Miguel.mateo wrote:Going back to an interesting point that it seems not clear, at least to me. This is pure speculation and it is not based on any source, I am just trying to understanding the technicalities behind. Let's say, for example, that Hungary decides not to use the forint anymore and jump straight to the euro:
1. Is that possible? This could have obvious seious implications to Hungary of course, but still can it be done?
2. If so, the only pre-requisite is that Hungary be part of the EU, correct? They are throwing away their currency, they are not converting it, so no need of ERM II rules correct?
3. Any other pre-requisites?
4. Can they then mint their own euro coins after they have adopted the euro?
Thanks,
Miguel
I see now where your questions are coming from...
In the example I mentioned, Hungary would be in a similar situation to Denmark. Denmark has a dual display of prices in certain areas with high tourist traffic in larger cities. Danes and tourists alike use the euro and it is excepted as payments at nearly all of the branches of the Danish Central Bank's affiliates. But the krone is still very much legal tender and is still widely circulated and is the major currency in Denmark.
While Denmark is not a member of the EMU, it is an ERMII participant. This allows a certain degree of latitude when it comes to using the euro for payments, purchases and holdings. The ECB purchases a certain amount of kroner with Euro, thereby creating a supply of the currency. Generally, Finland and Germany provide the physical cash in the form of banknotes and coins, but of course, tourists will bring their own and that is then used as well. The amount of Euro in circulation can not be kept to exact numbers, but when it all eventually makes it back to the Danish banks, an accounting of the amounts takes place and Euros are then sold back to the ECB (usually to Germany or the Netherlands- these two have proxy authority for the ECB in these types of matters), or are bought with more kroner (again- usually payable to Germany or the Netherlands).
The amount of kroner that the ECB holds must be a value equal to +/- 2.5% of the original transaction. So for example, if the ECB purchases 1,000 Kroner for 134 Euro, the exchange rate can not exceed 2.5% in either direction from the time of the transaction. If that were to happen, Denmark would have to surrender the surplus or the ECB would have to provide more Euro depending on which way the rate has gone (this has never happened, BTW).
Convergence criteria have already been met to a certain degree in Denmark since the Krone is still participating in ERMII. However, this is not the reason why Denmark is able to use the euro in this manner.
If Hungary wanted to follow in the footsteps of Denmark, a series of agreements would have to be signed and it would be difficult before the forint begins participating in ERMII. Andorra had sort of a special circumstance with no national currency of its own and an agreement was reached in 2004 since their cadet currencies were yielded to the Euro.
However, the Hungarian central bank could persuade the ECB to purchase forint in Euro, thereby creating a supply. This would be highly unlikely under present circumstances.
Hungary is expected to enter ERMII before the end of next year. If and when that happens, the ECB would be able to purchase forint and Hungary could then use it in the same way that Denmark does.
This situation provides a difficult challenge to Hungary that no longer exists in Denmark and that is one of supply. Denmark has been purchasing Euro for nearly 10 years already; the currency is ubiquitous. Hungary would probably not take this road unless the time-frame for adoption looks like it might take far longer than the two year minimum required under ERMII. Keep in mind that a two year waiting period is not the only pre-requisite to Euro adoption under ERMII.
In an extreme case of currency devaluation, high inflation or yet another, far worse, chapter of the current financial crisis takes place *and* the forint is in ERMII, the ECB would be obliged to purchase mass amounts of forint for Euro and then Hungary would be able to use it instead of a rubbish currency. However, in that case, at least 40% of the convergence criteria would be out of reach for Hungary and it would then have to wait for an economic recovery so that it can buy back a certain amount of the ECB holdings before Euro introduction could take place.
Adopting the Euro and using it are two completely separate things. Blurring that line can lead to deep, deep economic crisis. The reason the ECB officially allowed Andorra to use the Euro as their currency without actually being in the EMU, or even within the ERMII, is because the ECB holds both Spain and France accountable for the Euro that Andorra uses and circulates. Andorra is small and uses a tiny, tiny fraction of France and Spain's holdings. In other words, it is not a big deal.
Kosovo and Montenegro purchased several billion German marks before 2002 in order to use the mark as their own currency. These holdings were simply converted into Euro at adoption. Germany has the highest degree of economic and financial autonomy from the ECB of all the EMU members, so only Germany would be able to provide a supply of Euro in exchange for whatever holdings were provided at the time of the initial transaction or future transactions.
The Kosovo and Montenegro situation with Germany uses a modal similar to what Spain, France and Portugal use with their overseas territories. This same model will be applied to the Netherlands in 2009 for their overseas territories.
The most important point is that ERMII convergence criteria must be met in all cases in order for an EU member to adopt the Euro. Hungary can not simply throw away their currency. They must be able to provide holdings in exchange for a supply of Euro, in lieu of actual adoption, in the cases of extreme circumstance outlined above.
Only after all of the ERMII convergence criteria are met, can Hungary, or any other EU member, begin to produce their own Euro, because then adoption would have taken place already and a supply of the new currency would be needed.
Virtually none of this applies to the three micro-states, whose situations are far different from that of even Andorra.
I hope I've answered your questions. If not, let me know...
