One of the major determinants of the euro's long term future and indeed the economic prosperity for the EU as a whole will be the outcome of the current round of accession negotiations.
There are six countries which look set to join the EU over the next few years with a longer list following close on their heels. Turkey, Latvia, Lithuania, Bulgaria, Romania, Slovakia and Malta are likely to follow Poland, Hungary, the Czech Republic, Slovenia, Estonia and Cyprus.
Talks with Romania and Bulgaria should only begin if specific tough preconditions are met, notably in the former's case in respect of its appalling treatment of orphans, and in the latter's, its nuclear programme.
The Commission wants the EU to set itself the target date of the end of 2002 to complete its own preparations, such as treaty changes, for the first accession. It falls short, however, of setting any target dates for actual accessions, although these are widely expected in 2005 with a possibility that up to three of these countries will be in the euro by 2007, probably before the UK.
Also, in the wake of the Kosovo conflict, there has been an awareness of the need to establish another tier of potential members with whom a more formalised relationship could be developed, short of actual negotiations on accession. These include the Balkan states of former Yugoslavia as well as Albania, then Russia and Ukraine, and the Maghreb countries of north Africa.
All the candidates with the exception of Slovakia, Lithuania, Bulgaria and Romania, are considered to be functioning market economies. Slovakia and Lithuania are considered close, while Bulgaria has made progress.
Of course, most if not all of these states are likely to join the EU some years before they become part of the euro. However, most are anxious to join the single currency sooner rather than later; Estonia for example is already arguing that it should be a member of the euro on day one. This is largely because it has so far managed to peg its currency against the euro without a speculative attack. This is no guarantee that such an attack would not take place if the market were more focused on the likelihood of Estonia joining the singe currency any time soon. Estonia, the Czech Republic and Poland are generally considered front runners for euro membership.
There is a real danger that many of these countries will seek to tie themselves into the stability criteria far too early and will thus risk damaging their economies in a very fundamental manner. In a recent report, the Economics Pol- icy Initiative, a joint venture between the CEPR, the East West Institute and six local institutes, argued that the prospective newcomers must focus on structural adjustment and not on exchange-rate or inflation stability.
The authors, including Birkbeck College's Mr David Begg, argue that these countries simply should not set exchange rate targets when all the determinants of their money demand are necessarily changing.
In addition it would be foolish to set inflation targets. These economies, which are generally categorised as being in transition, need social returns on investment which are high while prices are likely to change significantly as the economy is restructured. In fact it is quite possible that inflation, although not hyper inflation, could speed up the rate of adjustment.
Front-loading good EU behaviour by insisting on limited exchange-rate flexibility may trigger a vicious circle of delayed reforms as governments concentrate on the wrong policy objectives which would further delay accession, they warn.
Generally incentives for responsible fiscal policy, which is probably key, should be given as much weight as formal exchange-rate agreements and nominal criteria.
However, this argument could not hold once any of these countries had signed up to the formal timetable to joining the euro. All countries should have to go through the transition process which Greece is currently undergoing.
This involves meeting the key inflation, budget deficit, debt levels and exchange-rate stability targets set out in the Maastricht treaty.
One issue which EU member-states will have to face up to, according to Mr Jim Power, chief economist at Bank of Ireland, is that enlarging the euro is far more likely to undermine it than support it. Indeed, he points out that one factor which could be weighing on the euro at the moment is the imminence of Greece joining.
The single currency is already being treated as being as weak as its weakest components. This makes it even more important that no political expediency is used to fast track the membership of newcomers as was done, to some extent, in the case of Italy.
After all, Italy is one of the largest economies in the EU, is a member of the G8 and could probably, realistically, never have been left out. The same does not hold true of even the largest of the accession countries.
