There are 13 countries in Central, Eastern and Southeastern Europe (CESEE) with floating
exchange rate regimes, de jure. This paper uses the framework pioneered by Frankel and
Wei (1994) and extended in Frankel and Wei (2008) to show that most of them have been
tracking either the euro or the US dollar in recent years. Eight countries, all of them
current or aspiring EU members, track the euro. Of the five countries keying on the US
dollar in various degrees, all but one belong to the Commonwealth of Independent States.
The paper shows that the extent to which each country's currency tracks the euro (or the
dollar) is correlated with the structure of its external trade and finance. However, some
countries appear to track the EUR or USD to an extent which appears inconsistent with
inflation targeting, trade or financial integration, or the extent of business cycle
synchronization. The phenomenon is particularly pronounced among the countries in the
CESEE euro bloc, which may be deliberately gravitating around the euro in anticipation
of eventually joining the Euro Area.