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Analysts: Early euro adoption unrealistic - extended

  Analysts polled by MTI on Monday said the notion that East-European countries should introduce the euro before their formal inclusion in the euro zone is unrealistic and pointless.

The Financial Times reported on Monday that a confidential report by the International Monetary Fund has urged non-euro-zone European Union member states in central and eastern Europe to consider unilateral adoption of the euro without formally joining the single-currency bloc.

CIB Bank’s György Barta said unilateral adoption of the euro would not be the same as introduction of the single European currency following the process of euro-convergence. Barta said internal austerity measures are necessary in Hungary, though would only serve to put the government budget in order, stressing that introduction of the euro should only be considered only following nominal and real convergence and an increase in potential growth.

Any other approach would meet resistance, Barta said. Barta added that thorough structural reforms would stabilize the forint and ease concerns related to the government budget and debt, thus making the potential adoption of the euro before convergence criteria are met unnecessary.

K&H Bank’s György Barcza said adoption of the euro before meeting the convergence criteria is unrealistic and would increase risks to both Hungary and the euro zone. Barcza added that Hungary has lost its credibility with regard to the introduction of the euro, a condition that that is reflected in the significant difference between long-term forint and euro interest.

Barcza estimated that long-term forint interest is 1% higher due to the uncertainty surrounding the date on which Hungary will adopt the euro. Barcza said Hungary’s main task is to meet all requirements and specify a date for adopting the euro. Barcza said that satisfaction of the necessary conditions would signal that Hungary is pursuing sustainable economic policies.

Hungary’s current economic problems would persist even if the country were to introduce the euro before meeting the criteria, though they might manifest themselves in the form of rising inflation and debt rather than forint rates.

Barcza commented that it is in Hungary’s interest to join a stabile system, noting that it is precisely the strict conditions that underpin the system’s stability. The K&H analyst remarked that euro zone members have met the same criteria, which some members such as Sweden consider to be too relaxed. Barcza added that the European Central Bank’s repeated indication that it would not loosen the conditions supporting the system’s stability also make the possibility of early euro adoption unlikely.

András Vértes, the president of economic think tank GKI, said the idea demonstrates that there is active international dialogue taking place regarding assistance to be provided to non-euro-zone member states. It also signals that Hungary’s proposal to shorten the period during which member states must remain in the ERM-2 and make the conditions connected to euro convergence more flexible were not ill-conceived.

Vértes noted that though almost all members of the euro zone have violated the Maastricht criteria as a result of the economic crisis, while non-euro-zone member states are still obliged to meet these criteria.

Vértes said that he thus expects the convergence requirements to be moderated in the coming one or two years. Vértes added that the proposal might also be interpreted as urging bolder steps in crisis-management, stating that the US has so far showed much more flexibility in this regard than the EU.

Economic think-tank Pénzügykutató Chief Analyst Mária Zita Petschnig said unilateral adoption of the euro would be contrary to established regulations for introduction of the euro, adding that if Hungary were to do this, the country would lose its individual monetary policy, which is vital in times of economic crisis.

Petschnig said that in proposing such a notion, the IMF may be attempting to place pressure on the EU to provide more assistance to non-euro-zone member states. “Maybe the IMF, itself, did not take the idea seriously,” Ms. Petschnig said. (MTI-Econews)