UPDATE 2-Czech plan sees euro in 2012, ups budget gap

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By Jan Korselt

The Czech Republic may join the euro in 2012, the Finance Ministry said on Wednesday, two years after a previous target date dropped by the government due to deep fiscal deficits.

The ministry said in a statement on completion of a technical plan for eventual euro adoption that the date was realistic, even though a document obtained exclusively by Reuters showed it revised upwards the fiscal gap for 2007.

The centre-right government dropped 2010 as the target date for adopting the euro late last year due to the worsening fiscal outlook. It has not set a new euro entry target but ministers have mulled 2012-2013 as possible dates.

"The Finance Ministry considers it realistic for the euro to be adopted in the Czech Republic in 2012 and the national plan is prepared in a way to correspond to this target," the ministry statement said.

The ministry document, an update to the country's draft euro Convergence Programme, showed the fiscal gap is now expected to rise to 4.0 percent of GDP this year from 3.5 percent in 2006.

The forecast confirmed the EU country would not meet its earlier plan of reducing the deficit to 3.3 percent this year.

EXCESSIVE DEFICIT

The deficit growth will keep the Czech Republic among countries subject to the EU's excessive deficit procedures which could eventually lead to a halt of funding from the EU's Cohesion Fund, which is up to 1.4 billion euro per year.

"A deviation from the approved trajectory within the excessive deficit procedure puts the Czech Republic in a very unfavourable light," the Finance Ministry said in a report accompanying the draft convergence programme.

"(It will) undoubtedly result in a negative assessment by the European Commission, including a proposal to the ECOFIN to decide on the next step in this procedure, for example, a new request to speed up the removal of the excessive deficit."

EU members outside the euro area submit annual updates to their convergence plans, normally in November. But the Czechs delayed theirs due to a political crisis following an inconclusive June election.

The new Convergence Programme is due to be discussed by the cabinet and submitted to the EU by March 15.

The document sees the public sector gap falling to 3.5 percent of GDP in 2008 and 3.2 percent in 2009, still above the 3 percent ceiling imposed by euro adoption rules. But it does not include any fiscal reform steps planned by the new cabinet.

The three-party government, which won a parliamentary vote of confidence last month, has agreed in its manifesto that it will slash the deficit to 3.0 percent in 2008, 2.6 percent in 2009 and 2.3 percent in 2010.

The ministry included the government manifesto as an appendix to the convergence programme in an attempt to demonstrate that corrective measures are in the pipeline.

The government aims to cut the deficit by stemming the growth of social expenditure, and reforms to the health and pension systems. It also aims to cut taxes hoping that such a move will help encourage people to pay their taxes.

Many of the plans will face stiff opposition in parliament, where the government controls just 100 out of 200 seats.

[PRAGUE/Reuters/Finance.cz]