First join the European Union, then qualify for the euro. That was the path laid out for the countries of Eastern Europe that wanted to weld themselves to the West. Euro membership proved that a country had the discipline to join one of the world's most exclusive clubs.
The Greek crisis has slowed the rush to join. On June 7, Latvia's central bank governor, Ilmars Rimsevics, said the euro shouldn't be introduced in his country "at any price." His Lithuanian counterpart, Vitas Vasiliauskas, said two days later that the goal of adopting the euro in three years is "not something to kill yourself over." On May 20, Poland's central bank governor, Marek Belka, said his country and the region would not get the benefits they had anticipated from a quick adoption of the euro. And as far back as December, Czech Prime Minister Petr Necas said his country can refuse to adopt the single currency as long as it deems it beneficial to keep the koruna.
The struggle to stem the Greek contagion has shown the East Europeans, who have endured many crises of their own, that the euro zone is hardly immune. More alarming to these countries is the idea that if they were in the euro zone, they would be coughing up billions to a bailout fund for Greece, Portugal, and Ireland.
The other issue is the iron grip of the euro itself. Latvia and Lithuania pegged their currencies to the euro as a prelude to actual membership. When the global financial crisis hit in 2008, the Poles and the Czechs let their currencies fall against the euro so they could keep up exports. The Latvians and Lithuanians stayed with the peg to keep on track for adoption of the currency and preserve investors' trust. Then their budget deficits soared, delaying entry to the euro zone: Latvia needed a bailout from the EU and the International Monetary Fund. In these circumstances, euro membership offers scant comfort. Greece, for example, cannot devalue the drachma to export its way out of its hole. The drachma no longer exists.
Others in Eastern Europe still want to join the euro, or are glad they did. Hungarian Foreign Minister János Martonyi said on June 22 that adoption remains a primary goal. Slovenia, already a member, has profited from being inside such a large currency zone. Estonia, Latvia's and Lithuania's neighbor, endured many hardships to join. The bursting of a housing bubble, inflated by a lending boom after Estonia's 2004 entry into the EU, coincided with the global credit crisis. Pushed to the brink, Estonian businesses slashed wages. The economy shrunk almost 20 percent.
Yet government austerity, plus the end of high inflation, qualified Estonia for the euro, which it joined on Jan. 1. The economy expanded 8.5 percent from a year earlier in the first quarter, the EU's fastest growth rate. "Markets reward the discipline these countries have imposed on themselves," says Agnes Belaisch, who oversees $2.5 billion of emerging-market assets at Threadneedle Asset Management in London. Discipline hurts a lot, though.
The bottom line: East Europeans have to decide if they want the pain and now-dubious gain of qualifying for membership in the euro zone.