ECONOMY

Euro hopefuls line up

LUXEMBOURG – A small handful of the EU’s 10 new member states will this month agree on early entry into the European Exchange Rate Mechanism (ERM-2), the waiting room before euro adoption, the European Commission said late on Wednesday. Siim Kallas, the Estonian who works alongside European Monetary Affairs Commissioner Joaquin Almunia, also told Reuters there was a widespread consensus on the need for EU budget rules and the only debate was on how to apply them. All of the 10 states that joined the EU in May want to join ERM-2 and the euro, but have different timetables for entry. None have yet formally requested entry into ERM-2, a regime that would peg their currency to the euro, but accords look imminent. «In June, they will make agreements about who will be the first countries to join ERM-2,» Kallas said in an interview. He declined to comment on either the names or number of new EU countries that might soon sign up for ERM-2 entry. Denmark is the only country which currently links its currency to the euro via the ERM-2, the successor to the first ERM system which faced several waves of speculative attacks. An increase in the number of countries in the ERM-2 grid would not lead to speculative exchange rate flows in the current environment, Kallas said. «Currency regimes are transparent. Under today’s conditions, speculation with foreign exchange regimes inside Europe is quite unlikely and I do not see any big changes» in currency flows. Among the 10 new EU states, two of the three Baltic states, Estonia and Lithuania, are considered by financial markets to be among the first to join ERM-2 and adopt the euro in 2007. Latvia expects to join in 2008. Cyprus also aims to apply for entry to ERM-2 this year, but not before the summer, a Finance Ministry official told Reuters on Wednesday. «We are waiting for the evaluation of the (European) Commission for our convergence plan. We have heard that the feeling is that it is a credible program, a doable one,» the official said. Cyprus, seen as being part of the first wave of new EU members to adopt the euro, aims to introduce the single currency in 2007, but has so far left it unclear when it will apply for ERM-2. The feasibility of the date hinges on Parliament adopting measures to reduce Cyprus’ budget deficit, which reached 6 percent of gross domestic product last year, the official said. «That is why we will be waiting to see the developments in these areas… and then decide to make an official application for ERM-2.» Provided that the measures were adopted over the summer as planned, ERM-2 application would follow before the end of this year, the official said. Slovenia, another candidate for swift ERM-2 entry, told Reuters in March it had started talks with the Commission and could enter ERM-2 by the third quarter and adopt the euro in 2007. New members keen The new EU states must keep their currencies in tight ranges against the euro within the ERM-2 for at least two years before they can join the euro. Euro entry also requires deficits below 3 percent of gross domestic product – the same cap that is set in the EU Stability and Growth Pact on budget discipline, which has been broken by several EU states, including Germany and France. New EU states appear to be keener on the current Stability Pact rules than older EU members, according to Kallas. «The new member states are quite enthusiastic about the rules of the Stability Pact whereas some old member countries have some doubts about the rules» and their applications. According to Commission forecasts, at least half of the eurozone’s dozen economies are struggling to keep their 2004 deficits below the EU cap of 3 percent of GDP, let alone balance their budgets. Still, Kallas said all eurozone members had at an informal meeting on Tuesday affirmed the need for EU budget rules and he stressed that the only debate was how to apply these rules. «Everybody has stressed that the Stability Pact must remain and the only question is how to implement these quite strict rules. If there is a political will… everything is possible.» Revamp due The Commission has already presented some ideas for revamping the EU budget pact, including taking more account of a country’s debt level when assessing its budget deficit. There might also be scope to introduce more flexibility on budget slippage during economic downturns, but this must be matched by more rigor during economic upswings, Kallas said. «If we are flexible in bad times, we must also be clear about the necessary steps in good times.» Another idea, recently aired by EU Competition Commissioner Mario Monti, was to give some budget leeway to states that make progress on the so-called Lisbon goals, intended to transform the EU economy into the most dynamic in the world by 2010. Such leeway might be a good idea but would be hard to justify for countries that are flirting with the EU deficit ceiling, according to Kallas. «A 3 percent deficit is already quite high when you calculate how much it might mean your children will pay in the future. The level of public debt is an important element that has to be taken more into consideration in the future,» he said. «Saying expenditure should be linked to the Lisbon strategy might be a good idea but you have to start to define what you mean and you must be more precise. In practice, the process to finance good incentives is very difficult,» he added. Kallas said the EU should use the flexibility that the Stability Pact offered within the 3 percent deficit cap to put more emphasis on the quality of future public spending. Moreover, the structural reforms that were much needed in Europe could not be achieved by throwing money at problems. «The danger is… that some parts of government and Parliament want to solve the problems by adding money. Finance ministers always ask what is the purpose of spending money and can this problem be solved in another way.» He said different EU states had met with different levels of success in selling the need for budget discipline to their population, mainly due to differences in traditional national views on deficits. «In some countries, like Estonia and Belgium, the public approach is that a budget deficit is perceived as very negative. In other countries, the deficit has always been there and been considered as a tool for government.» However, there was a need for all countries to press on and achieve the balanced budget goal that is the medium-term target for all EU member states. «The best deficit is zero,» he said.