Rather Impudent After Lithuania Rejection
Yet that leaves 12 EU countries that do not use the euro, of which only two (Britain and Denmark) have an opt-out that permits them to continue to do so. Now the EU Commission and the ECB will issue a report which criticizes the remaining 10 states for not doing enough to meet the criteria for joining the euro.
But while it is obvious that Sweden is dragging its feets for purely political reasons (the no-vote in the 2003 referendum) and while particularly Hungary have pursued extremely irresponsible fiscal ( with a budget deficit of 10% of GDP) and monetary policies, it is quite impudent for the EU Commission to criticize Lithuania and the other Baltic states, after rejecting Lithuania on extremely flimsy and invalid grounds earlier this year.
As I explained at the time, the reason why the Baltic states have so high inflation is because they have extremely high economic growth and fixed exchange rates versus the euro. Because high economic growth drives up land prices and wages in the non-tradable sectors of the economy, high economic growth will inevitably raise the real exchange rate. This can be achieved either by a higher nominal exchange rate or by higher price inflation. Yet the EU Commission demands the for the Baltic states impossible combination of fixed exchange rates and a moderate consumer price inflation rate.
The only way the Baltics could lower their inflation rate while keeping a fixed exchange rate would be to either wreck their economies through statist policies or to start adopting the kind of currency market interventions used by China and some other countries, where the central bank accumulates massive foreign reserves which are later "sterilized" to limit domestic price inflation. The first alternative would be bad for quite obvious reasons, the second would probably not be permitted by the EU.
For reasons that I explained earlier, admitting the Baltic states would certainly be in the best interest of both the Baltic states and the existing euro zone members. I suspect that the real reason why the EU have suddenly started care about the formal rules (which they have ignored in the past, for example with regard to the excessive budget deficits in Germany and France) is that with their higher growth and higher inflation, admitting the Baltics would raise both aggregate Euro-zone growth and aggregate Euro-zone inflation. That in turn would force the ECB to pursue a less inflationary monetary policy, which I think would be a good thing, but which most politicians think is a bad thing.