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Lithuania exclusion from eurozone violates spirit of the entry treaty
By Prof Willem Buiter and Prof Anne Sibert
Published: May 19 2006 03:00 | Last updated: May 19 2006 03:00

From Prof Willem Buiter andProf Anne Sibert.

Sir, As we feared, the European Central Bank and the European Commission have recommended denying Lithuania admittance to the eurozone.

Lithuania's 2.7 per cent inflation rate marginally exceeds the 2.6 per cent that is the ECB's calculation of the entrance criterion.

The entry treaty requires Lithuania to have inflation of no more than 1.5 percentage points above the average of the three best-performing member states in terms of price stability.

The ECB has defined its own price stability target for the eurozone as inflation close to but below 2 per cent. However, for eurozone candidates it redefines price stability as the average of the three lowest inflation rates in the European Union.

Poland and Sweden (neither of which are in the eurozone) and Finland have the lowest inflation in the EU, with an average of 1.1 per cent.

Adding 1.5 points yields the ECB's calculation of an entrance criterion of 2.6 per cent. But, inflation of 1.1 per cent is far too low, according to the ECB's own standard.

When challenged, the ECB and European Commission argued, not in favour of their methodology, but that this defective benchmark was used in all five earlier convergence reports. The logic of the argument is extraordinary.

Suppose that for five years in a row, either deliberately or because we were incompetent, we successfully submitted tax returns that significantly understated our true tax liability.

If we were caught in year six, would we get away with the argument: "You should let us get away with this because you always did before?" We think not.

Lithuania has been kept out of the eurozone because of an inflation benchmark that violates both the spirit and the letter of the treaty. It should appeal the matter to the European Court of Justice.

Willem H. Buiter,

Professor of European Political Economy,

European Institute,

London School of Economics and Political Science,

London WC2A 2AE

Anne Sibert,

Professor of Economics,

Birkbeck College,

University of London,

London WC1E 7HX

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