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1st Jul 2022

ECB sparks doubt over eurozone expansion

  • The ECB has raised concern over rushed eurozone enlargements (Photo: European Central Bank)

The European Central Bank has sent signals of caution over the next round of eurozone enlargement, with Slovakia fearing it will be denied euro entry in 2009 for political reasons.

Two members of the executive board of the Frankfurt-based bank warned about the readiness of both the eurozone and the euro candidates for further expansion of the single currency at a conference on Monday (1 October).

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The 13-member monetary union was last enlarged in January when Slovenia, as the first of the 2004 EU entrants, joined the euro club. Ljubljana is set to be followed next year by the two Mediterranean islands of Cyprus and Malta.

But early access was not possible for Estonia and Lithuania, which originally wanted to join along with Slovenia, as both recorded higher levels of inflation than those permitted by the rules as a result of their record economic growth.

According to ECB board member Lorenzo Bini Smaghi, the Baltic experience highlights a pattern similar in most post-communist countries which suggests that while they are fast in nominal convergence with euro criteria, their real level of overcoming the gap with western Europe is still not sufficient.

He argued that the newcomers' economic boost has primarily been the result of transition and "it is not a renewable source of convergence for the future - when transition is over."

"Should we be worried that these imbalances can be very disruptive for convergence if they prove to be unsustainable, as corrections can be painful and costly?" Mr Bini Smaghi asked.

Too many things too fast?

Fellow board member Jurgen Stark pointed out that four poorer states which earlier joined the EU and then also the eurozone - Ireland, Greece, Portugal and Spain - had much more time to adapt to both the EU's rulebook and euro criteria than the 2004 newcomers.

Moreover, while they participated in the exchange rate mechanism, they were able "to cushion the inflationary impact of real convergence by allowing the nominal exchange rate to appreciate," which has not been the case of some current euro candidates.

"This might help to explain why the catching-up process in the cohesion countries appears to have been somewhat smoother than current experiences in some central and eastern European countries," he said.

"It would be wrong to assume that the current problems can be easily solved by joining the euro area before a fully sustainable level of convergence has been achieved," said Mr Stark.

He added that these countries should rather "build on their impressive achievements than to run the risk of facing additional problems if they enter monetary union too early in their convergence process."

"A sustainable level of convergence is in the interests of both the applicant country and the euro area as a whole."

Slovakia getting nervous

The ECB's statements are being closely monitored in Slovakia as the country prepares to finalise its euro membership bid, hoping to enter in 2009.

The most recent doubts were raised by press reports about a possible different method of calculation of the budget deficit by Eurostat, the EU's statistical office, which could mean the country would not fulfil the euro deficit criterion.

Slovak prime minister Robert Fico lobbied for political support from French president Nicolas Sarkozy on Tuesday (2 October).

Speaking to journalists, Mr Fico indicated he would not accept political reasons for spoiling Slovakia's euro chances.

"I refuse that someone defines new political statements or criteria. I also refuse reflections about the eurozone being too tired of enlargements or that the four Vysegrad countries should join the eurozone together," he said, according to Slovak radio.

Slovakia is the first state in central Europe planning to join the single currency. Poland, the Czech Republic and Hungary have not yet set an official date of entry.

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