The idea surfaces regularly, not least when the krĂłna takes yet another inflation dive: Couldn't we just adopt the euro and skip everything else? Get the stability without the membership? The answer is no. That is the clear and settled position of both the European Union and the European Central Bank (ECB).
There's no self-service lane for the euro
In the EU treaties, adopting the euro is the final step of a negotiated process: membership of the Union, at least two years in the ERM II exchange rate mechanism, and meeting the Maastricht criteria on inflation, interest rates, and public finances. The EU's Council of Ministers removed all doubt as early as November 2000: unilateral euro adoption "is not compatible with the Treaty" and cannot serve as a way around the convergence process it lays down. Our EEA membership changes nothing here; the EEA Agreement does not extend to the monetary union.
This position has been delivered to us in person. In February 2008 — a few months before the crash — JĂĽrgen Stark, then a member of the ECB's Executive Board, gave a talk in ReykjavĂk where he answered the question directly: a country adopting the euro unilaterally would do so entirely at its own risk, with no commitment whatsoever from the EU or the ECB. The bank would follow a policy of "non-engagement and non-support" towards such a country. A year later, Olli Rehn, then the EU's Enlargement Commissioner, repeated that the Union would neither support nor accept unilateral adoption of the euro.
But Montenegro uses the euro — and San Marino?
This is the most common objection, and it rests on a fact: six European countries outside the EU use the euro. But the story behind the fact matters, because none of them swapped an independent currency for the euro.
The four microstates — Monaco, San Marino, the Vatican, and Andorra — have never had a currency of their own in the modern sense. Monaco used the French franc under a monetary convention with France, San Marino and the Vatican used the Italian lira under agreements with Italy, and Andorra used both the franc and the peseta. When the franc and the lira became euros, the money of these states simply converted along with them. They then concluded formal monetary agreements with the EU that allow them to use the euro and mint limited quantities of their own coins.
Montenegro and Kosovo have a different history, but the outcome is the same. In the breakup of Yugoslavia, with the Yugoslav dinar consumed by hyperinflation, both countries adopted the German mark in 1999. When the mark gave way to the euro in 2002, they simply followed along. The EU has never recognised this arrangement. On the contrary, it has repeatedly stated that unilateral use of the euro is incompatible with its treaties, and the issue is a specific matter to be resolved in Montenegro's accession negotiations.
None of these six countries ever faced the step we would be taking: shutting down an independent currency with its own central bank and adopting the euro without permission. That road has never been travelled, and the EU has said clearly that it is not open.
What if we went ahead anyway?
Nothing can outright forbid a sovereign state from using whatever currency it likes. But consider what unilateral adoption would actually mean:
- We would have to buy every single euro. The Central Bank of Iceland can create krĂłnur but not euros. Swapping out the country's entire money supply for euros would cost a substantial share of our foreign exchange reserves; the very reserves meant to protect us in a crisis.
- No backstop in a crisis. A central bank can only act as lender of last resort in a currency it can create itself. We learned that the hard way in 2008, when the banking system collapsed, in part because the Central Bank could not stand behind the banks' foreign currency obligations. Unilateral euroisation would make that condition permanent, and the ECB has declared that it would not come to our aid.
- No voice, no seat. Interest rate decisions steering our economy would be made in Frankfurt without any input from us. With full membership and euro adoption, by contrast, our central bank governor would sit on the ECB's Governing Council with a vote on policy.
- Burned bridges. The road into the EU, and with it to genuine euro membership, would become harder rather than easier. Breaking the rules of the club we wanted to join would have consequences.
The Central Bank of Iceland reviewed our currency options in depth in a report of over 600 pages in 2012. It judged unilateral adoption of another currency a far worse option than adopting the euro with full membership, not least because the backstop is missing.
The main entrance is the only entrance
So there is no shortcut to the euro. The good news is that the road that does stand open to us is well marked. With membership we would get the backing of the European Central Bank already in the waiting room, a seat at the table where interest rate decisions are made, and the benefits of the euro on solid ground. The euro is not a day pass sold at the door; it comes with membership of the club. If we want it, we join — and gain all the other rights of membership at the same time.
Sources and further reading:
- JĂĽrgen Stark (ECB): The adoption of the euro: principles, procedures and criteria — speech in ReykjavĂk, 13 February 2008 — Stark was then a member of the ECB's Executive Board. The speech sets out the bank's position on unilateral euroisation: it is not compatible with the EU treaties, and the bank follows a policy of non-engagement and non-support towards countries that choose it.
- European Commission: The euro outside the euro area — overview of the countries using the euro outside the EU; the microstates' monetary agreements and the unilateral use by Montenegro and Kosovo.
- EUR-Lex: Agreements on monetary relations (Monaco, San Marino, the Vatican and Andorra) — summary of the four microstates' monetary agreements with the EU and their background.
- Central Bank of Montenegro (CBCG): Euroisation — the history of Montenegro's currency arrangements: the German mark adopted in 1999, with the euro following automatically in 2002.
- Central Bank of Iceland: Special Publication no. 7 — Iceland's currency and exchange rate options (2012) — an in-depth review of our currency options, including unilateral adoption of another currency.
- Treaty on the Functioning of the EU (TFEU), Article 140 — the legal framework for euro adoption: member states, convergence criteria, and assessment by the Commission and the ECB.