(Adds ECB council member Mersch's comments in paras 7-10)
By Marek Petrus
PRAGUE, Oct 17 (Reuters) - The Czech Republic should carefully weigh the timing of euro adoption to avoid damaging its economy, central bank (CNB) board member Pavel Rezabek said on Wednesday, confirming the country's lukewarm stance on common currency.
Rezabek said that rushing into the euro zone could cause problems for the Czech economy, which has sustained low inflation while growing at a 6 percent annual rate for a third year running.
"It is not a question of yes or no but when (to join), and this is a question that is in the Czech Republic's discretion," he told a seminar on euro adoption. "We should weigh the timing of entry to the euro zone very carefully. I agree we should not enter too late ... but on the other hand, overly hasty entry could cause certain problems."
Rezabek said deeper fiscal reforms, particularly of the pension system, were needed to cut the fiscal deficit in a sustainable manner below the European Union's ceiling of 3 percent of GDP and prepare for euro entry.
He stressed the need to meet not only the nominal entry criteria for inflation, public debt, interest rates and currency stability but also achieve real convergence in prices and incomes which still lag levels in western Europe.
European Central Bank officials have repeatedly urged countries wanting to adopt the euro to let their economies catch up with existing euro zone members before abandoning their independent monetary policies, and ECB Governing Council member Yves Mersch echoed this on Wednesday.
"As long as you still have a divergent price development path, you might be better served with additional national economic instruments, namely national monetary policy," Mersch the Prague conference. "The request is therefore, that nominal and real convergence are (going) in parallel.
"Since the degree of heterogeneous development cannot be steered by monetary policy anymore, you have to have a greater insistence on being ready to use fiscal policy and structural policy to a much higher extent than I see happening right now in this country," he added.
HARD TO SET DATE
Rezabek spoke out against applying for euro zone membership before the country fulfills the nominal entry criteria.
"Without meeting the nominal criteria, I am personally of the opinion that we should not lodge an application for (euro zone membership)," he said.
"If we are unable to fulfil the criterion for (the public) deficit, it is difficult to set any date," he said, referring to the government and central bank's decision earlier this year to refrain from setting a formal target date for euro adoption.
EU finance ministers urged Prague last week to speed up its budget deficit cuts, refusing to extend beyond 2008 a deadline to bring the shortfall below the bloc's ceiling of 3 percent of GDP. The fiscal gap is seen at 3.6 percent of GDP this year.
The Czech government approved last month a 2008 budget that generally complies with EU demands, envisaging a deficit of 2.95 percent of GDP in 2008.
The government also pledged to lower the gap to 2.6 percent in 2009 and 2.3 percent in 2010, but private sector economists, central bankers, and finance ministry officials alike say more cutbacks are needed to achieve a sustainable deficit reduction. ((Reporting by Marek Petrus; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477; editing by David Stamp))
Keywords: CZECH CBANKER/
