Aspiring euro members told to focus on recovery

LONDON - The crisis-stricken nations of Central and Eastern Europe should not be too hasty in planning to join the eurozone but rather focus on recovering from the financial crisis, a top official at the European Central Bank said Monday.

Gertrude Tumpel-Gugerell, a member of the executive board of the European Central Bank, said in a speech in Vienna that the financial crisis and the associated global recession has made it more difficult for prospective euro members in Central and Eastern Europe (CEE) to join the single currency club.

She urged governments in the region to be realistic about their attempts to join the euro and said an overly ambitious timetable for adopting the euro could be damaging.

"I should emphasize that entering the euro area prematurely — that is before a sufficient degree of convergence and economic flexibility — would not be a panacea for the CEE countries to overcome the crisis impact," she said.

"On the contrary, a premature entry into the euro area would deprive the countries from important adjustment tools and would therefore not be in the interest of the country joining," she added.

Before the financial crisis exploded, a number of countries in the region hoped that they would join the euro, but Tumpel-Gugerell's comments suggest that the central bank will not sanction any flexibility in the membership criteria.

Neil Shearing, emerging Europe economist at Capital Economics, said it's clear that the ECB is "unwilling to relax entry criteria" as it would "undermine the currency."

To join the eurozone, countries have to enter the ERM2 — the EU's fixed exchange rate mechanism — for two years. But to be in the ERM2, certain economic conditions, such as keeping public debt in check, have to be satisfied.

Tumpel-Gugerell said the financial crisis reversed "some of the impressive progress" that many of the countries had made in terms of converging their economies to those of the current 16-country eurozone.

In the years before the crisis, many countries in Eastern Europe had posted exceptionally high growth levels. However, much of it was fueled by cheap credit, big pay rises and housing market bubbles, which were inflationary and unsustainable when the global economy went into recession.

Many countries in Eastern Europe, particularly in the Baltic countries, have suffered badly in the economic downturn. Latvia's economy, for example, will shrink by 18 percent in 2009, according to the International Monetary Fund.

"This clearly has an impact on the state of the convergence process of the CEE countries and has potentially moved euro adoption further into the future," said Tumpel-Gugerell.

"The timetables of the euro adoption have to be carefully assessed, given particularly the large uncertainties that are associated with the current economic and financial situation," she added.

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Julia Marshall in London contributed to this story.

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