Crisis a setback to euro adoption

2010-05-06 16:16

Warsaw - The global financial crisis has further slowed euro adoption in seven central and eastern European EU states due to the widening of public deficits, the Fitch ratings agency said on Thursday.

The tiny Baltic Sea state of Estonia is the exception and will meet its 2011 target for eurozone entry, according to Fitch.

"Fitch's latest forecast dates for euro adoption are: 2011 for Estonia, 2014 for Lithuania, 2015 for Bulgaria, Hungary, Latvia, Poland and Romania and 2016 for the Czech Republic. However, the risks are skewed towards longer delays," the agency said in its Thursday statement.

"Deep recessions have caused the average budget deficit in the eight countries to widen to 6.1% of GDP in 2009 from just 1.1% in 2007, and many countries face a challenging and lengthy period of fiscal retrenchment to correct 'excessive deficits' to below the 3.0% reference rate," said Ed Parker, Head of Emerging Europe in Fitch's Sovereigns team.

The average government debt ratio increased to 34.5% of GDP in 2009 from 25.1% in 2007, and Fitch forecasts it to reach around 43% at end-2011, the agency said.

Fitch also questioned whether the Greek debt crisis would make "EU authorities stricter" when giving to green light for eurozone entry to candidate states.

"The forthcoming assessment of Estonia's application will be an important test case of the EU authorities' willingness to expand the euro area post-Greek crisis. If it were rejected, despite meeting all the reference rates, that would create a damaging precedent and negative signal for CEE as a whole," said Parker.

Bulgaria, the Czech Republic, Hungary, Poland and Romania have yet to join the Exchange Rate Mechanism (ERM II).

The requirement for a minimum two-year ERM II membership rules out European Economic and Monetary Union (EMU) for these countries until at least 2014, Fitch said.

  - AFP