EU Accepts Slovenia, Rejects Lithuania as Euro Zone Member

The EU executive's recommendation opens the way for Slovenia to become the first former communist country to join the currently 12-nation currency club on Jan.1, 2007.

EU member states and the European Parliament also have to approve of Slovenia joining the euro zone next year for the ex-Yugoslav republic's euro debut to go ahead next year.

But the commission told Lithuania, which also wanted to join the eurozone next year, that the Baltic country's inflation was not in line with a euro zone limit of 2 percent. Lithuania has been frustrated with the European Commission and the European Central Bank (ECB) -- which sets euro zone monetary policy -- for insisting that the Baltic state bring down inflation running at an annual average of 2.6 percent.

Slower process than expected

In May 2004, economists and political leaders held broadly that the new EU members would become part of the euro zone by 2010, with the first wave of three to four countries by 2007. That view has since changed.

While Slovenia seems ready to adopt the common currency, for the other hopefuls, the date for joining the current 12-nation euro zone continues to be pushed back.

The governor of the Hungarian central bank (HNB), Zsigmond Jarai, said last week that Hungary might be ready to adopt the euro in 2013.

"If we're lucky," he added.

Except for Poland, the new EU members, mostly ex-communist states of north and east Europe, want to join the euro zone as soon as possible as indicated when they signed the EU accession treaty.

However qualification to join the euro zone depends on applicants satisfying a range of measures and notably five criteria for economic convergence. The criteria set targets for inflation, interest rates, the exchange rate, the public deficit and debt.

Major stumbling blocks

Those are major barriers blocking the euro roadway. In Hungary, previous governments avoided tackling the spiraling public deficit which would have called for unpopular measures to cut state spending.

Last year, Hungary's deficit was equal to 6.1 percent of gross domestic product (GDP), while the EU has set a deficit ceiling of 3 percent of GDP. Hungary's leadership has decided to apply tough remedies. Last week, Socialist Prime Minister Ferenc Gyurcsany announced major overhauls of the public and health sectors, including massive job cuts among the 100,000-strong civil service, to try to qualify for the euro zone by 2010.

Different set of standards for euro hopefuls?

Another paradox is that the euro hopefuls are being held to the letter of the common currency criteria, while certain members already in the euro zone, such as France and Germany, have missed some marks, such as the deficit ceiling, for several years.

Up against that strict attitude, Estonia has pushed back its euro target date by one year to January 2008 even though it was one of the rare European states for the past five year to post a budget surplus: 1.6 percent of GDP in 2005.

Estonia, like Lithuania, faces a hurdle of inflation, a product of economic growth exceeding 10 percent per year. Strong economic growth can be expected to cause appreciation of a country's currency. But owing to concerns about stability, the Baltic states have chosen to shadow the euro. The only possible adjustment is to slow down inflation.