–The Euro...The New World Currency?

Euro Looks Good In A Crisis
Lionel Laurent

The euro didn't appeal to everyone when it first launched in January 1999, initially as a non-physical currency. Great Britain and Denmark both snubbed the single currency, choosing monetary independence over centralized control. Even when the euro turned into crisp banknotes and shiny coins in 2002, Sweden wasn't impressed either: A referendum on the currency in 2003 turned in a resounding "no."

But in the midst of a major economic crisis, these small pockets of resistance to the euro are starting to give way. Independence from the European Central Bank no longer seems so attractive, particularly at a time when non-euro currencies are vulnerable to a crisis in confidence. Iceland's banking collapse in October, for example, crushed the Icelandic krona relative to the euro and paralyzed foreign-exchange transactions. Denmark's central bank had to raise interest rates in October to support the Danish krone, at a time when policy-makers around the world were pushing through coordinated rate cuts.

Yahoo! BuzzSo even though a country like Iceland -- which is not even part of the European Union -- would have a hard time getting itself in shape for the euro, Sweden and Denmark could easily meet the criteria. Inflation is under control, estimated budget deficits this year will be relatively modest and both countries' currencies have stayed broadly stable against the euro. Meanwhile, public opinion of the euro is improving, though in Sweden the "no" vote still holds sway.

"Denmark and Sweden would clearly have an advantage in joining the monetary union," said Gilles Moec, an economist with Bank of America. "Their foreign-exchange policies don't make much sense."

Not all europhobic countries will think twice about their opposition, however. The Brits are still attached to the pound, and for good reason: Even though the currency is sliding toward parity with the euro, it's approaching oversold levels, and the euro itself may start to suffer a backlash from traders next year. Economists also believe the weak pound will help rebalance Britain's battered economy. (See "Why Britain Shouldn't Join The Euro Zone.")

Some countries in Eastern Europe have seen their chances of joining the euro fade as they fail to meet the criteria of entry. Hungary is one example: Although it will try to rein in its budget deficit according to a new International Monetary Fund bailout package, the country is unlikely to reach member status until at least 2012.