After turmoil in the currency markets nearly destroyed the Icelandic krona and undermined the Polish zloty, those two countries are rethinking their opposition to the euro. More surprisingly, Denmark — a nearly picture-perfect model of economic management — looks more likely to embrace the euro, after rejecting it twice in the past.
Denmark was forced to use high interest rates to defend its currency, the krone, against speculative attack. The effects of those higher rates are now rippling through the Danish economy, contributing to achange in attitudes.
“Denmark is so extremely sound by all macroeconomic standards,” said Thomas Mirow, president of the European Bank for Reconstruction and Development. Its changing stance on the euro “says a lot about stand-alone options in difficult times.”
After 10 central and eastern European countries joined the European Union in 2004, the political will to control budget deficits and inflation — the two key criteria for adopting the euro — melted away.
As a result, only four small countries — Slovenia, Cyprus, Malta and Slovakia — have qualified for the euro. But the financial crisis has changed the situation in a few furious months, as the newly visible costs of not using the euro recast the politics of independent currencies.
At its core, the convulsions in financial markets encompass a “flight to quality,” the term investors use to describe a sudden shift of money out of potentially risky assets into the safest possible assets, one of which has been the euro, and investments denominated in euros.
This dynamic has played out quickly.
In late October, the Polish zloty fell sharply in value against the euro as markets fretted that the economic crisis gripping Hungary would spread to neighboring Poland.
That focused minds within Law and Justice, the rightist nationalist party to which the Polish president, Lech Kaczynski, belongs. The party has long demanded that Poland hold a referendum on the euro, believing it would fail.
But the zloty’s depreciation suddenly threatened a swath of the party’s voters who had taken out euro-denominated loans, analysts said. While these loans came at attractive interest rates, a weaker zloty threatened Polish borrowers with higher mortgage payments.
Within a few days, Mr. Kaczynski agreed to a plan for adopting the euro by 2012, and quietly dropped demands for a plebiscite. A few weeks later, Poland reached an agreement with the European Central Bank on a currency swap line of 10 billion euros to tide it over during the crisis. The zloty stabilized.
“ ‘When there’s a threat, find God,’ goes the proverb in Poland,” said Rafal Antczak, an economist at Warsaw University. “And that is what has happened.”
Latvia, Lithuania and Estonia, which also joined the European Union in 2004, have never needed convincing about the euro’s merits, but they are redoubling their efforts to ensure that they can join within a few years. Hungary, which got its own assistance from the European Central Bank, is also shifting toward the euro. And Sweden, which also belongs to the European Union but voted down the euro in 2003, has seen a shift in public sentiment.
Iceland, an island nation of 300,000, teetered on a national bankruptcy before securing a lifeline from the International Monetary Fund. The Icelandic krona’s free-fall of nearly 80 percent against the euro made the country’s banks, which had heavy liabilities in other currencies, insolvent almost overnight. Iceland has long rejected membership in the European Union, a prerequisite for adopting the euro, because it feared the bloc’s common fisheries policy would strip it of control over a vital natural resource.
Now facing a painful recession, polls show that 60 to 70 percent of Icelanders favor joining the European Union and abandoning the krona. The governing party is reconsidering its opposition.
Major companies in Iceland are already moving to make the euro a reality. Alfesca, a seafood company, and Straumur-Burdaras, an investment bank, now plan to list their shares in euros, eliminating the risk to foreign investors of owning a krona-denominated asset.
“When you have a crisis like this — both a banking and currency crisis — that can only strengthen the call for changes,” said Finnur Oddson, managing director of the Iceland Chamber of Commerce. ”There is a general agreement that our current monetary policy does not work, to put it very politely.”
Denmark will be the acid test for the euro’s appeal, analysts agree, if only because the country has already rejected the common currency in two referendums, the most recent in 2000. Prime Minister Anders Fogh Rasmussen has seized the moment to announce plans for a third referendum, near the end of his center-right government’s term in 2011.
The main obstacle to joining the euro zone, however, is still very much political. The Socialist People’s Party, the main opposition group, has long opposed adopting the euro, saying that the European Union needs to pay more attention to popular causes like curbing speculation and making agricultural policies more environmentally friendly.
The party’s continued opposition would probably sink the referendum, since the margin of support is thin. In November, a poll taken by the Danish statistical agency showed that proponents of the euro had a 49 to 45 percent lead over opponents after a long period of lagging behind.
But Villy Soevndal, chairman of the Socialist People’s Party, has dangled the possibility that it might support the euro if Mr. Rasmussen can get the European Union to take action on the issues it holds dear. Soevndal may be simply bleeding his political opponent, many people in Denmark say, but for the first time since the euro was created, a Danish yes looks tantalizingly possible.
“We get to decide whether Danes vote yes or no,” Mr. Soevndal said. ”We don’t want to play our cards without getting anything.” In order to stabilize trade with the 15-nation euro zone, which is Denmark’s largest trading partner, the Danish central bank keeps the kroner fluctuating in a narrow band against the euro. Since the euro was created in 1999, that has meant adjusting interest rates in lockstep with the European Central Bank.
As the Danish debate over the euro has gathered steam, supporters of the common currency have come to believe that they can bank on a new set of voters: the young Danes who have traveled widely and experienced the benefits of the euro. At the time of the last referendum, euro cash and coins had not yet been introduced.
Marie Petersen, a student and part-time waitress, said her year studying in Spain convinced her that she would rather have euros in her pocket than Danish kroner.
“You can see how it works in other countries,” Ms. Petersen, 21, said. “That’s a big difference from last time.”
source: nytimes.com
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Several Countries Are Rethinking the Euro
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