Appetite for euro wanes

LONDON (Reuters) – The European Union’s biggest newcomers, reluctant to push through reforms to rein in budget deficits, are unlikely to adopt the euro this decade, a Reuters poll of 34 emerging market strategists shows. Euro entry ambitions for the smaller Baltic countries – Estonia, Latvia and Lithuania – may also be hampered by high inflation, although median forecasts in this week’s survey showed they will probably adopt the single currency in 2009. Budget deficits and political uncertainties in Hungary, Poland and the Czech Republic – the three largest newcomers – could mean they are overtaken by Bulgaria and Romania, set to join the EU in January, on the road to the euro club. Median forecasts in the poll showed Poland and the Czech Republic swapping domestic currencies for the euro in 2012 while Hungary – which has overshot its budget deficit target for several years – is forecast to do so around 2014. Indeed, analysts said most of the 10 new members that joined the now 25-member EU in May 2004 were in no hurry to push through reforms to meet strict criteria on inflation, budget deficits, public debt, exchange rate and interest rates. «Since countries joined the EU they have been less willing to play ball. There has been reconsideration of the benefits of joining with increased euro skepticism throughout the whole continent,» said Timothy Ash at Bear Stearns in London. «Poland’s and Hungary’s problems are deep-seated and reflect a lack of reforms in the past. There has been a lack of acceptance, particularly in Hungary, that they had problems.» That diminishing enthusiasm may have prompted Hungary and the Czech Republic to dump their euro entry targets this year while in Poland – which never had a target – the government has made clear that it is nowhere near ready for the euro. Indeed, economists pushed back their forecasts by a year for Hungary and by two years for the Czech Republic since the last poll in August, although they were slightly more optimistic for Slovakia with forecasts showing it joining a year earlier. Enthusiasm may also be waning at the European Commission. EU Monetary Affairs Commissioner Joaquin Almunia told a news conference earlier this month that only the Mediterranean islands of Cyprus and Malta and also Slovakia, at a stretch, had realistic prospects of joining the eurozone this decade. The poll showed Slovenia will become the first of the 10 newcomers to adopt the euro in January, followed by Malta and Cyprus in 2008 and Slovakia in 2009, provided inflation falls. And analysts do not expect any change in tone in the next EU summit scheduled for December. «Almunia was pretty outspoken. I don’t think anything will change unless there is more stability,» said Clemens Grafe at UBS in London. Political noise «For Poland it completely depends on politics,» said Grafe. The ruling conservative party there relies on support from fringe parties, making it next to impossible to cut spending, while the Hungarian government faced recent street protests after its prime minister admitted to lying to win elections and allowed deficits to soar to the highest in the EU. This year’s elections in the Czech Republic have also resulted in a hung parliament with the next elections now expected in 2008. «Given the country’s current lack of a stable government, the necessary reforms may now be put off until after new parliamentary elections can be held,» said Sharon Fisher at Global Insight. «If elections are delayed until 2008 that could push back major legislative changes until at least 2009.» For Bulgaria and Romania, which clinched the green light to join the EU in January earlier this year, euro adoption is likely to come in 2012 and 2013 respectively, median forecasts showed. Bulgaria’s lev currency is already pegged to the euro, which gives the country an advantage over Romania, some analysts said. Indeed, Bulgaria was forecast to become the next country to join the ERM-2, where currencies must be kept within a fixed band against the euro for at least two years, in 2008. «The difference is in their exchange rate regimes. Bulgaria is in a better position because it has a currency board,» said Grafe. In both countries, however, wide current account deficits remain their biggest hurdles. Both countries are running government budget surpluses but future spending plans on infrastructure could boost deficits. The Czech Republic, Poland and Hungary – the only three of the 10 2004 EU entrants yet to lock their currencies into the ERM-2 – and Romania were forecast to do so around 2010 or possibly slightly earlier in 2009 for the Czech Republic.

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