Euro expansion losing momentum

RIGA, Latvia – Baltic inflation data this week will pour more cold water on the hopes of new European Union members struggling to qualify for euro adoption and cast doubt on the pace of the eurozone expansion. Economists expect Estonia to report tomorrow that consumer prices rose 4.3 percent year-on-year in August, a slight improvement from July thanks to lower fuels and seasonal food prices but still almost double the euro area rate. The data will confirm a conclusion analysts have already reached: that Estonia’s revised aim of joining the euro in 2008, itself a shift from the previous deadline of 2007, is now impossible and that even 2010 may be a difficult goal. Under Maastricht Treaty rules, a euro candidate country’s average annual inflation over 12 months must be no more than 1.5 percentage points above the three best performers in the EU – putting the current watermark at 2.8 percent. »I think 2008 is a very distant prospect. 2010 is a very hard to contemplate,» said SEB-Uhisbank analyst Hardo Pajula. Estonia’s failure has a wider significance. Economists say it bodes ill for the country’s Baltic neighbors and, given problems of other European euro hopefuls with meeting the euro criteria, deals a symbolic blow to the single currency. The ultimate goal is to make the euro common to the whole EU and when 10 mostly East European states joined the bloc in 2004, they all committed themselves to adopting the currency – now shared by 12 nations – by decade’s end. But with the once best-in-class Baltic states struggling with inflation and larger Central European countries with politically induced high deficits, Slovenia, which joins the euro club in January, is the only country sure to do do so before 2010. «I suppose you could say that eurozone expansion has lost momentum,» said Latvian opposition lawmaker and former economy minister Krisjanis Karins. Latvia’s finance minister yesterday indicated that a 2008 target for joining the euro may have to be pushed out past 2010. «One of the options could be 2010, but it’s not the only year when we could join. Everything must be evaluated as a whole,» Finance Minister Oskars Spurdzins told Reuters. Still, he disagreed that eurozone expansion had foundered. «There are conditions set to join the eurozone and currently we do not qualify, but it does not mean that it is a failure,» Spurdzins said. Two weeks ago, Estonia changed its inflation and economic growth targets for 2006 and ensuing years for the second time this year, and government officials all but admitted that its revised 2008 timetable for adopting the euro was unworkable. Later, the Finance Ministry, detailing the problems one of Europe’s fastest-growing economies has in keeping a lid on price rises, said 2010 inflation would be 3.1 percent compared with expected eurozone average of 2 percent and likely above the euro adoption limit. Ratings agency Fitch then revised down the outlook on Estonia’s foreign currency issuer default «A» rating to stable from positive, estimating the Baltic state would join the eurozone only in 2009-2010. Fitch observed that the Baltics are setting the tone for all the new EU states, with euro adoption timetables suffering setbacks across Central Europe this year. Estonia, Poland, Hungary and Lithuania have revised or abandoned their target dates in the past 12 months – and Latvia will soon do the same, Fitch said. Latvia and Lithuania are now expected to join the eurozone only in 2010, it said. Cyprus looks on track for 2008, but inflation will push back Malta’s date by a year to 2009. Fitch has forecast 2009 as the most likely date for Slovakia’s entry but said the Czech Republic, Poland and Hungary are not likely to join before 2011, 2012 and 2014 respectively. In the Baltics, the delay may have a political impact in the form of faltering support for the single currency. In all three states, a substantial chunk of the electorate question the euro’s benefits. In Latvia, heading into elections next month, euro doubters are in a growing majority. Analysts warn that after the collapse of the European constitution, there is a risk the public could grow further disillusioned within the 10 mainly Eastern European nations that joined the European Union with such fanfare in 2004. «Euro expansion is a sitting duck. Politically this is another failure after the failed EU constitution because momentum is lost,» said Mark Chandler, an analyst at the Baltic International Center for Economic Policy Studies.