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Foreign Exchange

Single minded: emerging Europe and the euro

After a deluge of negative headlines from the eurozone this year, why are policymakers in emerging Europe still queuing up to pledge their allegiance to the single currency?

Why would anyone want to join the euro? That was the response of many international observers to announcements earlier this year by the governments of Latvia, Lithuania and Poland of plans to push ahead with adoption of the single currency. For Nobel Prize-winning economist Paul Krugman, the news that Poland in particular was proposing to tie its healthy economy to the euro was enough to "make you want to bang your head against a wall".

And indeed, after three years of relentless bad news from the eurozone, it can be hard to see why policymakers in emerging Europe would be eager to join what many see as a doomed institution – particularly with the examples of Spain and Ireland as awful warnings of what can happen when fast-growing, less-developed economies throw in their lot with the likes of Germany.

So is this an example of collective delusion? Or is there still a rationale – economic or otherwise – for signing up for the single currency?

The answer, unsurprisingly, is complex. First, analysts point out that it is essential to distinguish between countries, such as Latvia and Lithuania, that have been pegged to the euro via the Exchange Rate Mechanism (ERM II) for nearly a decade and those, such as Poland, that still have a free-floating currency.

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