Euro adoption in CE/SEE: a story for the next decade, but we recognize a frontrunner

The question whether seeking euro membership seems beneficial for a given country depends on a complex network of “traditional” economic factors. On the one hand, a high degree of ex-ante convergence or similarity with the euro area can be seen as a key prerequisite for successful euro membership; on the other hand, euro area entry can also support further convergence ex-post. In any case, the sustainability of ex-ante convergence will determine the extent to which it makes sense to give up monetary policy autonomy or monetary flexibility (if any). Otherwise, the single monetary policy of the ECB, driven by economic data derived from the euro area aggregates and thus major euro member countries, could be structurally ill-suited to a potential new euro member. In the context of the aforementioned, this applies in particular to small economies, i.e. almost all euro members or potential candidates from CE/SEE. Moreover, the debate and assessment of Croatia's and Bulgaria's euro entry bids, for example, showed that institutional and banking sector-specific factors have been de facto added to the hard-coded "Maastricht criteria". Up to a certain extent this makes sense as joining the euro club nowadays also implies entering the “Banking Union” (Single Supervisory Mechanism, SSM). Furthermore, the strengthened EU economic governance with the “Macroeconomic Imbalance Procedure” (incl. current account balances or international competitiveness indicators) going beyond the “Maastricht Criteria” has been made part of euro readiness assessments as well. All in all, joining the currency club has possibly become more demanding. However, up to a certain extent this is natural as euro area enlargement represents an evolving process spanning over decades with learning effects (incl. the governance of the single currency area) and structural shifts in surrounding conditions.

However, political considerations should by no means be underestimated and, after all, European monetary unification is indeed a political undertaking. Political aspects of euro membership include the (perceived) stability and attraction of the currency bloc. The calculus here is determined by questions such as the international/global role and attractiveness of the euro, the (perceived) credibility of the ECB with regards to its core mandate, local vulnerabilities at the macroeconomic and/or banking sector level and thus also possible reputational and/or financial advantages of accession (including existing or not de facto euroization). According to Eurobarometer surveys, the euro area and the euro attained their lowest acceptance rate in 2014, when only 50-60% of Europeans were in favour of the monetary union; now the corresponding figure is back up to 70-80%. Currently, only 16-23% of EU citizens are decidedly eurosceptic, compared to 30-42% in 2014. In this respect, it is also not surprising that in the four CE/SEE euro candidates (Czechia, Hungary, Poland, Romania) only 50% of the population on average aimed at joining the euro in 2014; this year we are back above 60% on average at least.

On top of the trust into ECB and the stability of the euro area, the perceived future orientation of the euro area and/or ECB can also play a role here, for example as a modern central bank in the fields of green finance or digitalization of banking/central banking (e.g. digital euro). Moreover, geopolitical considerations may play a role. Here we would point to the fact that most remaining non-euro area EU countries are in the eastern part of the EU and thus in close or actual neighbourhood to the war in Ukraine and Russia. Hence, the issue of security and being part of EU decision making to the largest extent possible gains possibly a new degree of relevance. However, in some cases entering the euro area might be not an easy-going political strategy either. That said, actual adoption of the euro depends on many political and social factors, e.g. the support for euro membership by the broader public. EU political constellations are just as important as local political constellations. Here, the credibility of a country at the political EU level or with relevant EU institutions must be considered. All in all, euro area membership represents a complex political and economic venture, while a successful euro entry bid is not per se a free ticket to sustainable prosperity.  

Taking income convergence as key starting criterion all current candidates from CE/SEE may qualify as decent euro members. On average recent euro area entrants (Slovenia, Slovakia, the Baltics and Croatia) showed an income level (GDP per capita at PPP) of 69% of the euro area. Currently, all candidate countries from CE/SEE are already well above this level posting on average a GDP per capita of 77% vis-à-vis the euro area. However, the devil is in the details. The latest official Convergence Report has been published in June 2024. According to this assessment none of the CE/SEE countries covered here (Czechia, Hungary, Poland, Romania) fulfils the formal euro entry criteria. The only sub-criteria fulfilled is the public finance and (level of) long-term interest rates criterion in case Czechia (all others have not been met). Furthermore, the four CE/SEE countries considered here faced one of the highest inflation spikes in the EU thus, not surprisingly, failing to meet the inflation, as well as rates criterion. Moreover, the pandemic and high inflation episode have resulted in large-scale public spending. Recent crises obviously also led to certain FX weakness and large volatility on FX markets with the managed policy of the Romanian currency leading to relatively mildest fluctuations vs the fully free-floating HUF, CZK and PLN.  

Obviously, the lack of sustainable convergence when it comes to rates, inflation, public finances or FX is largely driven by the recent external shocks and resulting economic crises. This is also reflected in the fact that all countries covered by the 2024 Convergence Report, incl. Sweden and Bulgaria, do miss the inflation criterion currently. The failure to meet the accession criteria by a wide margin in all potential euro members from CE/SEE currently shows the challenge of planning and executing a credible and long-term euro strategy in geopolitically challenging times and associated economic volatility. In other words, it may have been easier to join the euro area in the past. Given the current starting position and increased macroeconomic uncertainties and volatilities, we hardly expect the next euro entry to materialize before/until 2030.

