Dr Charles Tannock

Member of the European Parliament for London

Euro a big hit in Montenegro and Kosovo

forbes.com - 11 June 2010

By DUSAN STOJANOVIC

PODGORICA, Montenegro -- European Union membership still remains an elusive goal for Montenegro and Kosovo. But Europe's two youngest states have an apparent advantage over many other candidates to get into the elite club: They use the euro.

Sure, there is some anxiety about the European currency's weakness in the wake of the Greek economic crisis. And the accompanying economic jitters within the EU - and particularly in those EU countries using the euro - is also causing concerns.

"With the euro falling, I'll need more money to break even," said Nikola Lazarevic, the owner of the Grispolis fish restaurant in this Adriatic seaside town.

But for now, the benefits of using euros - but being outside the eurozone - are obvious. EU nations with the shared currency have been called to donate billions to bail out nearly bankrupt Greece, and even prosperous EU nations are tightening their belts to avoid even the slight chance of default.

But it's business as usual both here and in Kosovo, which enjoy the advantages of the European currency without having to worry about the responsibilities accompanying it.

"We have never had any doubts in our decision to introduce the euro," Montenegrin Prime Minister Milo Djukanovic told The Associated Press. "The euro has encouraged foreign investors and added to our economic stability."

Both Montenegro and Kosovo adopted the currency when it was launched in the EU in 2002, circumventing the rigorous economic criteria imposed on nations already in the bloc but not yet ready to adopt its common currency.

Back then, Montenegro was still part of Serb-led Yugoslavia but was looking for ways to decouple from the dominant republic, which had become an economic basket case during the Balkan wars backed by Serb dictator Slobodan Milosevic.

Before adopting the euro, both countries had been using the German mark, with Montenegro introducing it in 1996 and Kosovo in 1999 following its breakaway from Serbia after a brief war.

Unlike Montenegro, Kosovo's move has had some sort of mandated legitimacy because it was approved by the United Nations, which was still in control of what back then was still formally a Serbian province.

The countries have not been forced to follow the financial responsibilities that other eurozone members adhere to, such as caps on the budget deficit, but also have no say in monetary policy.

Analysts also note that using the euro can hurt competitiveness.

"On one side the euro has provided Kosovo a stable currency without worries over inflation, but a strong euro has so far damaged exports," said Shpend Ahmeti, whose think tank monitors the economy. "As a result Kosovo has been more expensive than other countries in the region."

That holds true for Montenegro as well - but for Djukanovic, the euro has had a crucial psychological effect in bringing his tiny nation of 680,000 people closer to the EU. That's important with the tiny country not expected to meet EU membership criteria at least for another four years. Kosovo is even further away, because its contested independence declaration from Serbia is not recognized by all EU nations.

Djukanovic says the euro also helped Montenegro fight inflation, keep its 4 percent budget deficit at check and stabilize its public debt at about 36 percent of gross domestic product.

"Those figures are better than in most European Union countries," Djukanovic said. "Therefore, we have had all the benefits of the euro."

Most Montenegrins agree.

"It's much better to have euros in your pocket than some shaky local currency that goes up and down all the time on the exchange markets," said Milan Rasovic, an accountant working in a private firm. "With the euro, at least you know where you stand."

Sitting on the sidelines is the European Central Bank, whose task is to maintain the euro's purchasing power and thus price stability in the eurozone. The bank has said it does not welcome unilateral "euroization" because such countries have not fulfilled the international criteria for the common currency

But the bank also has not actively opposed the moves because the two small states use a relatively insignificant amount of euros and because the currency has had a beneficial effect on stabilizing their economies.

Still, the euro will become an issue at the latest when the two countries join the EU. Will they be allowed to keep the currency even if they fall short of the economic criteria that all EU nations must meet to use the euro?

Comments by EU officials suggest that they will cross that bridge when they come to it.

Montenegro's and Kosovo's "current de-facto use of the euro will be addressed in the negotiations" preceding EU entry, said Angela Filote, the spokeswoman for the EU's enlargement office. "Their present use of the euro ... is fully distinct from euro area membership."

The Montenegrin government generally remains secretive about the specifics of its euro influx.

Iron boxes packed with new euro bank notes arrive monthly on special, secret flights from Germany. How much is brought in, how the currency is paid for, and whether it is in addition to money in circulation or a replacement for old bank notes is known only to government insiders.

The first flight in 2002 brought in new bills and coins worth 30 million euros to replace the German marks being used.

Kosovo turned in over 1 billion German marks, which was trading at 50 eurocents in 2002, in exchange for its initial trove of euros. Converted in Germany, the euros have been in circulation since - along with whatever euros have come in from the outside

It remains a mystery what Montenegro deposited - gold or cash - with Germany's central bank when the switch from the Yugoslav dinar to the German mark was made. But it is believed that Germany's acquiescence was largely a political decision to help Montenegro move away from Serbia's orbit.

Although figures are unavailable, much more cash is in circulation in Montenegro now because of large foreign investments, mostly from Russians and Britons who have been buying property on the Adriatic coast and investing into its tourist and other industry.

Djukanovic said Montenegro has accumulated euro1.07 billion in direct foreign investment since 2006 - giving it one of Europe's highest per capita investment levels.

Money laundering is one area of concern for EU officials, considering that - unlike countries in the eurozone - Montenegro does not print and mint its own euros with distinctive markings.

"It is a very easy place for organized crime to go, buy large amounts of unregistered euro notes through the banking system and launder them for their notes coming from another jurisdiction," Charles Tannock, a Montenegro specialist for the European Parliament's committee on foreign affairs.

Associated Press writers George Jahn in Vienna, Nebi Qena in Pristina, Kosovo, and Slobodan Lekic in Brussels contributed to this report.

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