Research Update: Euro flirts in CE/SEE – a never ending (love) story

Since CE/SEE countries joined the EU in 2004, 2007 and 2013, there has been speculation about when the euro will be introduced in markets such as the Czechia, Hungary, Poland or Romania.

To date, optimistic scenarios of a rapid euro introduction did not materialise. Currently, 'only' Croatia and Bulgaria are on course for the euro. Larger CE/SEE countries with flexible exchange rates have not been euro-euphoric in recent years, no national euro accession strategies are in place. We see many reasons for this.

From a CE/SEE perspective, growth-enhancing (internal) effects of euro integration have been rather disappointing, e.g. in terms of economic growth, intra-euro trade or increased competitiveness. Moreover, despite current low interest rates in CE/SEE, the analysts of Raiffeisen Research expect the long-term monetary policy and inflation cycles in CE/SEE and the euro area to diverge significantly and especially from 2022 onwards. Flexible exchange rates have also served CE/SEE-EU economies very well in recent cycles. For medium-sized stability-oriented CE/SEE economies (e.g. the Czech Republic), Sweden may even be an example that there is a 'good life' outside the euro area and within the EU with a flexible exchange rate. Also, for larger regional economies (e.g. Poland, Romania), the benefits of joining the euro may also be more limited than for small ones (e.g. Bulgaria, Croatia) and/or countries with de facto or de jure FX pegs.

As economic aspects of euro accession are not so in focus in CE/SEE at present, we are mainly dealing with political choices. In the long run, political preferences may shift again. With UK's exit from the EU, the gap between the EU and the euro area narrowed considerably. Euro area membership can thus be seen as an important building block for shaping EU agendas in the long run. We think that political preferences could shift towards more 'euro-friendliness' or the formulation of a euro strategy especially in Romania, perhaps also in Hungary, in the later 2020s.

Overall, however, we do not expect further CE/SEE countries (besides Croatia and Bulgaria) to join the euro area before 2030. In the case of the euro accession candidates and Croatia and Bulgaria, it will depend above all on the extent to which euro accessions are linked more strongly than before at the EU level with aspects of institutions, governance and promised reforms (so called post-entry commitments). In case of an institutional and governance turn the waiting period in the so-called 'euro waiting room' (Exchange Rate Mechanism II, ERM II) could well last longer than the two-year minimum.

Currently, we see a probability of less than 10% that the euro area or the 'euro waiting area' ERM II will grow in CE/SEE by the mid-2020s. Even by the end of the 2020s we only see a chance of just under 30%. The outlined values imply that we only see euro accessions with a probability of (over) 60% from 2030 onwards. Only in Romania we do see a probability of more than 50% that euro accession could be initiated by 2030, in the Czech Republic we do not expect this with 75%.

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A comprehensive (English-language) analysis on the European outlook in CE/SEE, in co-creation with the analyst teams in the Czech Republic, Hungary, Poland and Romania, can be found on our Raiffeisen Research Portal here (login required):

€-Flirts in CE/SEE - a never-ending (love) story

Our (English-language) view on the euro outlook for Croatia can be found (freely accessible) here:

Croatia - (not so) optimal euro area candidate.