For all its flaws, the Euro zone’s gravitational pull is proving hard to resist.
Croatia and Bulgaria became the latest countries to inch closer to the bloc when they got the green light on Friday to enter the so-called waiting room to join the single currency. They would be the 20th and 21st members; Romania, another former communist state, hopes to be the 22nd, Bloomberg reports.
Less than a quarter of century since it was created, the euro area has been repeatedly buffeted by financial meltdowns that could have easily shattered the entire project.
Yet those episodes also spurred governments to allow the European Central Bank to boost its powers in an effort to keep the bloc together. That’s proved to be a strong-enough argument for some that a shared currency — which all European Union members are technically supposed to adopt, though Denmark has an opt-out and others have resisted — still holds appeal.
Euro Aspirations
More countries are applying to join the single currency
“It’s a tremendous vote of confidence in the EU and the euro if more countries want to join — it’s a confidence booster,” said Gilles Moec, Chief Economist at AXA SA. “It may be a bit of a headache for the central bank, but expanding the euro area should boost its credibility as a currency for the entire EU,” he added.
Croatia and Bulgaria will now spend at least two years with their currencies pegged to the euro before they can become full members.
When they do, they’ll gain full access to the massive financial backstop of the ECB, which has repeatedly stepped in to calm crises. As the coronavirus pandemic hit Europe, it announced a highly flexible bond-buying program specifically to keep down government borrowing costs in stressed economies such as Italy’s.
They’ll also adopt the world’s second-biggest reserve currency, replacing a Croatian kuna and Bulgarian lev that never fully won public trust. Close to 80% of savings in Croatia are in euros, and at an event last year to mark the 25th anniversary of the kuna, central bank Governor Boris Vujcic said he hoped it would never reach its 30th.
Slovenia was first to join in 2007. Slovakia grappled with currency instability before it entered in 2009. The Baltic republics of Estonia, Latvia and Lithuania, after massive economic meltdowns during the global financial crisis, joined from 2011 to 2015 in part due to geopolitical concerns related to their proximity to Russia.
Croatia and Bulgaria are two of the EU’s poorest members, and both rely heavily on foreign tourism that has been crushed by the pandemic. They’ve already turned to the ECB to set up swap lines to access euros.
