Making an example of Lithuania
The European Commission (EC) last week rejected Lithuania's bid to join the eurozone in 2007, due to the country's inflation rate rising 0.1 percent above the required figure. Lithuania had an average annual inflation rate of 2.7 percent in March, whereas the target for entry was 2.6 percent.
Economic and Monetary Affairs Commissioner Joaquin Almunia said Lithuania was being made an example to others. "If we are now, in our first opportunity to enlarge the eurozone, creating bad precedents, not enforcing the treaty in a transparent way ... how will we say 'No' to Hungary that has an eight-percent budget deficit?" Almunia told CNBC.
Experts agree that the refusal has little to do with Lithuania's economic situation, and is more of a warning to the larger new member states whose finances are in poorer shape, and whose entrance to the eurozone could have a much larger impact.
"The whole debate about Lithuania isn't about Lithuania. It's about Poland, the Czech Republic and Hungary," said Katinka Barysch, an economist at the Centre for European Reform.
The decision could attract claims of double standards within the EU, as many "old" EU members had to stretch the rules when the currency was introduced. Italy and Finland failed to meet a 24-month requirement to be in the stability-testing Exchange Rate Mechanism, and seven countries, including Germany, had too much debt.
EU Budget Commissioner Dalia Grybauskaite, a Lithuanian, called the decision on her country "accountancy dogmatism," saying the rules - designed in 1992, when the eurozone did not yet exist - were set down to support economic stability.
The reference value for eurozone entry is calculated using inflation data from the EU's - not the eurozone's - best inflation performers. In March, the three states with the lowest inflation rates included Poland and Sweden, neither of which is in the eurozone. If the calculations had been made using data from eurozone members only, as Vilnius argues should be the case, Lithuania would have fulfilled the criteria. Lithuania's inflation is a result of its rapid growth of more than six to seven percent, over three times the eurozone average.
"Lithuania is just not important enough to anybody," said Charles Robertson, chief economist for Eastern Europe at ING bank. "Purely looking at the facts they should be allowed in, but there is no political will." (Reuters)
