The euro for the Balkans?

Daniel Gros

The Economics of Transition, 2002, vol. 10, issue 2, 491-511

Abstract: This paper makes the case for full euroization of the Balkans. It argues that the full adoption of the new currency, including the use of euro notes and coins, would bring important benefits for the countries in south east Europe. The key benefit of euroization would be the opportunity it would provide to radically reform and open the financial system, thus changing the equilibrium of the domestic political economy (by eliminating political influence over credit allocation). It also argues that the loss of seigniorage would be minor, but that there is no reason why the rich EU should benefit from this. Compensation for the loss of seigniorage would be technically easy to implement. Finally, the paper presents a small model that demonstrates how a devaluation might actually impair the debt‐servicing capacity of the government. This implies that the exchange rate cannot easily absorb shocks to the interest rate to be paid on external debt, or to the availability of capital for emerging markets in general. A deterioration in the availability of external capital might thus trigger extremely large exchange rate adjustments, which in turn can disrupt the domestic financial system. This should be an important consideration for such a highly indebted region. JEL classification: F33, F32.

Date: 2002
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