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Growing confidence in the euro

The eurozone has expanded to 15 countries after Malta and Cyprus adopted the European Union’s common currency in January. The entry of the Mediterranean islands, and Slovenia in 2007, is in line with the expectation that among eurozone outsiders the smaller economies would meet the so-called convergence criteria sooner than their diversified and larger counterparts. The latest development coincides with the steady rise of the euro as the second global currency after the US dollar, with over 25 per cent share in the world’s foreign exchange reserves. The growing tendency among third-country governments to spread the risk and hold an increasing proportion of their forex reserves in euro is due to the eurozone’s global attractiveness as the world’s largest trading destination and its stable currency. The US dollar recently dipped to a record eight-year low against the euro, triggering a rethink in some Asian countries on the dollar as the sole currency peg for exchange rates. In particular, the eurozone is said to be better placed to respond to demands from emerging economies and oil rich states.

The single currency — first introduced as a unit of account in 1999 and as banknotes and coins in 2002 — enables consumers (about 320 million) in the 15 states to compare prices of goods and services and do away with the cost of changing currency for travel within the euro area. For the 12 non-eurozone states in the EU, their ability to influence common policies, which affect decision-making domestically, has been restricted. This is a considerable price to pay in a highly integrated region. Hence, leaders in the accession states of the 2004 enlargement, besides Romania and Bulgaria, should eschew nationalist and populist rhetoric on the question of euro adoption, although they have legitimate concerns about enforcing curbs on public spending, a precondition for membership. The consolidation of the eurozone makes the United Kingdom’s reasoning for its opt-out decision much less convincing, besides diminishing its own financial and economic clout on the European stage. Sweden and Denmark, where the euro was rejected in popular referenda in the 1990s, but nevertheless remain putative members of the eurozone, should create the political climate for formal euro entry and exert their weight on the policy framework.

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