Nov. 8 (Bloomberg) -- Groucho Marx once famously pointed out that ``I don't want to belong to a club that will accept me as a member.''

Right now, the new members of the European Union are feeling that way about the euro. They are allowed into the club, yet they are no longer sure they want to join.

The original three recalcitrant nations -- the U.K., Sweden and Denmark -- have turned their backs on euro membership. Now countries such as Poland, Hungary and the Czech Republic are set to join them.

They are making the right decision. The policies demanded for euro membership are wrong for fast-developing economies. Worse, the euro area has become so synonymous with stagnation it is now much less appealing to join than when the common currency was introduced in 1999.

Most international investors moving into eastern Europe are doing so in the expectation that their assets will soon be traded in euros, not in the various national currencies.

What they should be recognizing is that the emerging economies of eastern Europe will be more stable outside the euro.

The new EU members are meant to be working toward adoption of the currency. The U.K. and Denmark have the option to stay out of the euro area. The Swedes are meant to join one day, but keep turning the idea down in referenda (and funnily enough have a growth rate more than double the euro area average). Otherwise, if you belong to the EU, the rules say you are meant to be preparing yourself for eventual membership.

Except that the most significant countries are now backpedaling furiously.

Polish Delay

In Poland, recent elections put Law & Justice in control of the presidency and made it the largest party in parliament. One of its main policies is to delay euro membership. Polish Prime Minister Kazimierz Marcinkiewicz said last week his government won't take steps to adopt the euro during its four-year term.

In Hungary, Prime Minister Ferenc Gyurcsany was equally dismissive of euro membership last month. ``I don't want to give up a single meter of motorway, I don't want to give up a single forint of pension increases and I don't want to give up a more just family support system,'' he said of suggestions that spending should be cut to prepare for euro membership.

In the Czech Republic, Miroslav Singer, the deputy governor of the Czech central bank, said this year that the euro hadn't helped economic growth in the dozen countries that share it. It was hardly a ringing endorsement of the common currency.

Estonian Opposition

In Estonia, a poll showed more than half the population opposed euro membership, according to an AFP report last week. And only 38 percent of people in the 10 new countries expect ``positive consequences'' from the euro, down 6 points from last year, according to a European Commission report last week.

Quite reasonably, many analysts have concluded that eastern European leaders aren't planning to walk up this particular aisle. ``The EU attracted accession states on account of the relative prosperity it enjoyed through the 1990s,'' said Stephen Lewis, chief economist at Monument Securities Ltd. in London, in a note to investors. ``More recently, the euro zone has, rightly or wrongly, become a byword for economic stagnation. It is not surprising, therefore, that the forward momentum of European integration has been lost.''

The loss of faith in EU integration hasn't gone unnoticed in the foreign exchange market. ``The experience of the last few years shows that the currencies of all these countries have tended to overshoot,'' said Oliver Weeks, an emerging markets strategist at Morgan Stanley in London, in a telephone interview. ``It almost pushed Poland into a full-blown recession.''

Three Reasons

It's a fair point. Investors have mostly looked forward to euro membership for three reasons: The restrictions on public borrowing demanded by the EU would stop governments racking up big debts; it would lock in membership of the EU; and it would mean assets were priced in a stable, global currency -- not lots of little currencies that many have trouble pronouncing.

In short, it would be a force for stability for countries that only 16 years ago were still part of the Soviet empire.

Certainly, the markets are still assuming it will happen. Even after the recent sell-off, stocks are buoyant. For example, the Budapest Stock Exchange Index is up 48 percent in 2005. The bond market is even stronger. Hungary and Poland are the two best-performing government-bond markets in the world this year.

The trouble is that the arguments against euro membership are growing all the time.

Public Spending

Fast-developing countries can't afford to make the kind of public-spending cuts that euro membership will demand. They need new roads, schools, hospitals and houses. These countries are being built from scratch, and so they need to borrow money. The capital markets are happy to give it to them.

Next, the deflationary policies of the European Central Bank are hardly encouraging for potential members. For example, the Czech Republic ran interest rates below the ECB's benchmark level of 2 percent for most of this year to revive growth. The new EU states need the flexibility to set their own interest rates to cope with the bumps along the road to modernization.

Indeed, the main threat to the stability of eastern Europe over the next few years won't be just currency volatility. Political volatility will be evident as countries agonize over whether to sign up to the euro. There will be swings in bond and currency markets as traders examine the opinion polls.

Italian Doubts

The arguments for joining the euro don't make much sense at the moment. The euro was meant to be a force for stability and expansion. Yet lackluster economic growth is no incentive for countries weighing the benefits of joining the common currency area. And with nations such as Italy already talking about quitting, there isn't much sign of stability.

Far better, surely, for each country to announce now that it has no plans to join the euro in the foreseeable future. New EU states could get on with building their economies, and the euro countries could concentrate on their own problems.

In the meantime, get used to the zloty, the forint and the koruna. They may well be around for a long time yet.

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

Last Updated: November 7, 2005 17:45 EST