Safety in numbers

Of the east European countries that joined the EU in 2004 only Slovenia has adopted the euro. Slovakia will follow next year, having met the criteria including low inflation, a broadly balanced budget and a pegged exchange rate for two years.

Hungary is paying for years of profligate spending. Earlier this year, Budapest abandoned joining the eurozone at an early date when allowing its currency to float. With budget deficits of 9.2 per cent and 5.5 per cent in 2006 and 2007 respectively, investors lost confidence in the forint's band against the euro.

But much of Hungary's household and corporate debt is denominated in foreign currencies: almost two-thirds of mortgages are in euros or Swiss francs. Many of the borrowers do not intend to repay the mortgages until the euro is adopted. But the later the date, the more exposed they are to a weaker currency through interest payments, rendering the country more vulnerable to a sharp downturn. A single currency eliminates such exchange rate risk within the union and protects the country from capital flight.

A loan from the International Monetary Fund may be helpful if it reins in government spending. Painful as that might be, it would bring Hungary closer to the eurozone.

The Baltic states are grappling with a different set of problems. After years of strong growth, high inflation and massive current account deficits, their economies are slowing substantially. But governments have not overspent, allowing for some fiscal easing - investor appetite for new debt permitting. Exchange rates are fixed to the euro, and backed by credible levels of reserves.

Provided Estonia, Latvia and Lithuania resist running over-loose fiscal policies and are not forced to devalue their currencies, the downturn should help balance their economies. As inflation comes down, euro entry comes within reach.

The European Central Bank deserves credit for supporting Hungary with a loan. It should continue to take an accommodating stance as it shepherds new members into the eurozone. Now may not be the time to set ambitious target dates to join the monetary union but it is the time to move closer together.