Vol. 4 Num 77 Tue. August 12, 2003  

EU candidates eager to adopt euro despite ECB warnings

Former communist countries in central Europe hope to adopt the euro by 2010, but while feasible for a few, such a move could in fact curb economic growth, some economists believe.

Despite repeated warnings from the European Central Bank (ECB) and before formally joining the European Union next year, eight candidate states have proclaimed their intention to adopt Europe's single currency as soon as possible.

For these countries, the euro symbolises economic stability and prosperity and their central banks have set dates: 2006 for Estonia, 2007 for Latvia, Lithuania and the Czech Republic, 2008 for Hungary, Slovakia and Slovenia, and 2009 for Poland.

But in order to adopt the euro, countries must respect restrictive economic criteria in the 1991 Maastricht treaty concerning public deficits, inflation, interest rates and exchange rate variations.

Taken together those variables set limits on what governments can do to boost economic growth.

Joining the euro zone by 2008 or 2009 "is theoretically possible, but difficult for the main countries, Poland, Czech Republic, Slovakia and Hungary, mainly because of public deficit criteria", according to Walter Pudschedl, an economist at Bank Austria Creditanstalt, a prevalent bank in eastern Europe.

Countries wishing to adopt the euro "will be required to reduce their structural public deficits, through cuts in social protection systems but also in investments, which poses a threat to growth", he told AFP.

The Vienna Institute for International Economic Studies (WIIW) recommends that candidate states take their time.

"2008 is a very ambitious objective. It would be wise to wait," says WIIW director Peter Havlik.

"Deficits (in candidate states) are currently well above the three per cent" ceiling established in the EU's Stability and Growth Pact, which France, Germany and Portugal have already breached.

"Deficit-reduction policies would hurt growth," he says.

Gross domestic product is rising rapidly among the EU candidates, with the Czech Republic, Hungary, Poland, Slovakia, and Slovenia posting average growth of 2.7 per cent, compared with 1.0 per cent in the euro zone.

One reason the eastern region is competitive is because salaries are between one-quarter and one-fifth those in western Europe and thus attract foreign investors.

Without continued strong growth, the improvement in living standards in eastern Europe would be curbed and unemployment affecting almost 20 per cent of the workforce in Poland and Slovakia could spike even higher, the WIIW estimates.

Poland's central bank is aware of the threat and has revised an original target of adopting the euro by 2007.

Other countries, however, should have less trouble joining the euro zone.

"The Baltic countries are well placed to adopt the euro quickly and I am not worried about Slovenia, which already meets all criteria with the exception of inflation," Pudschedl says.

But despite the austerity imposed by Maastrict criteria, many central European economists remain convinced of an economic interest in adopting the single currency.

"The Hungarian economy will profit from the euro," says Laszlo Molnar, executive director of the GKI economic institute in Budapest.

"The euro will bring inflation and interest rates down and facilitate investment and financing of the Hungarian debt.

"Hungarian businesses will also operate more easily in Europe, their main export market."