New-member trio first in line for ERM

Date: 17/06/04

By Matthew Saltmarsh

ESTONIA, Slovenia and Lithuania are first in the queue as finance officials prepare to meet soon, to decide which new EU members will be first to enter the Exchange Rate Mechanism (ERM II).

The smart money is on the three being accepted into the ERM - a precursor to joining the single currency - in July.

But insiders say the others may have to wait until next year, or even beyond.

No formal applications have yet been made. That will only occur on the Friday before the key Saturday meeting to agree entry terms and the level at which the currencies will initially be pegged.

The meeting of a group known as the 'ERM committee' will include experts from the European Central Bank, the European Commission and the finance ministries of the euro-area countries and Denmark, which is an ERM II member. Exact dates for the meeting have not been set, but agendas have provisionally been cleared for the weekends of Saturday 26 June and 3 July.

In assessing which countries can join the mechanism and when, the committee examines the candidates individually and judges each based on its degree of economic convergence.

After the agreement of target exchange rates within the ERM's fluctuation band, an announcement will be made before the start of currency, bond and stock trading the following Monday.

The entry of Estonia, Slovenia and Lithuania should be straightforward: the two Baltic countries have 'currency boards', where central banks intervene to ensure their currencies are pegged at a fixed rate to the euro. Slovenia has a 'managed float', intended to keep a stable exchange rate.

The criteria for full euro membership are that the budget deficit has to be below 3% of gross domestic product (GDP), public debt less than 60% of GDP and inflation within 1.5% of the three EU countries with the lowest rate. Long-term interest rates must be within 2% of the three lowest and exchange rates must be kept within the 'normal' fluctuation margins of ERM II.

Applicants will serve a full two years within the mechanism.

Article anticipates that Estonia, Slovenia and Lithuania will be accepted into the European Exchange Mechanism (ERM) - a precursor to joining the single currency - in July 2004.