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Summary of "Euro area accession countries in the context of the pandemic"

Background and Questions

The document discusses the impact of the pandemic on the process of euro area accession among non-euro EU member states. Seven of the eight non-euro EU countries are required to join the euro area, with Denmark being the exception due to its opt-out. As of July 2020, Bulgaria and Croatia had joined the Exchange Rate Mechanism (ERM-II) and the Banking Union, while Romania expressed interest in joining. In contrast, the Czech Republic, Hungary, Poland, and Sweden have not shown interest in euro membership.

The document raises two key questions:

1. How will the pandemic affect the process of euro area accession?
2. How will the instruments of the Recovery Package help the euro area accession countries?

Impact of the Pandemic on Euro Accession

The author suggests that the pandemic has not had any direct implications for the process of joining the euro area. The currency markets of ERM-II members (Bulgaria and Croatia) have not experienced stress, and similarly, the other non-euro countries (the 'outs') have not faced significant market pressure.

Euro-area specific policy responses, such as measures by the European Central Bank (ECB) and national central banks, have been implemented, but there has been no demand for the European Stability Mechanism (ESM) credit line. Moreover, the pandemic response measures across the EU have been largely uniform, with 19 countries applying for loans from the SURE employment-support facility, including six of the seven non-euro countries (excluding Sweden). This indicates that lack of euro membership did not hinder the countries’ ability to access EU-wide crisis support.

Main Aspects of Euro Adoption Decision

The decision to adopt the euro is primarily a political issue, rather than an economic one. The author argues that the Maastricht criteria are not sufficient for successful euro adoption. The key aspects that influence the decision include:

• Prevention of macroeconomic imbalances
• Prevention of financial imbalances (which requires prior membership in the Banking Union)
• Stability-oriented fiscal policy
• Microeconomic flexibility

In contrast, the reform of the euro area is considered less important in the context of euro adoption.

Role of the Recovery Package

The Recovery and Resilience Facility (RRF) and other instruments of the EU's Recovery Package are expected to provide significant financial support to euro area accession countries. However, the author notes that the benefits of the package are more pronounced for lower-income countries due to the allocation method. All euro-outs, except Sweden, are classified as lower-income countries, which means they are likely to receive a larger share of the funds.

The Recovery Package includes:

• Insurance component: Countries that were more severely affected by the pandemic receive more support.
• Redistribution component: Lower-income countries receive more support than higher-income ones.

The author highlights that the Recovery Package could provide a 4–7% increase in GDP for most euro-outs, with Croatia and Bulgaria receiving up to 11–13% of their GNI. Additionally, countries can access 6.8% of GNI in loans from the RRF. However, the ability of these countries to utilize this additional funding effectively depends on their capacity to spend it, given that they already have remaining funds from the 2014–2020 budget and new allocations from the 2021–2027 budget.

EU Budget Veto and Potential Market Pressure

The EU budget veto by Hungary and Poland introduces the possibility of an intergovernmental recovery fund that excludes these two countries. If this happens, the countries could face market pressure and adverse economic impacts, as they may not be able to access the same level of support as other euro-outs. This could create a disproportionate burden on these countries and potentially slow down their economic recovery.

Conclusion

The pandemic has not significantly affected the euro area accession process. The Recovery Package offers substantial support to euro-outs, particularly lower-income countries, but its effectiveness depends on the countries' ability to spend the funds and the political dynamics within the EU. The decision to join the euro remains a political choice, and the economic conditions of the countries have not changed substantially in a way that would alter this decision.