UPDATE 1-Czechs may have euro in 2012,but no firm target-PM

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By Jan Lopatka

The Czech Republic could join the euro zone in 2012 if it tackles economic reforms, Prime Minister Mirek Topolanek said on Wednesday, but the government refused to set a firm target date while approving a euro adoption strategy.

Topolanek told a news conference that entry in 2012 was conditional on the government being able to push through reforms of the pension and health systems, which are destined to accumulate ever-deeper deficits in their current shape.

The government was forced late last year to abandon a 2010 target date due to the poor state of public budgets.

"The (2012) target, so far, is not unachievable," Topolanek said after the cabinet approved the strategy which does not set any dates for joining the common currency.

Due to the government's fragile position in parliament, it did not want to risk being forced to abandon another target date. "We decided not to take on this reputation risk and not to set an indicative target," he said.

Topolanek's right-wing Civic Democrats (ODS) have long been cautious about euro entry timing, saying the country first needed to put its finances and welfare systems in order, and only then determine the right time for euro adoption.

Topolanek's line on 2012 echoes a similar position taken by central bank Vice-Governor Ludek Niedermayer on Tuesday. The central bank had recommended that the cabinet should not set any target date, but Niedermayer said 2012 was far enough in the future for the necessary reforms to have been made by then.

Finance Minister Miroslav Kalousek has spoken in favour of setting 2012 as a soft target date, hoping that this would help to put politicians under pressure to make the unpopular changes needed to fix the budget. But earlier this week he abandoned attempts to have a target date set.

The government aims to cut the budget deficit to 3.2 percent of GDP next year and 2.5 percent in 2010 from 4 percent expected in 2007. Under euro entry rules, the gap must not exceed 3 percent.

The Finance Ministry said on Wednesday that apart from the budget deficit, the main obstacle to euro entry was insufficient flexibility of the economy, mainly of the labour market.

The Czechs have enjoyed a rising currency and lower interest rates than in the euro zone, which has shielded the economy from emerging market turbulence.

[PRAGUE/Reuters/Finance.cz]