No Pardon for Euro Prospects

The Eurozone governments and officials will not compromise on the criteria for joining the Euro*. Lithuania was turned down in June, Slovenia got in under the wire but as this Bloomberg article reports Eastern European countries are protesting agains the rules of adoptation.

'European Union governments won't relax inflation criteria for countries seeking to adopt the euro, standing firm against pleas from fast-growing eastern European nations to show flexibility on the entry rules.

Bending the rules is ``not acceptable with a view to the credibility and stability of the euro,'' German Finance Minister Peer Steinbrueck said at a press conference after an EU meeting in Luxembourg today.

Pressure has been mounting on EU leaders to loosen the rules since June, when they rejected Lithuania's bid to join the euro until the government gets price increases under control. Slovenia, with slower growth and lower inflation than Lithuania, won acceptance to become the first eastern European country to join the single currency.

The EU's ``no'' to Lithuania marks the first time the EU has turned down a euro aspirant, setting the tone for larger countries such as Hungary and Poland that are struggling to pass the economic tests to switch to the euro in coming years.

Six eastern countries -- Poland, the Czech Republic, Latvia, Estonia, Lithuania and Slovakia -- protested today that a rigorous reading of the inflation rules will keep them out of the euro and delay the economic unification of Europe.'

(...)

The fight over euro-entry rules underscores Europe's east- west economic divide. Eastern European nations are expanding at a faster pace than western Europe, heightening inflation pressures as the ex-communist countries catch up with the West's standard of living.

European Central Bank President Jean-Claude Trichet took part in the meeting to emphasize that the inflation-conscious ECB will brook no loosening of the criteria, which were laid down in the Maastricht Treaty of 1993.

``Any change to the rules would be very damaging to credibility,'' Trichet told the ministers, according to an EU spokesman who briefed reporters

In Denmark we have an expression about throwing stones and living in glass houses and I feel it migth apply here. However, there is no doubt that some of the protesting countries are in no shape to join the Euro; here I am particularly thinking of Hungary and Poland. The thing is ultimately though; for how many of the Eastern European countries would the Euro be a smart choice?  

* (+demands of convergence once you are in)

• Low inflation rates – The RPI (Retail Price Index) of a country must not rise above 1.5 % of the RPI in the three countries with the lowest inflation rate.
• A country must maximum have a budget deficit amounting to 3 % of GPD.
• The public debt must not exceed 60 % of GPD.
• You must have a stable currency. Other currencies following the Euro into phase three must not deviate from the value of the Euro by more than 2.25 % and there should have been no devaluation of your currency two years prior to your entrance into the fixed currency regime of the Euro zone.