IMF Says EU Eastern States Should Adopt Euro: Report

Struggling European Union countries in central and eastern Europe should switch to the euro even without full euro zone membership, according to a confidential report quoted by the Financial Times on Monday.

The paper cited the report as saying the 16-member eurozone could relax entry rules so the states could join as quasi-members without European Central Bank seats, a prospect analysts said would be hard pressed to find support at the ECB or in the EU's executive Commission.

"For countries in the EU, euroisation offers the largest benefits in terms of resolving the foreign currency debt overhang (accumulation), removing uncertainty and restoring confidence," said the report, written around a month ago.

"Without euroisation, addressing the foreign debt currency overhang would require massive domestic retrenchment in some countries, against growing political resistance."

The paper said the report had been prepared to support an unsuccessful push by the IMF, the World Bank and the European Bank for Reconstruction and Development to support a region-wide anti-crisis strategy for the European Union and eastern Europe.

It did not cite which countries had been specified as becoming euro zone joiners quickly.

Latvia, Lithuania, Estonia and Bulgaria have pegged their currencies to the euro and market speculation has focused on whether they will devalue the pegs or hold them steady.

AP

All have said they plan to keep their pegs, worried devaluing would strain those who have borrowed in Swiss francs and euros by significantly pushing up their costs of repaying those loans, and also put banks under pressure.

Euro zone entry could remove that threat but could make recovery harder because exports would be more expensive.

The other countries -- Poland, Hungary, Romania and the Czech Republic -- have floating currencies that have fallen by at least 13 percent since last July against the euro and hit foreign currency borrowers in the first three.

Unilateral euroisation was raised by some academics before most of the region joined the EU in 2004, but it was written off as risky if not impossible without EU and ECB support.

Out of Date

Analysts also said the idea of fast euroisation had probably been overtaken by an agreement at last week's G20 meeting to triple the IMF's lendable funds to $750 billion and its creation of flexible credit lines for better-run emerging markets.

Poland said on Monday it may be interested in that facility in the future but for now saw no such need.

"If it does exist, this (report) could be a document that was used to provide an incentive to EU leaders to push them and help them realize how serious the situation is in central and Eastern Europe," said Simon Quijano-Evans, economist at Cheuvreux.

"In the meantime, EU leaders have clearly realized and they've provided a substantial amount of funding, so from that point of view I think a lot has been done already," he said.

Quijano-Evans said, however, that he expected to an acceleration of ERM-2 and euro zone entry in some countries.

Poland and Hungary in particular, as well as other non-euro zone members, have expressed interest in speeding up euro adoption and have lobbied for the European Commission to allow for more flexibility.

But the Commission has stuck firmly to the rules, and the economic crisis has pushed up budget deficits and fuelled currency instability across the region, complicating countries' efforts to meet the required Maastricht criteria.

The IMF report, covering eastern Europe, former communist states and Turkey, expects a 2.5 percent fall in gross domestic product for the "emerging Europe" region this year, compared to a 4.25 percent growth forecast last autumn.

It said the region would have to roll over $413 billion of maturing external debt in 2009 and finance $84 billion in current account deficits.

In the last six months the IMF has pledged over $60 billion in loans to the region, with Hungary, Latvia, Romania, Serbia and Ukraine among those with programs.

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