluation is no longer an option to boost competitiveness. While short-term devaluation can help, sustained devaluation leads to inflation. Therefore, the euro should only be adopted when Hungary’s GDP per capita (adjusted for purchasing power) approximates the eurozone average. Currently, Hungary stands at about 75%.

At the recent Lamfalussy Lectures Conference, Prime Minister Viktor Orban acknowledged that Hungary had considered adopting the euro but deliberately held off for 20 years. In its current form, the euro benefits strong and competitive economies but does not necessarily help emerging economies catch up. Even Sandor Lamfalussy, the "father of the euro," warned that "joining the monetary union prematurely could be lethal".

Over the past decade, central bank analyses have consistently found that in and of itself adopting the euro is not a panacea. Only in few, exceptional sectors did the performance of value added production improve after euro introduction. Germany's processing industry is a case in point. As for sectors in other countries, technological advancements, institutional structures, and country-specific factors played a larger role in economic growth than the euro itself.

The sector results clearly show that the biggest winners of euro adoption were Germany and the Netherlands, thanks to their strong manufacturing sectors. Surprisingly, the expected boost for tourism on the continent, especially in southern Europe, did not materialize—instead, Belgium, Austria, and Lithuania saw faster economic growth.

In conclusion, a comment on the convergence criteria: macroeconomic indicators serve "only" as a general guideline. The most important conditions for euro adoption are: commitment to boosting competitiveness and an adherence to strict budgetary discipline spanning across political cycles. And most crucially the public readiness for a new currency. 
 

The author is a senior analyst at Vilaggazdasag.