By Jan Lopatka (Reuters, 9.4.2002)

CLOCK TICKING ON CZECH REFORMS NEEDED FOR EURO.

PRAGUE, April 9 (Reuters) - Time is running out fast for the Czechs to launch fiscal reforms which would allow them to adopt the euro soon after joining the European Union, central bank Vice-Governor Ludek Niedermayer said.

He told Reuters in an interview debate over when the central European country should ideally join the euro zone is losing prominence in the light of real obstacles in the shape of its fiscal arrangements. The comments are a strong message to politicians ahead of a June election to cut a yawning fiscal gap, which the bank sees as a threat to the economy regardless of the euro.

The election will produce an administration to lead the Czechs to the EU in about 2004, in a group of up to 10 mostly post-communist states hoping to join the wealthy western bloc. Adopting the euro - high on the agenda for many of the candidates - can come two years later at the earliest, after a compulsory stay in the ERM2, a 30-percent wide currency band.

But the Czechs, with their public finances slipping into depeer and deeper deficits mainly due to social benefits and pensions, may simply not qualify by then.

"The alpha and omega is the pace of fiscal reform," Niedermayer said.

"Unless something really important, something visible happens, unless intensive and real work on that starts, it may happen that in 2003 it will be clear that it is not possible for the 2004 budget to fulfil Maastricht criteria. In that case, we would be out of the game."

One of the so-called Maastricht criteria, which candidates must fulfil to join the euro, says deficits must be kept under three percent of gross domestic product. Other criteria spell out the maximum levels of debt, inflation and interest rates.

The 2004 budget is key because it will be the last available figure to measure if a country can join the euro in 2006.

Many EU candidates want to join the euro quickly to import monetary stability from the euro zone. Most analysts however expect the process to take somewhat longer than the minimum two years.

HUGE DEFICITS

The Finance Ministry expects the 2002 deficit to reach nine percent of gross domestic product, when privatisation revenues are excluded.

The budget is burdened by the temporary costs of transforming the economy from its communist past, which has been exacerbated mainly in banking sector loses.

But even excluding these costs, the deficit is expected to hit 4.4 percent this year, up from 3.2 percent in 2001, mainly due to a costly pay-as-you-go pension system and other benefits.

What makes it worse is that the deficits are growing at a time of economic revival. The economy grew by a healthy 3.5 percent last year despite a slowdown in the euro zone. This shows the structural, rather than cyclical, nature of the gaps.

Niedermayer said there were may ineffective subsidies to both companies and households which need to be chopped, a tough move for a government facing re-election.

"There is a lot of ineffectiveness in the system of state finance," he said. "There is no choice. The options are to start later and do it worse or to start as early as possible."

ELECTION AHEAD

With elections coming up in June, time is tight if politicians want to make a push for the euro. The 2003 budget must reach parliament by the end of September, and any budget reform laws would take months to gain legislators' approval.

The ruling Social Democrats are pro-euro but are criticised for a lack of fiscal discipline. The centre-right opposition Civic Democrats call for caution over a quick euro adoption.

The central bank has no official stance on the issue, with its board members divided on when to join. Niedermayer said that one factor to watch when deciding over the timing was what the other candidates do. Staying out when others will join may bring addditional costs, he said.

"Investors in some countries would get rid of the exchange rate risk and in some, such as ours, would be exposed to currency fluctuations," he said.

Niedermayer did not comment on monetary policy in the interview, ahead of the release of the Wednesday minutes of the bank's March policy meeting.

(C) Reuters Limited 2002