Economics

Coming in from the cold? The possibilities of Euro adoption in the western Balkans

Stefan Minic muses on the potential for Serbia and other Western Balkan countries to adopt the Euro, and the possible economic problems, and solutions, that could arise.

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Since the recession hit the Balkans in 2009, local, national currencies tend to have devalued steadily against the Euro. The Serbian dinar has been slowly losing value, and on January 29th it hit the lowest level ever. The situation in Bosnia-Herzegovina seems to be slightly different, but only due to the fact that Bosnian Convertible Mark (BAM) is pegged to the Euro and rarely faces fluctuations in the exchange rate. Even though Croatia, the youngest member of EU, decided to keep Kuna as their national currency, Serbian economists and government members are speculating that the best solution for the financial crisis would be switching to the Euro.

Miroslav Labus, professor of Economics at Belgrade University and former vice-president of Serbian government, expressed his beliefs that Serbia should switch to the Euro in order to open its market more to investments coming from the European Union. Except for the fact that Serbs are nostalgically connected to the currency they have used since 1868, and the fact that introducing a new currency would create a new leak from the already small budget of this Western Balkan country, this step could be the key to creating sustainable economic growth.

The main reason why this idea is being mentioned right now is the constant fluctuation of the interest and exchange rates. Switching to the Euro, Serbian government would lose the ability to control their interest rate, but at the same time it would finally stop daily changes in real exchange rate, which damages exports, imports, and daily trade. Creating a more economically stable situation and integrating with the European financial market would attract more investments from abroad and cut expenses on constant exchanging between the Dinar and the Euro. However, loss of independence would not be the only issue, as it is almost certain that prices in the country would raise drastically, exacerbating already large inequality levels.

On the other side, raising price levels could fix the problem of cheap imports in Serbia. Serbian agriculture has been hit by lower prices of imports, forcing them to reduce their production because of low sales. Even though it seems that finding a good solution for Serbian economy is impossible, the government would need to prepare the economy before the transition. Serbian policy makers should focus more on creating more competitive market, and a slow increase in prices that would prepare the population for the inflation expected with switching to the Euro.

It is difficult to say if this transition in currencies would help, knowing that the Serbian economy is different from economies that recently switched to Euro. Estonia switched to Euro in January 2011, being the first ex-Soviet country to do so. Even though this change occurred during a recession, the Estonian economy was never more stable. Economic integration raised prices in the country, but also allowed easier penetration of Estonian exports into European markets, which increased their GDP, since Estonian national income depends 70% on exports. However, the fact that Estonian government had massive support from their citizens was the reason why they had such a smooth transition. It is important to note that Estonians expressed their interest in switching to Euro, joining EU and NATO from the moment of achieving independence. Keeping in mind that Serbia is still divided between Russia and the EU, along traditional fault lines, and so Estonia would not be the best country to compare Serbia with.

Lithuania would be more comparable to Serbia. Even though Lithuania joined European Union in 2004 that did not cause Russian investors to move out of the country. This made Lithuanian government wait, to see the reaction to Euro adoption in their Baltic neighbors, Latvia and Estonia, before introducing the Euro as their national currency in January 2015. Facing economic growth in both Estonia and Latvia, it is expected that Lithuania will experience improvements in their economy, despite perceived lack of independence and short term price hikes.

Following this example, Serbia could potentially wait until Croatia decides to switch to the Euro and then either follow their path or stick with independent national currency. Although integrating into European financial system would not necessarily mean solving of all problems Serbian government is facing, the decision should be made soon, because economic instability created due to the constant fluctuations of the exchange rate and large national debt could lead the country in another recession after long term recovery from recessions from nineties and 2008/2009.

 

Stefan Minic is a graduate of the United World College in Mostar, in Bosnia & Herzegovina,  and studies Applied Mathematics and Economics at Brown University in the United States

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