Central Europe in no rush to join the 'eurozone'

13-05-2004

Initial enthusiasm in Central Europe for quickly adopting the euro has cooled in recent weeks. In part, this is because governments in the region are reluctant to quicken the pace of reforms and rein in their budget deficits in order to meet the preconditions for eurozone entry. Another factor is that the European Commission is very unlikely to take disciplinary action against the new EU member states. Brian Kenety reports.

Photo: European CommissionPhoto: European Commission Under the terms of the European Union's "Stability and Growth Pact," governments cannot run a budget deficit greater than 3 per cent of GDP, nor can they have a debt ratio of more than 60 per cent of GDP.

In order to join the eurozone, countries must also maintain a low rate of inflation and set interest rates close to the EU average.

Poland, the Czech Republic, Hungary and Slovakia -- the largest new EU member states, in terms of population -- are actually the least prepared to meet the economic criteria for adopting the common currency.

Thanks to taking on unusually high "one-off" loan guarantees, the Czech Republic last year posted a 12.9 per cent budget deficit as a percentage of GDP -- the largest of any EU country. This year it is likely to be 6 per cent.

Is this a cause for concern? Not for Professor Kamil Janacek, the chief economist of Komercni Banka in Prague, and an advocate of the "go-slow" approach.

"My stance as far as the adoption of the euro for the Czech Republic is concerned is: don't hurry. And I think that the costs in the near future of the early adoption of the euro surely would outweigh the benefits."

Professor Janacek says that for economies in transition to run high deficits is perfectly "normal" and that the new EU members have enough on their plates in implementing the body of EU law, the 80,000-page of the acquis communautaire, without making life more difficult by rushing to join the eurozone.

"The main task for the Czech economy for the moment is to speed up the 'catch up' with the old EU member states -- to increase GDP per head and the life standards -- and then to accelerate the structural reforms, to speed up the public finance reforms, and to digest the very complicated acquis communautaire."

"And in this case, to adopt at the same time the common currency [euro] could set a big barrier for these processes. I think it is very reasonable to orient ourselves for the adoption of the euro around 2010 -- or even beyond."

In practice, meeting the "Maastricht criteria" -- the economic prerequisites to adopting the euro -- means imposing some measures rather unpopular with the average voter, such as removing caps on state-controlled prices in the energy sector.

In addition, renowned financier and currency speculator George Soros has warned that rushing to join the euro zone could increase the risk of currency attacks. So has the ECB, the Frankfurt-based European Central Bank.

Petr Zahradnik, photo: www.nyu.czPetr Zahradnik, photo: www.nyu.cz Petr Zahradnik, head of the EU office at Ceska Sporitelna, the largest Czech retail bank, says that while the risk of such attacks is present. However, key monetary policy decisions of the Czech National Bank now deviate little from ECB guidelines, making them far less likely.

"It's a permanent danger but I think now the Polish zloty or the Hungarian florint are more favourite targets than the Czech crown. I really don't think our currency will be a subject of excessive risks like speculators, in comparison with the situation in the last 10 or 12 years."

Meanwhile, the European Commission released budget reports on six new EU member states with high deficits this week, and plans to recommend corrective measures. These would take effect if endorsed by EU finance ministers at a meeting on July 5th.

The reports forecasts that in 2004 Poland and the Czech Republic will run budget deficits of around 6 per cent of GDP - still twice that of the 3 per cent ceiling set in Stability and Growth Pact. Hungary and Slovakia are expected to post deficits of 4 per cent and 3. 6 per cent, respectively.

Slovenia, Latvia and Lithuania kept their deficits below the 3 per cent mark last year while Estonia had a surplus.

One reason the Commission hasn't reacted more strongly to those posting excessive deficits is that it's not just the EU newcomers which are struggling with high public debt. France and Germany have repeatedly breached the 3 per cent limit. And just this week, the EU's first ministerial meeting since the enlargement, decided to bend the eurozone rules for Italy.

Professor Janacek again.

"More and more I am hearing that the Czech stance is reasonable, sensible. So, the 'don't hurry' policy, or 'don't hurry' strategy, is appreciated -- in Frankfurt and in Brussels. Again we are back to the main questions. We are obliged to accelerate our catch-up."

13-05-2004