(Reuters) - The small Adriatic republic of Montenegro signed its first accord with the European Union on Monday and will take several years to become an EU member state, but has already been using the euro currency since 2002.
Here are some facts about euroisation, the unilateral adoption of the euro by a country outside the European Union and the euro currency union.
- Outside the official 13-member euro zone, the euro is used in Europe by the microstates of Monaco, San Marino, Vatican City and Andorra, by newly independent Montenegro, and by Serbia’s United Nations-run province of Kosovo, which hopes to be independent by 2008.
- Euroisation can foster macroeconomic stability and fiscal discipline in the case of currencies plagued by high inflation. It can help lower currency and sovereign risk by eliminating the danger of sudden devaluations, promote financial integration with the euro zone and eliminate transaction costs.
- The risk is that the country cannot use official interest rates and exchange rates as instruments of economic policy. The central bank’s ability to act as a lender of last resort is also tempered: the liquidity it has at its disposal, e.g. to help distressed banks, is restricted to a country’s foreign reserves.
- The euro is used officially by Monaco, San Marino and Vatican City through agreements concluded with EU countries they were traditionally close to, France and Italy.
- Andorra adopted the euro unilaterally as a substitute to the Spanish peseta and is currently in negotiations with the EU to formalise its use.
- Montenegro and neighbouring Kosovo, which had both previously used the German mark as their currency, have no legal arrangement with the EU to be allowed to use the euro and no immediate plans to ask for one.
- Recent suggestions by some Icelandic officials that the country could adopt the euro without being an EU member were immediately quashed by the European Central Bank.