29th May 2023

New EU states should join euro 'as quickly as possible'

The question of how quickly the ten new EU member states should join the single currency will grow to dominate the EU's economic agenda.

Some experts argue that the accession countries should join as quickly as possible to reap the benefits of closer economic integration.

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Others, notably the European Commission and the European Central Bank, say they should take their time to achieve the strict economic conditions required before joining the euro zone.

But Robert Mundell - the 'father of the euro' - is in no doubt. He wants to see the euro zone, which he was instrumental in creating, expand quickly, if the new EU states can meet the criteria.

"I think that countries should join as quickly as possible, but they first of all have to have the ability to balance their budget", the Nobel-prize winning economist told the EUobserver.

Stricter conditions

However, he advocates even stricter conditions than those currently set by the EU and warns of problems for Europe after these poorer countries do join the common currency.

Accession countries are legally bound to join the euro, but only if their budget deficits - tax receipts minus public spending - are below three percent of their gross domestic product (GDP).

But the professor would like to see tougher measures. "I think they should be even better than the three percent budget deficit, I think the basic criterion should be a close-to-balanced budget".

He also believes that the accession of the new states to the euro zone will pose "adjustment problems".

"The accession of 10 countries to the euro zone is a big step for Europe because it’s the accession of countries with one third of the per capita income, poor countries, with low wage rates and poor labour markets so there is gradually going to be an increasing influx of labour into the rest of Europe and so it is going to create adjustment problems".

'No job growth' in Europe at current exchange rate

But Professor Mundell also thinks that Europe has serious problems to deal with now, mainly concerning the astronomical rise of the euro, which continues to break new record levels against the dollar almost daily.

He said, "I would think it is going to be very serious … there is going to be almost no job growth in Europe with rates at this level, which is really uncompetitive".

"Overall growth in the euro area will be lower of course [as a consequence]", he adds.

The ‘globo’

It is partly to avoid such instability in the foreign exchange markets that he is advocating a global currency - sometimes dubbed the "globo".

Initially, this would be a mainly technical instrument to be used in the large international exchanges, for movements of capital and commercial transactions. But this could eventually lead to a common world currency.

"What I would want to follow that up with would be an official world currency, backed by this as the platform", says the economist.

Such an idea may seem to be a long way off. But when Professor Mundell laid the intellectual foundations for the euro, few people thought that European countries would ever give up their francs, pesetas and marks.

Rewriting the pact

Professor Robert Mundell is a Canadian professor of economics at Columbia University, New York. He won the Nobel Prize in 1999 and he specialises in currency union economics.

On Europe's other economic problem, the row over the euro rules, the professor is tight-lipped. All eyes will be on economic and monetary affairs commissioner Pedro Solbes on Tuesday to see if he will decide to take the member states to courts for their effective suspension of the rules underpinning the euro.

But Professor Mundell says, "I wouldn't wish to comment on the politics of the decision but if I were re-writing the Stability Pact, I would do it a little differently. I would put a little less weight on the budget deficit".

The euro: just what Europe needed

Professor Mundell was a leading member of the group on economic and monetary union, which paved the way for the single currency. He is therefore often referred to as the "father of the euro".

So how does Professor Mundell assess the performance of his creation in its first four years of operation?

"It has proved to be, as I believed, just what I think the Continent needed, despite difficulties in some countries and problems that some people have with it".

Although he does not believe that the EU can become more competitive than the US by 2010 - the so-called Lisbon aims - he says, "over time, with the expansion of Europe, and with Denmark, Sweden and the UK joining, the euro area is going to be a bigger economy than the US economy … so the demand for euros is going to increase".

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