Slovenia likely to become the first accession state to join euro zone

Slovenia is likely to get the green light today to start using the euro next January, as the European Union warns its biggest new members that it will not accept a lack of fiscal discipline from countries hoping to adopt the single currency.

Slovenia will be the first of the accession states to be granted entry to the euro zone. While Slovenia has hit all the EU's targets for inflation, interest rates, exchange rate, public deficit and debt, Estonia has postponed its bid to join the euro zone, and the hopes of neighbouring Lithuania look likely to be dashed.

The average inflation rate that the EU requires from countries hoping to adopt the euro is 2.6 per cent, but Lithuania's rate for the year to March was 2.7 per cent.

The Baltic state has asked for clemency but faces disappointment as Brussels takes a tougher stand on rules that it has bent for Italy, Belgium and Greece, and which only Ireland, Finland and the Netherlands currently satisfy.

Lithuania and Estonia have grappled with inflation as a side effect of rapid growth, and argue that the EU should calculate its target inflation rate as an average of that in the 12-state euro zone rather than the EU as a whole; if it did that, Lithuania would qualify.

They also remind Brussels it has a history of fiscal rule-bending.

Italy, Belgium, and Greece ran debts above 100 per cent of gross domestic product on adopting the euro; the Italian lira wasn't tied into the EU's exchange rate grid for two years beforehand, and France juggled the numbers to get its budget deficit in line.

Greece, which became the 12th euro member in 2001, admitted last year it filed false budget data and has failed to pull its budget deficit below the EU's limit.

"Some members of the euro zone can't meet the criteria, and still they work and function in the euro zone without a problem," complained Lithuanian prime minister Algirdas Brazauskas. "We are required to be a pure virgin."

While smaller economies like Lithuania and Slovenia would in fact have little impact on the overall state of the euro zone, Brussels wants to tighten up its rules on euro adoption now to stop bigger new EU members trying to bend them later on.

"The whole debate about Lithuania isn't about Lithuania," said Katinka Barysch, economist at the Centre for European Reform. "It's about Poland, the Czech Republic and Hungary."

Hungary hopes to adopt the euro in 2010, but is struggling to slash a huge budget deficit, while Poland has declined to even state a target date for joining the euro zone, and grapples with huge state spending and the highest unemployment in the EU.

Slovenia, meanwhile, is preparing for celebrations today. The richest republic of former Yugoslavia, Slovenia escaped the worst of the Balkan wars in the 1990s and embarked on a period of steady growth and relatively low inflation and unemployment. Economists credit its government with retaining control of major state assets and keeping a tight rein on public spending and currency inflation.