During its two crisis-wracked decades, many assumed the euro was doomed to retreat.
First, Greece and, more recently, Italy flirted with severing ties with the 19-strong currency union. Seemingly irreparable differences reared their head again this year. But now an expansion of the bloc could be more likely than a country departing.
“Coming somewhat against the current tide in European politics to slow EU expansion, Bulgaria and Croatia are proving that more integration is possible within the EU,” says Valentin Tataru, ING economist.
The two countries took what European Central Bank president Christine Lagarde called a “big step” towards becoming members by being admitted into the Exchange Rate Mechanism II.
However, it came as Poland, the biggest EU economy not in the eurozone, seemed to edge further away in its presidential election last weekend, and others remain resistant. Are fears of the bloc’s demise premature?
Covid-19 has exposed deep-seated differences between the Northern and Southern members of the bloc, with some leaders warning during the height of the tensions that the virus could tear it apart. Bulgaria and Croatia are two economies that still sense an opportunity, however.
“Usually when countries join a strong and stable currency they are trying to import macroeconomic stability and import the credibility of bigger countries,” explains Christian Odendahl, chief economist at the Centre for European Reform.
He says smaller economies, such as Bulgaria and Croatia, can enjoy more stability, intensify trade links and gain political sway by getting a seat at the euro table.
Claus Vistesen, eurozone economist at Pantheon Macro, explains that these small economies around the eurozone are “already more or less shadowing the ECB” on policy.
“If Bulgaria or Romania have a significantly different monetary policy to the ECB, the currency market would reflect that and they would probably be forced to move in line,” he explains.
“The economic advantages are quite obvious in the near term. What you will lose is some economic autonomy but that autonomy they don’t really have in the first place.”
Both still face hurdles before they can become eurozone members. Being admitted into ERM-2 means the country’s currency must stay within a range for two years to smooth entry into the bloc. But Tataru warns Bulgaria and Croatia still fall short on several other requirements to enter the eurozone.
“The inflation criteria for Bulgaria could prove trickier than one might imagine, while the relatively high debt-to-GDP ratio in Croatia will be the main problem,” he says.
In addition, they are likely to have a negligible impact on the bloc either economically or politically. The combined size of their economies is less than 5pc of the UK’s GDP and the two countries have a lower output than Ethiopia, Guatemala and city state Luxembourg. That lessens the risk of any Greek-style disaster, but allowing them into the club adds little value.
More importantly, much larger EU countries that are not in the eurozone are conspicuous by their absence. The region is surrounded by several large economies that are resistant to joining, including Sweden, Denmark, Hungary and Poland.
“For Poland the economic benefits might not be as large any more, [or] for Denmark and Sweden, which have established currencies and certainly don’t have a credibility problem,” explains Odendahl.
“Poland is already integrated into the supply chains of Europe quite deeply, despite having a different currency.”
Leaders in Poland, the 21st largest economy in the world, have shunned the euro and the country is unlikely to join any time soon. The head of the central bank and the governing Law and Justice party (PiS) have railed against the euro’s adoption, and pro-Europe campaigners in Poland were dealt a blow last week.
Relations with the EU were a key issue in Sunday’s presidential election in Poland, which was narrowly won by incumbent Andrzej Duda who aligns with PiS. Meanwhile, Hungary’s government and central bank have also ruled out its adoption.
“I don’t see it as necessarily the final destination for the Czech Republic and Poland, but for Bulgaria and Croatia it is for them politically a big step,” says Odendahl.
While Bulgaria and Croatia's intent to join the eurozone has been welcomed in Frankfurt, bigger prizes remain elusive for the bloc.