Fiscal reins for newcomers

NICOSIA (Reuters) – European Central Bank council member Nicholas Garganas yesterday voiced concern over fiscal loosening in some future EU members and said they should show budget discipline after they join the ERM-2 currency regime. «The recent rise in fiscal deficits in some of the EU accession countries is a source of concern, particularly as these deficits seem to have a structural nature,» Garganas, head of the Bank of Greece, said in the text of a speech. He said fiscal policy will play a central role in meeting the Maastricht criteria for the adoption of the euro and joining ERM-2 would serve as a test of new EU member states’ ability to sustain their convergence with eurozone targets. Garganas said the course toward joining ERM-2 and adopting the single currency will not be uniform for all. EU rules say countries wishing to join the euro must demonstrate trouble-free membership of the exchange rate mechanism for at least two years before adopting the single currency. «However, this time period is the minimum required and not the maximum. It doesn’t mean that right after this two-year period, countries will join the eurozone,» Garganas said. In ERM-2, countries must keep their exchange rate stable within a certain band against a set euro parity rate. While the ERM-2 applies a +/-15 percent range, EU policymakers have signaled a tighter +/-2.25 percent band will be used as a yardstick to judge the currencies’ performance. Ten countries, including Cyprus, are on course to join the European Union in May 2004. Garganas said meeting Maastricht targets is not a prerequisite for joining ERM-2. On the contrary, as shown in the case of Greece, adopting a currency exchange rate target can be a strong catalyst for meeting the criteria to join the 12-nation single currency club. «ERM-2 is not simply a waiting room for adopting the euro,» he said.