IMF tells new EU members to watch fiscal adjustment

PRAGUE (Reuters) – The managing director of the International Monetary Fund, Horst Koehler, yesterday urged EU accession countries to make quick and thoroughgoing fiscal adjustment as they chart their path toward joining the single currency after entering the Union in May. Koehler, speaking in Prague to central bankers from accession countries, did not give any guidance to euro hopefuls on a timetable he feels is best for joining the eurozone, instead delivering a blunt message on public finances. «The Maastricht criteria remain the measure for euro adoption. Their spirit has always been clear, namely to ensure solid economic fundamentals and durable convergence, which is also the best safeguard against the risk of destabilizing capital flows in the runup to adopting the euro,» he said. «And this would be helped, in particular, by early and ambitious fiscal adjustment, which in some cases could well go beyond the requirements of the Maastricht criteria for public debt and deficits.» Adopting the euro is a goal of all new entrants, who hope the single currency will cut debt costs and weave their economies even more tightly into the fabric of their richer Western neighbors. Koehler said that if countries push forward, they could reap as much as an additional 20-25 percent gain to GDP over the long term from the adoption of the euro, though he gave no specifics. «Realizing these gains will require strong and credible policies both within the current euro area and in the acceding countries,» he said. «It also requires clarity and transparency in mapping out the path toward the euro for the new members and avoiding any ambiguity regarding the application of the criteria so as to minimize market uncertainty and volatility.» Debate on how and when the 10 mainly East European entrants will join the euro is reaching fever pitch and financial markets have already priced in the significant probability of 10 mainly ex-communist states being aboard around 2008. But some bigger candidates such as Poland and Hungary are having trouble slashing bloated budget deficits, putting into jeopardy their plans to join as soon as possible. Koehler told the central bankers financial market supervision needs to be acutely aware of the risks to domestic financial stability from the rapid credit growth that can accompany euro adoption.