LETTERS TO THE EDITOR

Spring 2007

by Meelis Atonen

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Sir,

It would have been mission impossible to predict the EU’s future when the Maastricht standards for eurozone entry were set in the early 1990s; who then would have believed in an EU of 27 members and who could have predicted that this country’s economic growth rate would reach 11% a year? Nevertheless, the rules of eurozone accession must remain clear and unequivocal if it is to remain a financial bedrock upon which all members can build stable and sustainable economies. The Maastricht criteria have stood the test of time and they must therefore all be fulfilled before a country can join the euro.

Take the example of public budget and borrowing targets. Maastricht set the budget deficit ceiling at 3% of Gross Domestic Product and the maximum government debt limit at 60% of GDP. Achieving these goals is a matter of national choice, so any country having problems has only itself to blame. If the EU made concessions to new euro applicants over such well-established requirements that would pose a threat to the zone as a whole.

The situation is more complicated regarding the Maastricht inflation criterion. This is calculated as the average inflation of the three EU member states with the lowest inflation rates, plus 1.5%. At the moment, this amounts to 2.8%. But fixed interest rates and rapid economic growth in new EU members can cause prices to rise faster in these states than the eurozone average. It is also important to note that inflation differs significantly within the eurozone as well as between the eurozone and countries outside it. Thus, inflation in rapidly growing eurozone economies like Ireland and Spain has for years exceeded the eurozone average. This is comparable to the US, where inflation can vary greatly between states and regions.

It therefore seems unreasonable to maintain the present rigid method of calculating the inflation yardstick for new members, based on the lowest three EU inflation rates, when existing eurozone members are less constrained. A measure of flexibility could be introduced by calculating the entry-level inflation criterion with reference to the eurozone average, rather than the lowest EU rates. This could raise the inflation criterion for joining the euro to around 3.2%-3.4%, a more reasonable target to meet than the current 2.8%. This system would comply with the Maastricht rules while making allowance for wildly diverse levels of economic growth in different member states.

It saddens my heart as a politician to admit that this proposed change would not help my native Estonia into the eurozone in the coming year. But it would help to make eurozone entry conditions more like fair play.