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Down with Euro-Paternalism

Italy's presidency of the European Union bears an enormous responsibility, namely reinvigorating enlargement as the key aspect of the new EU. A good place to start would be to push for a different attitude on accession countries' adoption of the Euro. Indeed, EU institutions' current paternalistic stance towards the accession countries threatens to create a two-tier Europe that will complicate the task of integration.

The accession countries have upheld their end of the bargain, achieving a degree of trade integration with EU countries that is even higher than many current members. Three of them--Estonia, Latvia, and Lithuania--have currency boards or a fixed exchange rate with the Euro, as does Bulgaria, which is expected to enter the EU in 2007. The others have declared for several years their interest in adopting the Euro early on, in some cases unilaterally, even before entry into the EU--a position openly supported by the National Bank of Poland, and less forcefully by the National Bank of Hungary and the Czech National Bank.

But, despite their progress in bringing their inflation and interest rates closer to EU levels, many candidate countries fear that with the full opening up to capital flows--a requirement of accession--they will be exposed to the risk of sudden stops in capital flows and currency crises. They have learned the lesson from Latin America and Asia in the 1990's. Adopting the Euro would give them a great way to escape such risks and focus on creating real growth in their economies.

But the response from EU institutions, namely the European Central Bank and the European Commission, has been negative: candidate countries were told that they first must spend at least two years in the European Exchange Rate Mechanism (ERM II), where Euro aspirants are expected to prove their policy mettle. Initially, even currency boards were considered unacceptable, although, as is often the case in Europe, exceptions were made: countries with currency boards could keep them after entry into the EU.