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Tuesday, 5 December, 2000, 15:01 GMT
Eastern Europe - ready or not?
By BBC News Online's Orla Ryan

If you are not in, you can't win, bookmakers advise doubting punters.

Using roughly the same logic, 13 countries in emerging Europe and the Baltic states want to join the European Union (EU).

The original road-map allowed for a fast-track of six to join at the end of 2002, but it is now doubtful they will join before 2005, with adoption of the euro at least two years after that.

The question being asked is whether they are politically and economically ready to join the single market, and if they are, will life in the eurozone prove too tough to handle?

There is also the possibility of the EU continuing to delay the accession process for its own political reasons.

Slow consultation

In March 1998, the European Union formally launched the process that makes enlargement possible.

Economically, countries must satisfy the EU that they have a "functioning market economy" and their economies could withstand the competitiive pressures of EU membership.

Maastricht criteria for joining single currency
Inflation: no more than 1.5% above average of 3 best countries
Government deficit: less than 3% of GDP
Ratio of general government debt/GDP not to exceed 60%
Currency: within the 15% fluctuation bands for at least two years
Interest rates: average long-term yields within 2% of best 3 countries
Source: ING Barings
Politically, they must show a functioning democracy with respect for human rights and minorities.

The fast-track candidates of Hungary, Poland, Slovenia, Cyprus, the Czech Republic and Estonia, may join in 2005. Some say that Malta's strong economic performance and Slovakia's quick adaptation of EU laws puts them in this first wave as well.

Bulgaria, Latvia, Lithuania, Malta, Romania and Slovakia were only invited to start talks at the EU's summit in Finland last December.

Turkey has been given a conditional green light due to its human rights record.

In its latest economic assessment, the European Commission said that Cyprus and Malta were ready for membership now; that Estonia, Hungary and Poland were nearly ready; and that Slovenia and the Czech Republic were close.

Romania and Bulgaria were judged the furthest economically from a competitive market economy.

Once they have joined the EU, the accession countries then have a minimum of two years to wait - during which they will be members of Exchange Rate Mechanism (ERM) - before they can sign up to European Monetary Union (EMU).

Unlike the UK and Denmark, there is no opt-out clause for new EU members from the single currency - but it could be years before some new entrants meant the economic criteria for euro membership.

Feet dragging

How fast this will work in practice is unclear. Already, existing EU members are showing signs of dragging their feet. With French and German elections on the horizon, 2005 is the earliest that expansion will take place.

One unresolved issue is the reform of the EU's agricultural subsidy system, the CAP, which would be overwhelmed if it was to be applied to countries like Poland, where 20% of the population works in the farm sector.

For the single market to function, the joining countries need to be able to operate with a single tariff, a single set of administrative procedures and a single set of trade rules.

Cynics might question whether the existing countries conform to these requirements, but the emerging democracies of eastern and central Europe have a lot of catching up to do.

Early in November, the EC released what were in effect report cards on the performance of countries hoping for membership of the union.

While much progress has been made, inflation was identified as a problem.

Even where the economic criteria can be ticked off, many countries still have to implement legislation that will allow them to compete effectively in a single market.

For example, joining the EU will not be much use for Czech furniture makers if their products don't conform to European safety requirements.

Economic problems

Even if membership of the EU is negotiated, some foresee inflation as the potential back-breaker of these countries' aspirations to join the single currency.

The Professor of international economics in Geneva and co-author of a CEPR report on enlargement, Richard Baldwin, believes the inflation issue highlights the risks of signing up to the single currency too soon.

"It is a much better idea if economies are similar. Repeatedly, countries who have tried to keep their exchange rates fixed when they were growing fast have had to change it," he said.

But with EMU membership some five years away, there is still time for prices to be brought under control.

And, as one analyst pointed out, inflation in Estonia, at 5.6% in October, is lower than Ireland.

Risk of attack

Before joining up to the single currency, these countries will have to join an exchange rate mechanism for two years.

Those who witnessed the first episode of ERM, may wonder whether how the sequel will end.

A speculative attack on sterling resulted in the UK having to leave the ERM.

Some believe that ERM 2 could be even more vulnerable. "The commitment from the central bank to these currencies will be weaker than under the first one," Richard Baldwin said.

But such is the willingness of these countries to join the euro, that they may take it on board even of the EU goes slow on membership.

There is nothing to stop the aspiring countries adopting the euro themselves, a process some analysts refer to as euroisation, similar to the dollarisation seen in some South American countries.

For the aspiring members, this could be seen as a short cut to getting the benefits of euro membership.

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26 Oct 00 | Business
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