Montenegro and the euro


is a country in South-Eastern Europe, which is not a member of the European Union, Eurozone nor it has a formal monetary agreement with the EU, but it is one of the two countries that has unilaterally adopted the euro in 2002 as its de facto domestic currency. This means that the euro is not a legal tender there, however it is treated as such by the government and the population.

History

In modern history of Montenegro, between 1906-1916, an attempt was made to adopt its own national currency - Montenegrin perper, however it didn't last for long and other foreign currencies, such as Austrian krone, were also in circulation at the same time. Between 1922-1941 being a part of Kingdom of Serbs, Croats, and Slovenes, later known as Kingdom of Yugoslavia, Montenegro was using its official common currencies.

Yugoslav Dinar

After Montenegro became a part of the Socialist Federal Republic of Yugoslavia, it was bound to Yugoslav monetary policy and used the Yugoslav dinar as its official currency after World War II until 1999. After the disintegration of the SFRY, in 1992 the former member republics – Montenegro and Serbia formed the Federal Republic of Yugoslavia. In the new country, the monetary system was re-centralized, wherein the National Bank of Montenegro lost its autonomy and became a regional office of the National Bank of Yugoslavia headquartered in Belgrade.
A high level of monetary and financial centralisation was established, which was easy to be manipulated and which enabled many misuses due to the nonexistence of any legal state and financial discipline, and this resulted in hyperinflation in the period 1992 – 1994. After the crash of the common market and simultaneous outbreaks of war in two former Yugoslav republics, the monthly inflation rate in Serbia and Montenegro was 50% in February 1992, reaching 100% in June the same year. This caused severe and prolonged hyperinflation, which has led to a devastation of the region. No wonder Yugoslav dinar has its name in the list of worst currency in the world.

Deutsche Mark

At the beginning of 1999, the government started looking for a way to protect economic interests of Montenegro and its monetory independence. One option for that was to abandon dinar and assume all authorisations regarding the pursuit of monetary policy. In this regard, the government established a dual currency system, in which both dinar and Deutsche Mark would be used. The decision for that was mainly driven by an unstable, expansionary monetary policy stance of the National Bank of Yugoslavia.
The introduction of dollarization, as well as the improvement of the situation in the monetary, financial and banking sectors of Montenegro resulted in increasing citizensʼ confidence in the new monetary regime. Since January 2001 the country decided to take the Deutsche Mark as a sole legal tender. Since January 2001 the country decided to take this currency as a sole legal tender, because a sufficient amount of Deutsche Mark were in circulation, and for this reason there was no need to use the Dinar as the national currency.

Euro

On 1 January 2002 the euro notes and coins were officially introduced into circulation in many European countries, including Germany, where the Deutsche Mark used to be an official currency. Thus the Deutsche Mark ceased to be legal tender immediately upon the adoption of the euro. Following these events in the beginning of 2002 Montenegro took a decision to officially and unilaterally adopt the euro, first as a parallel legal tender to the Deutsche Mark, and since June 2002 as the only legal tender. The main motives were the same as before - to ensure monetary stability and to continue to avoid high/hyper inflation in the preceding decades. To date there are no official ties or agreements between Montenegro and the European Central Bank approving the use of the euro as an official currency.

Coins

Each of the euro-area countries have a common reverse, portraying a map of Europe, but some of them have its own design on the obverse, which means that each coin has a variety of different designs in circulation at once. Four European microstates which use the euro as their currency also have the right to mint coins with their own designs on the obverse side.
Unlike the members of the Eurozone, Montenegro has no authority to mint euro coins of its own and therefore does not have its own national side of the coins in use. Rather, they depend on bills and coins already in circulation.

The EU position

When Montenegro started using euro as a national currency, the European Central Bank initially did not object to this step. Since then, however, the European Commission and the ECB have expressed dissatisfaction with Montenegro's unilateral use of the euro, with European Commission spokesperson Amelia Torres saying in 2007 that "The conditions for the adoption of the euro are clear. That means, first and foremost, to be a member of the EU." Also in the Declaration attached to the Stabilisation and Association Agreement with the EU is written that: "unilateral introduction of the euro is not compatible with the Treaty." In spite of the fact that in 2010 Montenegro obtained the status of the official candidate, the European Union continued to raise the question of Montenegro abolishing the euro. Later on euroisation however was acknowledged by the European Commission through a specific approach, which takes into account euroization happened due to “extraordinary circumstances” present in the country at the moment of introducing the euro. As a result of that, Montengro still continue to use the euro currency as its legal tender and hopes to join the European Union as soon as possible.

Montenegrin position

officials have indicated on several occasions that the European institutions expect Montenegro to adhere very strictly to ERM rules, as a part of the accession procedures to the European Union. In 2009 Nikola Fabris, chief economist of the Central Bank of Montenegro, has said that the situation was different when they adopted the euro, and that other states which on a later stage also had been considering unilaterally adopting the euro, such as Croatia and Bosnia and Herzegovina, would have faced sanctions from the EU and would have their accession process suspended if they would have gone ahead.
The dispute regarding the use of the euro was expected to be resolved by analysts during the accession negotiations. Diplomats indicated that it is unlikely that Montenegro will be forced to stop the circulation of the euro in their country. In 2013 Radoje Zugi, the finance minister of Montenegro, said that "it would be economically irrational to return to a currency of your own, only to be back in the euro later". Instead, he hopes that Montenegro will be allowed to keep the euro, and he promised "that the government of Montenegro will meet some important conditions to keep the euro, such as fiscal compliance".

Current status

In 2007 Montenegro signed a Stabilization and Association Agreement with the European Union, then submitted its application for membership in December 2008 and finally obtained the status of official candidate in 2010. In 2012, Montenegro became the first country from the current six Western Balkan states to start accession negotiations with the EU and to date, according to many officials, it is a frontrunner on the path towards the EU membership.
As a part of the ongoing negotiations, the EU will have to deal with this unprecedented case in which a state, already using the common currency without implementing all the mandatory economic conditions, is striving to join the EU and the Eurozone. These conditions are set out in Article 140 of the Treaty on the Functioning of the European Union in order to ensure that a certain country is ready for integration into the monetary regime of the euro area. There are 4 economic convergence criteria:
  1. Price stability: The inflation rate cannot be higher than 1.5 percentage points above the rate of the 3 best-performing member states.
  2. Sound and sustainable public finances: Government deficit cannot be higher than 3% of GDP. Government debt cannot be higher than 60% of GDP.
  3. Exchange-rate stability: The candidate has to participate in the exchange rate mechanism for at least 2 years without strong deviations from the ERM II central rate and without devaluing its currency's bilateral central rate against the euro in the same period.
  4. Long-term interest rates: The long-term interest rate should not be higher than 2 percentage points above the rate of the 3 best-performing member states in terms of price stability.
Additionally to that, to join the euro area candidates must also ensure that their national laws and rules provide for the independence of their national central banks, and that their statutes are in compliance with the provisions of the treaties and compatible with the statutes of the European Central Bank and the European System of Central Banks.
The Maastricht Treaty provides that all members of the European Union will eventually join the euro area, once the convergence criteria have been met.
To date, the path of Montenegro to the European Union and subsequently to the Eurozone membership is still unclear. Some experts are of an opinion that in situation like this the convergence criteria should be set as an additional prerequisite for Montenegro's membership in the European Union and should be complied with before the country joins the Union.