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Montenegro Counts on Keeping the Euro

11 10 2007  As Montenegro forges closer ties with Brussels, it faces a warning that its use of the euro is not in line with the EU’s rules.

By Gjeraqina Tuhina in Brussels and Dragoljub Dusko Vukovic in Podgorica

The European Union is to remind Montenegro on Monday, October 15, that only members of the 27-nation bloc should be using the euro as their official currency, according to a draft document obtained by Balkan Insight.

Montenegro will be given the official warning when Podgorica signs a Stabilization and Association Agreement, SAA, which marks the first formal step in the small Adriatic state’s integration with the EU.

A draft document, to be adopted on the same day by the EU’s foreign ministers, will recall that “unilateral ‘euroisation’ is not compatible with the Treaty, which foresees adoption of the euro as the endpoint of a structured convergence process within a multilateral framework,” Balkan Insight has learned from diplomats in Brussels.

While well-informed observers in Brussels and Podgorica do not expect the EU to ask Montenegro to drop the euro - as it could be devastating to its fragile economy - diplomats and experts say the EU`s warning will indicate that Montenegro has to somehow deal with the issue, if it wants to join the EU. It remains unclear, however, what consequences Podgorica might face because of its continued use of the euro.

Montenegro adopted the euro as its official currency following the common European currency’s inception in 2002, having previously used the German mark. The EU insists that Montenegro’s use of the euro was tolerated until now because of specific historical circumstances.

However, the use of the euro has surfaced as a problem since Podgorica started the process of integration into the European family. It is because with the signing of the SAA Podgorica enters into a contractual relationship with the EU, that it will be offered official “advice” at Monday’s meeting of the EU’s foreign ministers in Luxembourg.

“For a country to adopt the euro as its currency in a formal way, it has to be, first and foremost, a member of the EU”, Amelia Torress, the European Commission’s spokesperson for economic and monetary affairs, told Balkan Insight. “Even after it becomes a member of the EU, it has to meet the criteria”, she added.

The Commission insists that only member-states that meet certain requirements can adopt the Euro. Of the eight central European and Baltic states that joined the EU in 2004, only one – Slovenia – has been allowed to become a member of the Eurozone. The others are still struggling to meet the conditions which, broadly speaking, include low inflation, low budget deficits and low levels of state debt.

The European Central Bank agrees that Montenegro is not formally authorized to use the euro. Its President, Jean-Claude Trichet, said last Monday that “participation without being a member of the European Union is totally excluded."

However, Montenegrin officials expect that their country will not be called on to give up its official currency. Instead, they believe an interim solution can be found during talks with the EU. Their optimism is based on two factors. First, Brussels would not want to damage the Montenegrin economy. And second, it would make little sense to require Podgorica to drop the euro, only to encourage it a few years later, once it is inside the EU, to re-introduce the currency.

Montenegrin Finance Minister Igor Luksic is convinced that this issue will not pose any complications for his country.

“I don’t expect any special problems. The question of euro usage means certain obligations for a country, and this is something that will be taken care of during the process of integration”, Luksic told Balkan Insight. “The euro was one of the foundation for our economic development, and this question should be looked at from that context”, he argues.

Zorica Kalezic, a special adviser to Montenegro’s Central Bank, shares the view that the EU will not ask Podgorica to give up the euro.

“European institutions are aware that that kind of decision can have widespread negative consequences for the Montenegrin economy”, she told Balkan Insight. She thinks that Podgorica should now focus on convincing Brussels that the euro will not be treated as a special, unearned privilege, and that when the time comes, Montenegro will fulfill all the Maastricht criteria relating to the euro.

Economis analyst Predrag Drecun is among those who believe that the EU’s forthcoming warning has greater relevance for some other countries that may be hoping to adopt the euro while bypassing normal procedures. These analysts believe
Brussels wants to avoid a situation where some Eurozone candidates query why Montenegro should be able to use the currency.

Others point to the EU’s possible concern about creating a precedent. UN-administered Kosovo has also been using the euro. Whatever the outcome of current talks on Kosovo’s future status, Pristina will want to join the EU, and Brussels will face the same tricky problem over “unauthorized” use of the euro.

Meanwhile, the small size of the Montenegrin economy, with a population of 650,000 people, means that its continued use of the euro has no impact, other than a symbolic one, on the Eurozone. “Montenegro cannot disturb the euro even in case all the currency used in the country disappeared”, Drecun told Balkan Insight. “In the light of this, I think that the warning concerns other countries that perhaps want to introduce the euro as a currency”.

He adds, however: “If the EU decided to ban the use of the euro, that would be disastrous for many of our companies.”

Kujtim Dobruna, a Vienna-based expert on foreign investment, agrees about the possible consequences of Podgorica being asked to abandon its financial safety-net. “Thanks to its monetary system, Montenegro enjoys macroeconomic stability and low inflation”, Dobruna explains. “The Euro offers security for foreign investors, because it eliminates currency and exchange rate risks. If Montenegro is obliged to drop the euro, this will risk macroeconomic stability and reduce the advantages in attracting foreign investment.”

EU officials say that the document, which will be adopted on Monday, will not include an immediate request to Montenegro to ditch the euro. However, it will mark the first time that the question will have been officially addressed.

“The draft is simply meant to make a point. We don’t want to tolerate a situation in which any country can give up its currency and adopt the euro”, an official from the European Commission told Balkan Insight. “Even the Baltic countries cannot meet the criteria for introducing the euro, although they have been EU members since 2004”.

The question of Montenegro’s monetary system will be addressed in due course, most probably during Podgorica’s future EU accession talks, sources tell Balkan Insight. These sources confirm that the question was raised even before, in meetings of European Commission officials with their Podgorica partners, especially during the SAA talks which lasted almost two years.

For now the EU foreign ministers are expected to stick to a declaration that will warn that “Montenegro’s present use of the euro, decided by Montenegrin authorities in exceptional circumstances, is fully distinct from euro area membership”.

In the draft document, due to be adopted on Monday, they will make it clear that the signing of the SAA with Montenegro “does not prejudge the position on how Montenegro’s current de facto use of the euro will be addressed in possible future accession negotiations”.

Gjeraqina Tuhina is Brussels correspondent for Kosovo public TV, RTK. Dragoljub Dusko Vukovic is a freelance journalist in Podgorica. Balkan Insight is BIRN`s online publication.