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2014 sees the start of further expansion for the euro club thanks to its latest member, Latvia. After Estonia joined in 2011, the incorporation of the last Baltic republic, Lithuania, is expected in 2015. Moreover, the euro was the international currency that appreciated the most in 2013. In summary, although the euro area's sovereign debt crisis is far from over, the euro is still an appealing currency for international investors and the monetary union continues to attract European citizens.

Certainly, the euro area's governance problems are gradually being resolved. However, the slowness of its progress is often exasperating. Moreover, depending on the outcome of May's European Parliament elections, delays cannot be ruled out and the pace of economic growth is still weak: in 2014 we expect GDP to grow by just 1%.

If new European countries wish to form part of the euro club, their reasons must be more than just the current economic situation and changing circumstances of the institutional construction of monetary union. Their reasons are political, in the noblest sense of the word, forming part of a long-term country-oriented strategy.

The case of the Baltic republics is the perfect example of how countries with complex geostrategic situations join the euro due to basic political reasons. Joining the euro strengthens the political ties of these countries with the European Union, reinforcing their vocation to be liberal democracies within the framework of joint sovereignty that characterises the European club. This consolidates their separation from the orbit of the political giant that is still the Republic of Russia.

Together with these geostrategic reasons or those related to the nature of the political regime there is a second, this time internal factor that also explains the appeal of the euro area. For any European country with a history of a weak currency, the decision to adopt the euro represents a commitment to change and modernise its socio-economic institutions. Especially when fiscal transfers between zones do not occur nor are they likely to, and if labour mobility is limited, it is only possible to live and compete in economic and monetary union if the country joining carries out a complete reform of its markets and policies in order to achieve two large goals.

Firstly, financial stability, especially with regard to the public sector although the Great Recession has reminded us that serious problems of excessive debt can also occur in the private sector. And, secondly, balanced economic growth that leads to convergence in standards of living. In other words, bringing the less rich zones of the monetary union up to the levels of the advanced zones by means of a faster improvement in productivity, which is then passed on uniformly to improvements in standards of living that do not erode the country's competitiveness.

The social and political changes required to belong to the euro are not simple. As Mario Monti acknowledged in September 2011, a few months before leading a new phase of reforms in his country, the euro is not only trying to achieve a stable monetary area but something much more important and much more difficult: «to induce a profound transformation not just of economic policies and structures but also of the institutions and the culture determining them». The countries that belong to the euro, both their leaders and the rest of their citizens, must be aware of the enormity of this challenge.

Jordi Gual

Chief Economist

31 December 2013

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