Kosovo is under mounting international pressure to scrap a decision to make the euro the only legal currency for daily transactions in the country that is due to come into force on February 1. 

The rule is expected to cause problems in majority-Serb areas of northern Kosovo, where the Serbian dinar is widely used, leading to a further deterioration of relations between Pristina and Belgrade. 

Kosovo adopted the euro as its domestic currency, despite neither being a member of the EU nor having been endorsed by the European Central Bank (ECB). 

Long tolerated by EU officials, the Balkan country’s use of the euro became controversial with the central bank in Pristina’s announcement that from February 1 the European single currency will be the only currency to be used in the country. 

The move was announced by the Central Bank of the Republic of Kosovo (BQK) as aimed at streamlining financial transactions and enhancing the stability of the currency market, and was accompanied by a set of measures intended to prevent counterfeiting. 

It sparked an immediate outcry by Serbian politicians and the Serb population of northern Kosovo, who have never accepted Kosovo’s unilateral declaration of independence from Belgrade. They argue that preventing the use of the Serbian dinar will lead to hardship for local Serbs. 

Special cases

Both Kosovo and fellow former Yugoslav nation Montenegro have adopted the euro as their currency, despite not having a formal agreement to do so. This is in contrast to other locations such as the Principalities of Monaco and Andorra that have concluded monetary agreements with the EU on the use of the euro. 

“The states of Kosovo and Montenegro in the Balkans are not members of the EU. The two countries adopted the euro unilaterally in 2002 and have since used it as their de facto currency. This means that the euro is not legal tender there, but is treated as such by the population,” an ECB statement emailed to bne IntelliNews said. 

The unilateral adoption of the euro stems from the two countries’ relatively recent independence — declared by Montenegro in 2006 and Kosovo in 2008 — after the wars that fractured Yugoslavia in the 1990s. 

Economist Lara Merling, a senior research fellow at the Center for Economic and Policy Research, says that despite the lack of a formal agreement, the use of the euro is tolerated in the two countries. 

“[T]he decision to fully switch to the euro cannot be separated from the internal conflict and civil war that followed the collapse of Yugoslavia. Their decision to adopt the euro is linked to that context of political instability, not being recognised as a country (Kosovo is still not fully recognised to this day) made issuing a new domestic currency virtually impossible – so in that sense the euro definitely helped stabilise things at first,” Merling told bne IntelliNews. 

“Due to their unique context the EU has de facto allowed for these two places to unilaterally adopt the euro even if this practice is otherwise not permitted for new members,” she added. “The actual use of the currency is now tolerated, and frameworks are being discussed to overcome any potential hurdles from the EU in that respect. Euroisation in these places has only survived because it received financial support from the EU, as well as technical assistance."

Kosovars initially used the German Deutschmark when the country de facto split from Serbia after the war of independence and Nato bombardment of Serbia and Montenegro in 1999. In September 1999 the UN peacekeeping mission in Kosovo (UNMIK) approved the use of Deutschmarks and other foreign currencies, and the people of Kosovo spontaneously adopted the Deutschmark as their currency.

In 2002, when the euro was introduced, Kosovo replaced the Deutschmark with the new European single currency. According to the central bank in Pristina, while Kosovo was not formally a member of the eurozone, adoption of the euro involved collaboration with the ECB and Eurozone national central banks, and around 100mn euros were dispersed before January 1, 2002.

Costs and benefits 

The Kosovo central bank says the adoption of the euro as a national currency brought monetary stability to the new country, as there was no risk of devaluation of a national currency. 

It also simplified and reduced transaction costs both within and outside of Kosovo. Kosovo’s top trade partners include both EU countries and its neighbours, and although most Western Balkan countries have their own currencies, the euro is widely used in the region and beyond. Currently, the euro is used by 20 EU countries and approximately 350mn individuals. 

According to the Kosovan central bank, “Euroisation in Kosovo had also some long-term policy objectives. Euroisation in Kosovo was expected to foster economic stability, solve the problem of reliability, and mainly to increase fiscal discipline by eliminating the possibility of reproducing the money to cover fiscal deficits. After a longer period of time this will lead to increased foreign direct investment.” 

This is confirmed by Zef Dedaj, acting general director of the Kosovo Investment and Enterprise Support Agency (KIESA), who said in an interview with bne IntelliNews in 2023 that Kosovo’s adoption of the euro “makes trade and investment much easier compared to other countries in the region”.  

The ECB’s website points out the euro’s role in supporting small and medium-sized enterprises, as the common currency facilitates business growth by minimising costs and risks in cross-border trade. 

However, the use of the euro in the two countries has not been without controversy, including a scandal related to counterfeit €2 coins that Reuters revealed in 2023 were widely circulated in Kosovo.

It also became apparent that there were downsides and limitations of using the euro, especially without actually being part of the currency union, according to Merling. This was evident in the economic crisis that followed Russia’s invasion of Ukraine as well as in previous shocks. “Not having their own currency has made the response to all economic shocks difficult – starting from the global financial crisis to the covid pandemic, and now Russia’s war in Ukraine,” she said. 

Dinar transactions persist

Despite the early adoption of the euro by the Kosovan government, even before its declaration of independence in 2008, the Serbian dinar continued to be used in the north of the country, although the euro is also used. 

Kosovo’s decision thus caused an outcry from Serb officials, including Serbian Prime Minister Ana Brnabic, as well as the Serbian central bank. 

The National Bank of Serbia (NBS) said in a statement on January 19 that Pristina’s decision violates international financial standards and disrupts longstanding agreements and established practices related to the flow of the Serbian dinar. It warned that the Serb population of northern Kosovo will suffer, due to to expected difficulties in paying wages, pensions and benefits, as well as the sudden switch for traders from dinars to euros. 

Kosovo’s Western partners have also repeatedly urged Pristina to drop the plan. In a last ditch attempt to avert another increase in tensions between the Kosovan authorities and the Serb minority, the embassies of France, Germany, Italy, the United Kingdom and the United States (the Quint countries) urged the Kosovan authorities to reconsider on January 28. 

"We are concerned about the impact of the regulation in particular on schools and hospitals, for which no alternative process seems viable at the moment. The regulation will also have a direct impact on the everyday lives of the overwhelming majority of Kosovo Serbs who receive payments/ financial assistance from Serbia," they said in a joint statement.

After discussions with Kosovo’s Prime Minister Albin Kurti, the Quint nations called for a longer transition period and stressed the need for clear and effective public communication. 

The switch to exclusive use of the euro comes after a year marked by several violent incidents in northern Kosovo, and a stalling of the normalisation process between Serbia and Kosovo. Pristina has already been subjected to punitive measures by the EU for the failure to de-escalate tensions in the north of the country.