Monetary Union: progressive integration of the new member states

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

At the end of June, Estonia, Lithuania and Slovenia entered the
ERM2. One week later, 6 of the 10 new member states (NMS) were the
object of an “excessive deficit procedure”. Behind these two
important events, the effective and progressive integration of the
NMS into the economic and monetary Union (EMU) is going forward,
says MINEFI-DREE’s Revue Elargissement.

Like the former EU-15 members, the NMS were included in the
Broad Economic Policy Guidelines (BEPG), which is a very detailed
document containing economic policy recommendations whose objective
is to reach “sustained high and durable growth within a stabilised
public finance environment”. 

In May 2004, for the first time, the NMS submitted to the
Commission their convergence programmes, which may be considered as
these countries’ “response” to the BEPG. They were adopted at the
Ecofin Council of 5th July. To sum up, all these programmes
forecast an acceleration in growth, except for those countries
which experienced very high growth rates in 2003 and 2004 (Latvia
and Lithuania); a strong consolidation of public finances, enabling
them to go below the 3% budget deficit ceiling in 2007, except for
the Czech Republic (-3.5% of GDP in 2007) and Hungary (-3.1% in
2007 and -2.7 in 2008); a low national debt level is targeted
(46.2% in 2004) except for Cyprus (75.2%) and Malta (72.1%).

In accordance with the Treaty, Member States must avoid
excessive deficits. However, Cyprus, Malta, the Czech Republic,
Hungary, Poland and Slovakia have a deficit higher than the
reference value of 3% and two of them (Cyprus and Malta) also have
a debt level higher than 60% of GDP, a ceiling also written into
the Treaty. Thus, in accordance with article 104.3, the Commission
initiated an “excessive deficit procedure”, a decision formally
adopted on 5th July by the Ecofin Council (article 104, paragraph
6). A draft recommendation was addressed to the member states
concerned, in order that they rectify the situation within a given
time (article 104, paragraph 7). However, in its recommendations,
the Council made a flexible interpretation of the stability pact
for the NMS.

Entry into the ERM2 and adoption of the

The treaties indicate that, before adopting the euro, new
members must spend at least two years in the European Exchange Rate
Mechanism (ERM2), with an exchange rate staying close to the
central parity. Taking into account the convergence criteria, euro
adoption will not take place before May 2006 in the 3 countries
(Estonia, Lithuania and Slovenia) which have just entered the

As regards the determination of the central parities, the
Estonian and Lithuanian authorities, whose currencies were already
tied to the euro, wished to keep the exchange rate, which was
considered as satisfactory, unchanged. The Lithuanian litas thus
entered the ERM2 at 1€=3.45280 litas and the Estonian crown at
1€=15.6466 crowns. The Slovenian authorities, whose currency
followed a trajectory of “controlled” depreciation with the euro
(decreasing in 4% in 2002, 2.8% in 2003 and 1.5% between January
and May 2004), had decided to enter the ERM2 at the last market
price (1€=239.640 tolars).

Finally, as those three countries entered the ERM2, they
committed themselves to following economic policies that would
combat macroeconomic and financial vulnerabilities, as they will no
longer be able to use the exchange rate as an adjustment instrument
(see also Review Elargissement n°59).


To read more analyses from the same source, visit the MINEFI-DREE website.

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