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Slovak CPI sustainability key euro question - Almunia

Slovakia is on course to meet the budget deficit target needed for euro entry but will have to show it can keep the lid on mounting inflationary pressures, the European Commission said on Friday.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia declined to say whether Slovakia would get the green light for its bid to join the single currency in 2009, noting that inflation there was forecast to take off again. “Under unchanged policies, for 2009 we estimate 3%. So the question of sustainability should be carefully considered when we write our report next spring,” he said of a Commission report on its progress due next May. “I hope in May (2008) the assessment will be positive but I cannot anticipate the assessment,” he told a news conference after the EU executive published the second of its twice-yearly economic forecasts. It expected Slovakia to cut its deficit by a whole point this year to 2.7% of national output, under the bloc’s 3% ceiling, and narrow it to 2.3% in 2008. But while it saw annual Slovak growth ticking up slightly to 8.7% in 2007, its forecast that inflation will nearly double from 1.7% this year raises questions over whether prices are stable enough for it to join the euro zone.

Slovak Prime Minister Robert Fico has expressed concerns in recent weeks that his country might be denied euro zone entry next year despite meeting the Maastricht criteria. “I want to...stress the worry of the Slovak government that there are some new, non-written criteria appearing that can significantly limit the ambition of the Slovak Republic,” he told a business conference in Bratislava last month. Almunia said that among other non-euro zone states, Poland and Romania were struggling to rein in public finances.

Poland’s deficit was forecast to be 2.7% of GDP this year but then to deteriorate to 3.2% next year due to factors including an easing of growth, social contribution cuts and provisions for personal income tax relief. The forecast for 2009 was a deficit of 3.1%, still above the EU cap. “If no policy decisions change these forecasts ... Poland cannot be out of the excessive deficit procedure,” Almunia said of EU disciplinary steps facing countries with deficits above the 3% ceiling. “I prefer to wait for the first contact with the new finance minister ... to receive information about the priorities and strategies of the new government,” he said of the new administration to emerge from last month’s elections. Poland has no official euro entry target, but officials have said it would happen in 2012 at the earliest.

In Romania, an increase in public wage and social transfer costs are expected to raise the deficit to 2.7% this year before it breaches the EU cap by hitting 3.2% in 2008 and 3.9% the following year, the Commission statement said. “The forecast assumes an almost doubling of pensions over 2008 and 2009 compared to the level of 2007,” it noted.

It said a gradual economic recovery in Hungary was expected to help the government further reduce its huge 9.2% deficit of last year to 6.4% this year, falling to 4.2% and 3.8% over the two following years. While that kept Hungary well above the 3% threshold, Almunia commended what he called the “rigor” with which it had sought to master its public finances. Growth, hit by government consolidation efforts launched in mid-2006, is expected to pick up again this year to reach 2% for 2007 as a whole, rising to 2.6% next year, the statement said. (guardian.co.uk)