Legal Eye: The euro is an obligation, not an offer

 "Each of the New Member States shall participate in the Economic and Monetary Union from the date of Accession as a Member State with a derogation."

 - EU Accession Treaty

The new Polish government has announced its intention not to set a target date to enter the eurozone, despite the fact that Poland and all other new member states have already joined the Economic and Monetary Union.

Granted, active participation in the eurozone for each of the new member states was 'suspended' at the same time Poland signed the Treaty of Accession, but nevertheless Poland is obligated to undertake key fiscal and macro-economic reforms necessary to adopt the euro. The question is not if Poland will adopt the euro, but when.

The million-euro question

Unfortunately, neither the Treaty of Accession nor the underlying Treaty Establishing the European Union provides a precise answer, let alone a target date. All new member states, however, with the notable exception of Poland, have announced their respective target dates by which they hope to have satisfied all requirements necessary to adopt the euro.

Lithuania, Slovenia and Estonia will join in 2007, Cyprus, Latvia and Malta in 2008, Slovakia in 2009 and Hungary and the Czech Republic in 2010. The United Kingdom and Denmark have 'opted out' of the eurozone for the time being, while Sweden has not satisfied all the requirements for admission.

What requirements?

In order to be admitted to the eurozone a member state must satisfy several fiscal criteria set by the Maastricht Treaty, in addition to taking certain necessary practical steps, such as actually printing the euro coins and currency.

The Maastricht Treaty requires an entrant to the eurozone to, among other criteria: maintain inflation at a level of no more than 2.3 percent; maintain a budget deficit at or below three percent of GDP; and keep the level of government debt at no more than 60 percent.

Measuring up

The most recent numbers for Poland indicate an inflation rate of 3.8 percent and a budget deficit in excess of six percent, both numbers well above the acceptable thresholds. Only with respect to government debt does Poland score well at 47 percent.

Additionally, prior to adoption of the euro a member state must belong to the Exchange Rate Mechanism for a minimum of two years, by which the fluctuation in a member state's exchange rate is maintained within a defined bandwidth, not varying more than 15 percent. Six of the new member states have already joined the Exchange Rate Mechanism, including Cyprus, Estonia, Latvia, Lithuania, Malta and Slovenia.

Poland is the only member state that has not satisfied even one requirement for admission to the eurozone.

What next?

Every two years (or sooner at the request of a member state) the EU Commission and European Central Bank prepare a progress report to the Council on the degree of success (or failure) by each member state in achieving the key economic thresholds.

Until such time as the new government has a change of heart and sets a target date against which to work, it seems highly unlikely that the fiscal and macroeconomic reforms necessary to adopt the euro will be achieved anytime in the foreseeable future.

Poland is obligated to undertake the necessary reforms to adopt the euro, but the question of when remains unanswered.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners