Joining the euro turns from dream to nightmare

The European Commission will next month (6 December) deliver a mixed verdict on progress being made towards eurozone convergence.

Countries applying to join the single currency are to be rated on how closely they meet criteria set out in the Maastricht Treaty.

Meeting strict targets at a time when new member states are beginning to suffer ‘reform fatigue’ is proving difficult for some.

The report will focus on the nine member states which are expected to join the eurozone at some point in the future. Countries under scrutiny are the Czech Republic, Estonia, Cyprus, Latvia, Hungary, Malta, Poland, Slovakia and Sweden. Ratings will cover convergence criteria including price stability, exchange rates, long-term interest rates and inflation targets.

The Maastricht inflation goals, an average of the inflation rates of the top three performers plus 1.5%, are a moving target.

Economic and Monetary Affairs Commissioner Joaquín Almunia closed the door on eurozone hopeful Lithuania this year for narrowly missing the target of 2.6% despite achieving all the other tests for adoption of the currency.

Slovenia, which passed all tests with an impressive inflation rate of just 2.3%, is the only new member state joining the eurozone in January.

"When it comes to meeting Maastricht criteria, most are on track but inflation holds them back," said Alan Ahearne, a research fellow at Brussels-based think tank Bruegel. "Estonia didn’t apply because it knew that it was going to miss targets."

Fluctuating oil prices and changes in taxation systems will have put pressure on inflation in some countries, according to David Rae, an economist at the Organisation for Economic Co-operation and Development. "The pace of reform varies quite a lot," he said. "On the fiscal side, there are clearly political issues in various countries that have made it very difficult to bring budgets into line."

Hungary, which has missed every annual budget deficit target for five years, is widely expected to be bottom of the class. The unstable economy - which also has a big current account deficit - is marked down by economic pundits, who rate its chances of meeting convergence targets by the planned deadline of 2009 as slim. Optimists estimate that 2012-14 would be a more likely outcome. Pessimists forecast that success may be as far away as 2016, meaning that eurozone entry would only take place in 2018.

New member states’ chances of meeting tough eurozone criteria are not helped by a bout of ‘reform fatigue’. "Efforts were undertaken in the run up to accession, but reforms are stalling now that they are in the EU and benefiting from the related growth windfalls," said Marc Stocker, senior economist at European employers’ organisation UNICE.

Behind the slowdown may be a new reluctance to gain a once-coveted place in the club. "Member states are beginning to have second doubts on whether adopting the euro is in their best interests…," said Ahearne. "They’re looking at overall performance of the euro area, which is improving, but most new member states have stronger growth."

Nevertheless, Malta, which is expected to cut its fiscal deficit to below the EU’s reference rate of 3% of gross domestic product, is likely to receive a glowing report from Almunia, setting it on track for adoption of the euro in 2008.

Cyprus is also working hard on changeover plans, with its eye on entry that same year.

The European Commission will next month (6 December) deliver a mixed verdict on progress being made towards eurozone convergence.

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