Montenegro Warns Against Unilateral Euro Adoption

By Emma O’Brien

April 21 (Bloomberg) -- Small European countries grappling with the global financial crisis shouldn’t resort to unilateral adoption of the euro because they may risk being excluded from the European Union, according to the сentral bank of Montenegro.

The International Monetary Fund recommended the EU’s eastern members consider adopting the euro as a way of helping reduce their foreign-currency debt, the Financial Times reported April 6, citing a confidential report by the Washington-based lender. Montenegro, which is not an EU member, took on the euro without the now 16-nation euro-area’s consent in 2002 as it sought to rein in hyperinflation and lure foreign investors.

“It was a completely different situation for us because it was done when the euro was not as entrenched as a physical currency,” Nikola Fabris, the Central Bank of Montenegro’s chief economist said in an interview.

While prospective EU member Croatia and hopeful candidate Bosnia have considered unilateral euro adoption this year, “it would be quite something for any country to decide to unilaterally adopt the euro now as they’d be faced with sanctions from the EU, all sorts of funds and grants would be suspended and the process of accession postponed,” Fabris said.

Montenegro replaced the Yugoslav dinar with the deutschmark in November 1999 to rein in inflation of 128 percent and to impose “fiscal discipline” on the country, Fabris said. It took on the euro 2 1/2 years later after Germany and the rest of the euro region introduced the new currency, he added.

EMU Demands

Euro-area finance ministers last month rejected calls from some of the EU’s eastern members to fast-track their transition to the euro or ease the terms for adopting the currency. The European Monetary Union demands prospective members keep inflation, public debt and budget deficits in check as well as lock their currencies into an exchange-rate mechanism which allows limited movement around a central rate to the euro.

“Euroization was crucial to the restructuring of our banking and financial systems because it gave them hard currency that was worth something,” Fabris said. “It’s a good solution when you have high inflation and a relatively unstable currency rate but you couldn’t do it now because of the EMU regulations.”

Other countries, including Kosovo, Monaco, Vatican City, San Marino and Andorra, also use the euro outside of the EMU’s borders.

Montenegro, a nation of almost 700,000 people that borders Serbia and the Adriatic Sea, will still record economic growth this year, after expanding at an average 8 percent over the previous three years, Fabris said. The “situation would have to be significantly worse than it is now” for the nation to join countries such as Hungary, Latvia, Ukraine and Serbia in seeking a loan from the IMF, he added.