All applicants must fulfil a number of formal and substantial conditions before joining the euro:
Satisfy Maastricht convergence criteria of fiscal stability;
Ensure Central Bank independence;
Achieve low inflation and long-term interest rates, and;
Prove monetary stability of their currency by participating in the Exchange Rate Mechanism II (ERM II) for a minimum period of two years.
No restrictions are placed on candidate countries' exchange rate policies before they enter the EU. Once they have joined the Union, they are expected to treat the exchange rate as a matter of common interest. Some voices in the EU have warned that premature efforts to join ERM II or the euro area may, however, be harmful both to the new member states and the euro area itself.
Eurozone hopefuls can already re-organise their external trade in the single currency. They also benefit from new sources of funding from newly-integrated euro financial markets, which have seen a massive number of international bonds issued in euro denominations since the currency's launch in January 1999.
There is no eurozone exchange rate strategy that the newcomers should follow in the run-up to joining Economic and Monetary Union (EMU). The Nice European Council (December 2000) recommended that candidates adopt monetary policies that best suit their own economic conditions and are consistent with their other policies.
Following their accession, the new members participate in EMU with the status of member states holding a derogation from adopting the euro. This status is granted in the Accession Treaties. During this phase, the new member states have to treat their exchange rate policy as a matter of common concern and they are expected to join the exchange rate mechanism known as ERM II.
Once the new member states have reached a high degree of sustainable nominal convergence, which means fulfilling all the Maastricht Treaty convergence criteria, including at least two years' participation in ERM II, they can adopt the euro.
In the aftermath of the 2004 enlargement, excessive optimism for early euro adoption seemed to have waned somewhat. Slovenia joined the euro zone on 1 January 2007. It was followed on 1 January 2008 by Cyprus and Malta and on 1 January 2009 by Slovakia. Only Latvia, Estonia and Lithuania had joined ERM II with a view to adopting the euro as early as they could, but in the meantime Latvia's economic situation deteriorated due to the crisis, which saw the country take a 7.5bn euro IMF-led rescue loan. Most of the accession countries were struggling to meet the entry conditions particularly with respect to inflation and, in the case of Poland and Hungary, high debt and deficits.
The credit crunch and the financial crisis have substantially worsened the economic situation of the new EU members. Currencies of acceding member states have been subjected to great volatility (Euractiv 20/02/09) and high deficits. This has had a detrimental effect on those countries that had borrowed from Western Europe and that were heavily dependent on Foreign Direct Investment (FDI). Due to the falling value of certain currencies, the costs connected with repaying the debt have grown exponentially.
As a consequence, the fall in confidence has revived enthusiasm for the single currency and all the Central and Eastern European Countries (CEECs) have streamlined tentative roadmaps for the adoption of the single currency. Poland, Bulgaria and Romania have also defined target dates: 2012, 2013 and 2014 respectively. According to analysts, these targets could be reviewed. All these countries still have to join ERM II, seen as the ante-chamber of the euro zone. A candidate country must keep its currency in the ERM II exchange rate for at least two years, where it trades in a range against the euro, before adopting the currency.
In Iceland, severely hit by the economic crisis, the power of attraction of the single currency was so strong that on 17 July 2009, the Icelandic Parliament voted in favour of EU membership, mainly due to the prospect of joining Economic and Monetary Union (EMU).
Joining the single currency also allows member states to take part into the Eurogroup, the informal meeting of eurozone finance ministers, which takes place one day before the Economic and Financial Affairs Council (Ecofin). This group has become an increasingly powerful forum and it will be formalised by the Lisbon Treaty's ratification.
Politicians generally agree that without the euro, the Union and its member countries would have been much more severely hit by the ecenomic downturn. In Ireland in particular, where a second referendum was held on the Lisbon Treaty on 2 October 2009, the 'yes' camp insisted that the country's participation in the euro area had provided a vital anchor of stability in difficult times.