Don't count on eurozone expansion

published 5 June 2006

Europe's political integration may have stalled after the EU Constitution was rejected by French and Dutch voters, but at least monetary union is on track: the 10 new entrants in 2004 are committed to eventual euro entry. Or so Brussels thought. But could they be in for another nasty surprise? As Matthew Lynn notes in The Business, "the sound of gears being thrown into reverse" across eastern Europe is "deafening". The Estonian government, which had intended to join in 2007, has officially delayed entry by a year; the Hungarian finance minister opposes the euro and the Czech finance minister has wondered aloud how the currency has helped its members.

You can see why, says Lynn. The rules governing the euro "are completely wrong" for fast-growing countries. Keeping budget deficits to 3% of GDP makes little sense for states needing to bolster spending on infrastructure to underpin rapid growth. It also seems illogical to sacrifice GDP to drive inflation down to very low western European levels; Estonia's inflation of 4% is hardly excessive with growth at 11%. And why would eastern European countries want to converge with the sclerotic, high-tax eurozone when its own model of flat taxes and minimal regulation is working? Don't count on the eurozone getting much bigger.