EC: No country ready for eurozone

  • 2004-10-27
  • By TBT staff
RIGA - The European Commission startled the union and new members last week when it stated in a report that none of the 11 countries seeking to adopt the common currency had fulfilled all the necessary criteria. In a separate statement, the European Central Bank said that the lack of fiscal discipline among older EU members was setting a bad example for new ones and that some of the acceding countries needed to trim their deficits.

The outgoing commission said in its Convergence Report 2004 that the 10 new members states and Sweden still had a lot of work remaining before they could be considered ready to adopt the euro.

"A lot of progress has been made with convergence, but the road to euro membership requires further efforts," said Monetary Affairs Commissioner Joaquin Almunia. "I hope that the next report in 2006 will provide a good incentive for further progress."

The report examines each country's inflation, fiscal policy, exchange and interest rates, and legislative compatibility. Lithuania, along with four other countries - the Czech Republic, Estonia, Cyprus and Sweden - complied with the convergence criterion on price stability. The average inflation rate in Lithuania during the 12 months to August 2004 was a negative 0.2 percent, far below the benchmark of 2.4 percent.

Still, even this was a cause for the commissioner's concern. "In the commission's view, member states in deflation cannot be considered best performers," Almunia said Oct. 21.

All three Baltic states had deficits below the 3 percent threshold, as did Slovenia and Sweden, and were among the eight countries that met the convergence criteria on long-term interest rates. Hungary and Poland did not meet this criterion since they had long-term rates of 8.1 percent and 6.9 percent, respectively, above the 6.4 percent required.

According to the report, Lithuania did not satisfy two of the criteria for adopting the euro: national legislation and the minimum two years' participation in the exchange rate mechanism program. Both Lithuania and Estonia joined the ERM-II last summer.

None of the 11 countries met the legal requirements necessary for the euro.

Almunia refused to confirm that Lithuania and Estonia might be among the first new member states to join the eurozone. "I can't guess what decisions the governments of these states would make," he said, adding that taking up the euro was not an option but an obligation to all new member states. The commissioner refused to say when exactly the euro-candidates would be prepared to adopt the euro.

Meanwhile, the European Central Bank said that the lack of fiscal discipline was threatening stability of the euro and the EU in general.

"The behavior of old members of the European Union in not complying with the Stability and Growth Pact, and this is not sending a good signal to the new member states," Otmar Issing, the bank's chief economist, was quoted as saying.

In recent years France and Germany have been gross violators of the 3 percent budget deficit, and the outgoing commission of Romano Prodi has appealed to the courts to penalize the union's two largest countries.