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Eastern Europe looks to the euro

By CNN's Tom Bogdanowicz

FRANKFURT, Germany (CNN) -- Three hundred million people will start using the euro on January 1. Ten years from now it could be 400 million or more.

The European Union is already negotiating with 12 countries in eastern and southern Europe.

The first new candidates are expected to join the EU in 2004, adopting the euro some two years later.

Many central and east European companies are enthusiastic about EU and euro membership. Among them is Polish machine bearings distributor FLT.

The company has a thriving operation based just outside London.

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But Managing Director Jerzy Rosinski thinks he could do better. If Poland was in the EU and the euro replaced the Polish zloty, he would be spared paperwork, and clients would have added confidence in his business.

"EU customers will regard us as a next-door neighbour, which means that we will be much more regard as a reliable supplier to them ... as a supplier who can not only deliver on time but can satisfy all the obligations which are normal in business," Rosinski says.

Corporate and public support is one reason why 10 former communist states are negotiating to join the EU.

Eight may be EU members by 2004, along with the Mediterranean islands of Cyprus and Malta.

Bulgaria and Romania are expected to join at a later date, and Turkey has also joined the list of hopefuls.

What they're all looking for is stability

"We would like to enter the European Union to be part of a stable integration block to anchor our stability, and also to have access to a better macroeconomic framework and to have access to funds which will improve our infrastructure," says Leszek Balcerowicz, president of the Polish Central Bank.

As participants at a top-level "Euro Goes East" conference in Frankfurt made clear, enlargement of the EU sets challenges for both sides.

Candidate countries will have to spend heavily to satisfy EU environmental and labour regulations, and they'll have to pay in to the EU budget.

What's more, unlike Britain or Denmark, new candidates will not be able to opt-out from the euro. It will be EU membership and the euro -- or nothing at all.

That could create difficulties for countries with overvalued currencies. Rosinski is hoping the Polish zloty will fall before euro entry.

"The Polish zloty or the other eastern European currencies has to be devalued to give importers the possibility to have a better advantage," he says.

In addition to the potentially contentious exchange rate issue, the EU also must tackle the thorny problems of agricultural subsidies and regional aid.

Some new candidates have large farming populations, and most would qualify for regional aid -- all a potential drain on EU resources.

Altogether the EU will have to spend some $50 billion in the first three years of enlargement.

"It's difficult to tell you in figures what political and economic stability in eastern Europe means, but try to imagine what we would have to pay if there were political and economic instability in eastern and central Europe," says Gunter Verhagen, EU commissioner for enlargement.

Negotiations may settle many of the obstacles to EU enlargement, preparing the route to turn the euro 12 into the euro two dozen.

But there's still the hurdle of referendums in the candidate countries. The performance of the euro itself could affect the outcome of those votes.


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