Czech cabinet likely to drop 2010 euro adoption date today

The Czech cabinet will probably abandon plans today to adopt the euro in 2010, mainly because budget deficits will be wider than expected. According to a draft document prepared by the Finance Ministry and the central bank and obtained by Bloomberg, the government is advised to give up a 2007 deadline for entering the exchange-rate mechanism, a minimum two-year test of currency stability. Such a delay would make it impossible to switch to the euro in 2010, the document said. The Czechs would become the fifth of 10 nations that joined the European Union in 2004 to put off their targets for switching currencies. East European members are struggling with excessive budget deficits and accelerating inflation, making it hard to comply with rules for accepting the euro. „The environment hasn't been created yet that would enable the Czech Republic to meet the given conditions for euro-zone entry within two years from joining the” exchange-rate mechanism „and benefit enough from euro adoption,” the document said. „Recommendation for entry in the future is conditioned merely by a clear plan for public-finances reform and further reforms aimed at increasing flexibility of the Czech economy, especially the labor market.” Finance Ministry spokeswoman Petra Krainova was unable to comment on the document's conclusions in a telephone interview yesterday.

The country's public-spending deficit will probably represent 4% of gross domestic product next year, more than the level of 3.3% of GDP pledged to the EU in a euro-adoption plan approved in 2004. The gap, which was to be squeezed below the euro threshold of 3% of GDP from 2008, may equal 3.5% of GDP in 2008 and 3% of GDP in 2009, according to the document. Those projections reflect a commitment to reduce the deficit by at least half a prcentage point of GDP a year, though they don't include specific measures needed for trimming the shortfall, the document said. The country must update a plan for bringing the deficit in line with EU rules by December 1. „The current development points to a high probability that the original deadline will be postponed for bringing the deficit below the required 3% level,” the document said. „It's premature to think about a new date” for meeting the deficit target „until there's a new strategy for public-finance consolidation.”

The central bank also considers it „very likely” the country will breach the inflation criterion for the euro in the future if it keeps its target of 3% inflation with a one percentage-point deviation on either side, the document said. The inflation benchmark is calculated by taking the 12-month average rate of the three countries with the slowest inflation plus 1.5 percentage points. That rate in August was 2.8%, while the corresponding Czech rate was 2.6%. „There are indications that a safe fulfillment of inflation criterion may require a reduction of the Czech National Bank's inflation target,” the document said. „It's desirable that during participation in the exchange-rate mechanism there are no significant changes to indirect taxes that would make the criterion more difficult to meet.” On September 19, both Prime Minister Mirek Topolanek, who took office on September 4, and central bank Governor Zdenek Tuma said it was unrealistic to expect the country could adopt the euro in 2010, citing a failure of previous administrations to strengthen economic and fiscal policies. Four other new EU members -- Estonia, Lithuania, Latvia and Hungary -- have already delayed their euro-adoption dates. Slovenia will join the European Monetary Union on January 1. (Bloomberg)