Governments ought to follow the sentiment and preferences of voters. In terms of social or public support for the euro as national currency, relevant Eurobarometer surveys across past years show interesting results, with surprising fluctuations between 2004 and more recent surveys. Hungarians and Romanians seem to be most optimistic in terms of the share of people expecting positive consequences of euro adoption. However, this sentiment of voters should not necessarily guide the political calculations of the current Hungarian political elite. In Romania, the public support for euro adoption has been very high and broadly stable from the first years of EU membership with only 21% of Romanians being against it in 2007 vs 43% in Czechia, 38% in Poland and 30% in Hungary in that year. Currently, 77% of Romanian would favour introduction of the EUR, the highest reading among CE/SEE countries seen over the last few years. Meanwhile, a large slump around 2014 has been observed in Czechia, while now the Czechs express historically high support for the euro at 49% with a 4-point increase in the last year. Nevertheless, 50% of Czechs are still against joining the euro area. This shows that despite high convergence and even increasing credit euroization, Czechia is still characterized by a rather entrenched social and political reluctance towards adopting the euro. We would not rule out the Czechia will continue to play the role of “Sweden in Central Europe”, i.e. not joining the euro area despite and overall economic readiness. Finally, an interesting development is the slump in support for the euro in Poland in the last year. This stands in contrast with the political shift that took place in October 2023, where the new government was returning to more constructive relations with the EU (the consequence of which was the long-delayed release of NGEU funds). However, neither the new government, nor the old one, were actively pushing the euro topic on the political level. Given the high degree of overall political fragmentation in the Polish society, we do not think that actively pushing for euro accession will be a winning strategy.

The (failed) status of fulfilling the convergence criteria alone makes euro adoption a discussion not for the next few years or even possibly this decade for all four CE/SEE countries. Not to forget that the 2024 Convergence Report adds a decent dose of scepticism regarding the sustainability of convergence in CE/SEE, even if individual threshold values can be achieved or are achieved at some point in time. What is more, given the (rule of law) challenges the EU faced in relations with countries like Poland or Hungary in the last years, we believe political-institutional factors may become more relevant on top of conventional convergence criteria. In this context, it should also be noted that the ECB has expressed concern about the Hungarian central bank's position on independence. However, it is not only on the EU side where we have doubts about the possible timing of euro adoption. Looking at the support levels for the euro in the four CE/SEE countries, as well as the attachment to the own currency in the case of CZK or the political divergence in Hungary as well as a lack of political debate on the topic currently, we believe none of the countries will rush with euro adoption. Still, we see some variety between them. Currently we would see Romania, the latecomer to EU vs CE3 (2007 vs 2004 in CE) as potential best and next candidate. Finally, in case of Romania there seems to be a certain political ambition to develop into a “true and full” EU member (incl. euro membership) in accordance with all EU rules and values. This cannot be said about all current EU members out of CE/SEE. Finally, euro adoption seems to be least likely (among the CE3) to happen in Hungary. In the following we provide our high-level country views in the ordering of a potential euro adoption.

Romania: Speaking about long-term policy orientation and public support we see Romania as most credible euro candidate out of CE/SEE starting from 2030 onwards. Public support for the euro as national currency is the highest and most constant in CE/SEE. Nominal and real convergence could allow for a credible euro entry strategy if the overall policy orientation remains EU integrationist. Moreover, we would see tangible economic benefits given the high degree of de facto euroization in the economy and banking sector. However, the country still has some reform challenges ahead. The quality of public institutions and governance in Romania is seen as relatively weak according to the 2024 Convergence assessment. 

Czechia: The “Sweden” of Central Europe might embark on a credible euro entry strategy once the domestic political spectrum would allow for. However, we currently see such a high degree of “currency patriotism” in combination with a certain EU fatigue that we hardly believe in a euro entry over the next 5-10 years. This holds true despite a creeping euroization plus a substantive support from the business community. Interestingly, Czechia currently exhibits the highest ratio of euro-denominated loans to non-financial companies in CE/SEE (slightly above 50% of total). On a positive note, public resistance towards the euro decreased markedly from 2014 until 2024 (77% of the population against the euro as national currency in 2014 vs. 50% at present). Therefore, there remains hope for another round of more euro supporters by 2034.

Poland: Economically speaking the largest CE/SEE economy could easily embark on a credible euro entry strategy. Moreover, euro membership could serve overall political and economy policy ambitions of the country; not to speak about ambitions of “national champions”. However, we see the political spectrum being so divided over fundamental EU integration issues that a push for euro membership is unlikely to be politically winning strategy. This holds especially true as the population remains by and large highly divided on the euro issue in the long term if you take the 2014 and 2024 Eurobarometer surveys as a reference.

Hungary: Putting the country on a credible long-term euro entry planning could serve as an important economic policy anchor given the high degree of macro-financial volatility and FX weakening seen over the last decade.  In our opinion, these trends are also a reason for the high level of support for the euro as a national currency (second highest level of support in the region after Romania). However, given current Hungarian elites, a sustainable euro accession strategy should hardly be possible or will meet barely any real approval within relevant EU institutions. The quality of public institutions and governance in Hungary is seen as relatively weak according to the 2024 Convergence assessment. However, the de facto euroization is already high as indicated by the second highest ratio of euro-denominated loans to non-financial companies in CE/SEE (around 45%).