While the new EU member states Poland, the Czech Republic and Hungary will probably not join the euro area before 2010, some of the smaller EU countries in Central and Eastern Europe are well on their way to becoming members of the euro area at the beginning of 2007.
“The euro will be legal tender in Estonia and Lithuania and also in Slovenia, one of Austria’s neighbouring countries, in less than one and a half years,” says Marianne Kager, chief economist of Bank Austria Creditanstalt (BA-CA).
Estonia, Lithuania and Slovenia already meet almost all of the criteria required for entry into the euro area: the budget deficit is below 3%, total public debt is significantly lower than the permitted level of 60% of GDP, and long-term interest rates are below 5.2%. Exchange rates are stable. The Slovenian tolar, the Estonian crown and the Lithuanian litas, which are linked to the euro via a currency board, have been moving within the permitted fluctuation margins of +/-15% against the euro without any problems. It is only the inflation rate that currently exceeds the permitted maximum level of 2.4%. The criterion of participation in the ERM II exchange rate mechanism for at least two years – the “waiting room for entry into the euro area” – will be met in mid-2006.
BA-CA expects that all convergence criteria will be met in time for these three countries to introduce the euro in 2007 as planned. According to BA-CA’s economists, Latvia will probably join the euro area on 1 January 2008.
“We expect that Poland, the Czech Republic and Hungary will not join the euro area before 2010,” says Kager. The main obstacle to an earlier adoption of the euro is the slow progress in budget consolidation in these countries. Although the Stability and Growth Pact has been revised to allow the costs of pension reform to be partly excluded from the calculation of budget deficits, these three countries will significantly exceed the limit of 3 per cent of GDP in 2005 and will continue to make only slow progress towards achieving the target.
Moreover, the scope for action by governments in these countries is limited by the forthcoming parliamentary elections. Especially in Poland, a possible victory of political parties which take a critical view of the EU and the euro might lead to a further delay in the introduction of the euro.
Slovakia holds a middle position between the pioneers and the latecomers. In June the country’s government adopted a new euro road map providing for participation in ERM II from the middle of 2006. “It is more than likely that Slovakia will meet the Maastricht criteria in time for being able to join the euro area in 2009,” says Marianne Kager.
The candidate countries in South-East Europe are making good progress on their way to the euro. Bulgaria and Romania will join the EU in 2007 provided they meet the required conditions and find ways to quickly resolve the recent internal political turbulences. Their efforts will then focus on introducing the euro as soon as possible. If the current scepticism in the “old” EU continues to intensify, however, Croatia’s negotiations for EU membership could become more difficult. As far as meeting the Maastricht criteria is concerned, Croatia has already made good progress in some areas.