Friday, September 15, 2006

The euro – no rush?

Recent declarations show that the enthusiasm among the NMS about early euro membership is fading. Before EU entry most countries declared they would like to join “asap”, and most seemed committed to doing so – but recent developments show that it will take much longer before they adopt the European common currency. We reviewed the exchange rate regimes in the NMS some time ago (to be found here), but it’s a good idea to summarize the current euro adoption targets:

  • Czech Republic – targeted 2010, recently abandoned mainly because of fiscal criterion. Refused to give new target date (previous official strategies) aimed at 2009-2010);
  • Estonia (in ERM II) – initially targeted 2007, however high inflation caused the revision to 2008, though relatively high inflation makes this date questionable;
  • Hungary – targeted 2010, but fiscal deficit levels made this date unrealistic and it was abandoned in July. No new date was given;
  • Latvia (in ERM II), – targeting 2008 though this date is questionable due to (relatively) high inflation;
  • Lithuania (in ERM II)– aimed for entry in 2007 but marginally failed to fulfill the inflation criterion, thus the bid was rejected by the EU, now aiming at 2009/2010, though the exact date is to be given;
  • Poland – no target date was given;
  • Slovakia (in ERM II) – targeting date 2009;
  • Slovenia (in ERM II)– on course to join the EMU in 2007;

Generally the NMS face two different sorts of obstacles. On one hand in the Baltics it is inflation that caused the postponement of euro adoption, and having already verified the entry dates for Lithuania and Estonia, seems to be set to jeopardize the target for Latvia, and perhaps even the new target dates for the other two.
With the combination of a basically fixed exchange rates and rapid growth, the prospect of a rapid decrease in inflation does not seem realistic. Moreover, the problem of not fulfilling the Maastricht inflation criterion is partly a result of a ‘lower than expected’ reference value of inflation in the EU. Fiscal deficit on the contrary is kept well within bounds.
On the other hand we have Hungary, Poland and Czech Republic - despite the declarations coming from each country it seems that it is the lack of political will which is decisive. Tax cuts and fiscal reform are the official priorities, backed with insufficient real convergence as an excuse, but somehow all this did not seem to matter when the strategies where initially set out. In fact all three countries have rather weak governments, and strong opposition to the euro adoption even within the ruling coalitions. This fuels the reluctance to cut spending and that seems to be the unofficial explanation.
The troubling question is that if these countries are unable to reduce deficits now – when growth is quite high when will be the right moment? It certainly will not be much easier when the boom is over.
Slovenia is joining soon, and Slovakia, at least up to now, seems to be following its set, albeit slower path, though it is still early enough for it to follow the path of its larger neighbors.


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