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Last Updated: Wednesday, 17 May 2006, 08:42 GMT 09:42 UK
Getting the euro timing right
By Theo Leggett
BBC News Europe business reporter

Slovene Finance Minister Andrej Bajuk holds up euro notes
Slovenia's Finance Minister Andrej Bajuk is all smiles

On Tuesday, the European Commission made two landmark decisions.

It recommended that Slovenia become the first of the 10 new EU member states to join the European single currency. It is expected to join on 1 January 2007.

At the same time, Lithuania became the first state to have its application turned down - arousing anger and frustration in its capital Vilnius.

Euro prestige

Joining the euro is not just an ambition for the new members of the EU. It is something they have all agreed to do eventually.

But the timing is up to them - provided they meet the EU's stringent economic criteria: low inflation, a budget deficit that falls within strict limits, and a relatively low level of government debt.

It is hard not to feel sorry for Lithuania; in many ways, its economy is even healthier than Slovenia's
So why the hurry?

In effect, it is a matter of prestige. Since declaring independence in 1991, Slovenia has striven hard to join the European mainstream, while holding firmly to its national identity.

By gaining an early entry to the eurozone, it is sending out a clear message.

It no longer wants to be seen as one of the poor men of Europe, but as a vibrant modern state - with a robust economy.

Prices, prices, prices

It is hard not to feel sorry for Lithuania. In many ways, its economy is even healthier than Slovenia's. It is growing faster, it has a lower budget deficit, and even lower levels of public debt.

Euro note
Come January, it will replace the Slovene tolar

The problem is inflation.

The commission says euro candidates should have a level of inflation which is no higher than the average of the three best performers in the European Union, plus 1.5%.

Complicated, perhaps - but at the moment that means inflation should not be higher than 2.6%.

In Lithuania the figure for the past year was 2.7%. But the Commission believes that inflation is heading in the wrong direction and is likely to climb higher.

Bending the rules?

Lithuania's President Valdas Adamkus thinks the criteria should have been relaxed.

"Introducing the euro would have strengthened the country's attractiveness for investment, and eased trade relations and the movement of our citizens in eurozone countries," he said.

"All together this would have boosted the welfare of the Lithuanian people."

The final decision rests with the European Parliament and EU finance ministers. Lithuania has being lobbying hard for them to bend the rules.

Unruly eurozone

There is certainly a precedent.

When the euro was first established, several member states did not meet the Commission's criteria.

Belgium and Italy, for example, had debt levels that were way too high, while France had to indulge in some creative accounting to bring its budget deficit into line.

When Greece joined in 2001, its debt was too high, as was its budget deficit - and it published false data about its finances to support its membership.

And now? Many of the EU's biggest economies are continuing to break the rules, but the Commission has been powerless to prevent them.

Choosy Commission

Yet when it comes to the new member states, it seems rules are rules.

Lithuania's Prime Minister Algirdas Brazauskas has hinted that the Commission is guilty of operating a double standard.

He says membership should not rest on "a few hundredths of a percentage point" of inflation.

But analysts say the Commission is probably not too worried about Lithuania itself. Its more concerned about the example it would set if it bent the rules again.

Then, so the argument goes, it would be much harder to insist that the larger Central European economies, such as Poland or Hungary, should fall into line.

There is also a small matter of politics. Now that the euro is firmly established, the Commission can afford to be choosy about when it allows new members to join.

And while it may be relatively powerless to force the big Western European countries to obey the rules, it can be much stricter with the new member states.

Bad news for Lithuania. But good news for Slovenia.

Slovenia to enter eurozone club
16 May 06 |  Business
EU newcomers prepare to join euro
28 Jun 04 |  Business
Country profile: Slovenia
16 May 06 |  Country profiles
Country profile: Lithuania
16 May 06 |  Country profiles

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