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EU won't extend Polish deadline to cut deficit beyond this year

The European Union refused to extend a deadline for Poland to narrow its budget deficit within EU limits, rejecting Polish calls to be given another two years. EU Warns Malta on Risk of Breaching Deficit Rules After 2007.

„Action taken to correct the excessive deficit does not appear adequate,” the European Commission, the EU's Brussels-based executive arm, said in a report today. „The budgetary targets do not provide a sufficient safety margin against breaching the 3% of GDP deficit threshold.” Poland, the largest of the EU's 10 eastern European members, has exceeded the EU's deficit limit of 3% of GDP since its accession in 2004. It is expected to stay above the ceiling through 2008, according to EU forecasts. Successive Polish governments have failed to persuade the EU to overturn a ruling to take effect in April this year that bans the government from classifying payments to private pension funds as state revenue. Poland estimates the accounting-rule change will add 1.9 percentage points to the budget shortfall. Narrowing the deficit is one of the conditions for adopting Europe's common currency, a requirement of Poland's accession to the 27-nation bloc. New Polish central bank Governor Slawomir Skrzypek said this week that the country may adopt the euro in 2012 or 2013. Skrzypek had previously said Poland should only join the euro area when it's „of advantage” to the country, whose currency has strengthened almost 20% against the euro since Poland became an EU member. Polish Finance Minister Zyta Gilowska said last week that the EU was „painting Polish reality too darkly.”

The European Union warned Malta that it is at risk of breaching EU budget rules after this year. „After the correction in 2006, which we expect to see confirmed soon, the challenge is to continue on a virtuous path and reduce the deficit and the debt to more sustainable levels,” EU Monetary Affairs Commissioner Joaquin Almunia said in a statement accompanying today's report. Malta's deficit will be 2.7% of GDP this year, below the EU limit of 3%, and its overall debt will be 69% of GDP, above the 60% ceiling. Malta and Cyprus have said they will apply for euro membership early this year. Malta, with 400,000 inhabitants and a €4.7 billion ($6.1 billion) economy, has met most tests for adoption of the common currency, including inflation, which has hindered other new EU member states. Malta's 12-month average inflation rate was 2.6% in December, the EU's statistics agency said January 17, below an estimated EU target of 2.9% for euro adoption. In Cyprus, the average inflation rate was 2.2%. Euro candidates need to keep inflation within 1.5 percentage points of the 12-month average of the three EU states with the lowest inflation rates. Higher inflation has forced other countries, including the Baltic nations that joined the EU in 2004, to put off their euro-adoption dates. Countries must also hit targets for budget deficits, debt, interest rates and currency stability to join the euro area.

Cyprus and Malta have kept inflation under control, partly because their growth rates lag behind other new EU members. Malta's economy will expand 2.1% this year, the weakest of the new members, according to EU forecasts. Cyprus is forecast to expand 3.8%. If they continue to meet the criteria, the two Mediterranean nations would apply to join the euro this year, soon after Slovenia became the first new EU member to adopt the euro at the start of 2007. EU leaders refuse to loosen the euro-entry rules, creating a new economic divide between richer western Europe and the poorer, faster-growing countries in the east.
The commission today also released report cards on Finland, Ireland and Luxembourg. Finland, Ireland and Luxembourg „run sound fiscal policies,” Almunia said in the statement. He urged Ireland and Luxembourg to prepare „for the projected increase in the costs of an aging population.” (Bloomberg)