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Europe

Pact Reform Removes Obstacles for East

The road into the euro zone for countries in eastern Europe has become smoother after the agreement by EU leaders last week to relax budget rules, ministers and analysts say.

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Entry to the euro zone no longer appears such a distant goal

By allowing countries to take into account the cost of pension reforms when they calculate their deficit, the changes to the EU's Stability and Growth Pact will "remove the major obstacle to a rapid entry into the euro zone for Hungary, Poland and Slovakia", the chief economist for Bank Austria-Creditanstalt (BA-CA), Marianne Kager, said.

The three countries, all busy reforming their pension systems, were at risk of missing their 2010 deadline for joining the euro zone because of their "high budget deficits." The new, but controversial, method of calculating will shave 0.6 to 0.9 percentage points off the deficit rations of the three former communist states, Kager said, putting them within the limit of 3.0 percent of gross domestic product (GDP) required by the Maastricht Treaty for a country adopting the euro.

"Slovakia's chance of joining the euro zone in 2009 is assured. Poland and Hungary, which were aiming for 2010, can now also set 2009 as their target," a BA-CA report published last Monday said.

EU Gipfel in Brüssel Joschka Fischer und Gerhard Schröder

German Chancellor Gerhard Schröder (right) and Foreign Minister Joschka Fischer during a press conference at the end of an EU summit at which leaders approved watering down the rules that underpin the stability of the euro.

Following the agreement, which has raised the hackles of EU central bankers, Poland and Hungary can hope to bring their deficits down to 2.8 percent of GDP, instead of 3.7 and 3.4 percent respectively, while Slovakia can achieve 2.3 percent instead of the forecast 3.0 percent, BA-CA predicted.

Hungary on euro track

Last week, Hungarian Finance Minister Tibor Draskovics welcomed the changes to the stability pact, saying that they would enable his country to remain on track to adopt the euro by 2010.

In January, the European Commission initiated an "excessive deficit procedure" against Hungary for failing to rein in its public finances.

"With the modifications of the stability pact, Hungary could emerge sooner from the excessive deficit procedure and is more certain than before to stay on track for the adoption of the euro," he said.

Poland sets hopes on 2009

His Polish counterpart, Moroslaw Gronicki, said that the reforms would help Warsaw to enter the euro zone by 2009.

"The situation is better that it was a few months ago. We have a chance of avoiding excessive deficit procedures against Poland in 2007," he said.

Den Tisch gedeckt für die EU

Polish economist Marcin Mroz, an analyst at French bank Societe Generale in Warsaw, told AFP: "The reforms have opened a window of opportunity for Poland to reverse a situation which would otherwise have delayed its adoption of the euro by two years."

But analysts pointed out that the public deficit was only one of the criteria for joining the euro zone.

"Inflation could still pose a serious problem in countries like Hungary, Slovakia and Slovenia," Kager said, while Mroz warned Poland to pay heed in this regard.

All these countries have higher inflation that the 2.5 percent currently required by Maastricht.

"It is an obstacle but one that can be overcome. It is easier to cut inflation and interest rates (another Maastricht condition) in the long run than to reduce the deficit," Kager said.

Furthermore, all the 10 new member states of the EU complied with the requirement of having debt below 60 percent of GDP, the analysts pointed out.

BA-CA said of all former east bloc states that joined the EU last year, only the Czech Republic looked set to exceed the 3.0-percent limit and therefore seems unlikely to join the euro zone before 2010.

Prague has not undertaken pension reforms and the Czechs are forecast to have a deficit of 3.3 percent of GDP two years from now.

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