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Euro to Survive Debt Turmoil, Informal Member Montenegro Says

By Leon Mangasarian

July 1 (Bloomberg) -- The euro, which helped Montenegro lower its bond yields this year, will survive its sovereign debt crisis, said Igor Luksic, the prime minister of the former Yugoslav nation that unilaterally adopted the currency.

“I don’t understand what anybody could gain from breaking up the euro zone,” Luksic, 35, said in an interview yesterday in Berlin. “The euro has been important for Montenegrin economic reforms, it’s been the anchor. I believe it is equally important for European countries.”

Montenegro, with a population of about 662,000, became independent in 2006. After having used the German mark, it shifted to the euro when it was introduced in 2002. It is one of three countries, along with Kosovo and Andorra, to use the currency without a formal agreement, according to the European Central Bank’s website. Seventeen of the European Union’s 27 members are part of the euro area.

Montenegro has been careful to meet the currency bloc’s fiscal rules, Luksic said. The 2011 budget deficit will probably be 3 percent of gross domestic product, with public debt at 45 percent of GDP, he said. The average debt level in the euro area will be 87.7 percent this year, with a 4.3 percent budget deficit, according to forecasts from the European Commission, the EU’s executive.

“We conduct an economic policy which will keep people in the ECB and the member states comfortable,” Luksic said.

Montenegro on April 1 sold 180 million euros of five-year bonds with a 7.25 percent coupon, compared with 7.875 percent at an offering of 200 million euros of debt on Sept. 7. The yield fell to 7.127 percent today on the bonds sold in April and to

7.023 percent on the debt offered in September.


Investor Confidence

“It seems we’ve been awarded by the investment community for what we’ve been doing,” said Luksic.

Montenegro was officially named a candidate for EU membership last December. Luksic said he hopes negotiations will begin early next year and that his country can join before the end of 2019. The country is aiming to follow former Yugoslav partners Slovenia, which joined the bloc in 2004 and adopted the euro in 2007, and Croatia, which ended entry talks yesterday and targets becoming a member in 2013.

Among challenges to Montenegro’s membership bid are “institution building and battling corruption and organized crime,” he said. “Most of the benchmarks are related to the political situation and less with the economy.”

Montenegro, which has a flat tax of 9 percent, is diversifying its economy, Luksic said. Mining for zinc and lead has resumed and agriculture and wine production are priorities as is tourism focused on projects involving four and five star hotels and golf courses.

Priorities for public sector investment are roads, waste water, solid waste and water supply, which are “preconditions for tourist investment,” Luksic said.