* Appeal of euro grows, but so do obstacles in crisis
* Czechs cool on quick entry, crisis means big delay
* Expected entry shifts by years, probably to beyond 2015
* For FACTBOX double click on []
By Jana Mlcochova
PRAGUE, June 18 (Reuters) - The global economic crisis has
boosted the euro's appeal for most central and eastern
Europeans, but Czech policymakers have shelved the project for
years due to the prospect of big budget deficits.
Meeting the criteria for adopting the common currency will
be tough for everyone because of currency swings and a boom in
issuing government debt during the downturn.
Slovakia, which joined the euro zone in January, has shown
other countries outside how valuable the common currency can be
as a shield during capital flight. This has focused
policymakers' minds on the steps needed to enter the bloc.
By contrast the Czech Republic's drive to adopt the euro has
weakened. The country has suffered relatively little compared
with the likes of Latvia and Hungary, which have been forced to
turn to the International Monetary Fund for help.
An absence of a currency and banking sector crises, thanks
to low foreign currency debt and a solid current account, means
there is less incentive for Czech politicians to try squeeze in.
"The (global) crisis has made things more difficult but it
has also created a much larger incentive, except maybe for
Czechs, to move ahead," said Christian Keller, Senior EMEA
Economist at Barclays. "The Czechs were the ones that never had
big intentions."
"OUTSIDE OF REALITY"
A Reuters poll just seven weeks ago predicted the Czechs
would join the single currency in 2014. [] That date now
seems highly unlikely. Fresh forecasts showed government
deficits of between 5.1 percent of GDP in 2010 and 4.2 in 2012,
even with 5-20 percent cuts in discretionary spending.
That in itself is a factor making entry more difficult,
because applicants must narrow their deficits below 3 percent of
gross domestic product, despite the fact that most current euro
zone members are running far higher gaps.
The Czech Republic is run by an interim cabinet that doesn't
believe euro entry is possible before the second half of the
next decade, and an election in October is unlikely to bring a
shift. Finance Minister Eduard Janota told a newspaper this week
that "all debates on euro adoption are outside reality today".
Petr Necas, Vice-Chairman of the right-wing Civic Democrats,
has said it was utopia to think any big party would support
painful fiscal reforms, meaning cuts in welfare, at this point.
His party, which was a ruling party until March, is lukewarm on
the euro.
The leftist Social Democrats, normally staunch supporters of
a fast euro entry, have effectively slammed the door on quick
adoption. Leader Jiri Parounek said the country needed to spend
to fight the economic downturn, so the euro had become a
secondary issue.
The Social Democrats still talk about entry in 2014-2015
entry but only "if the economic development permits", and it
plans higher pensions and welfare despite the budget strains.
"The Social Democrats do not endorse the euro any more and
other parties are significantly reserved ... so it seems to me
that the next election term will not move us much further," said
Petr Sklenar, an analyst at Atlantik FT.
Raffeisenbank strategist Ales Michl forecast the Czech
Republic could join as late as 2019. It's hard to find an
analyst who predicts entry before 2016 whereas last year 2012
looked viable.
"It's a lack of political will combined with the bleak
economic reality; it's a crossover of the two negative factors,"
said Michl.
Adding to the scepticism is the central bank, whose board
members, mostly appointed by eurosceptic President Vaclav Klaus,
have repeatedly argued against any rush. "I am not dealing with
a date," central bank board member Eva Zamrazilova said in a
Reuters interview last week.
She said the country should join the ERM-2 exchange rate
band -- a two-year precursor to the euro -- only after the
fiscal side is in order, implying a long path.
OTHERS TRY HARDER, BUT OBSTACLES GROW
Other central European countries are much more ambitious.
Poland has stuck to its 2012 target, although analysts say this
is hardly realistic and slippage there was likely too.
A 2012 entry would require Poland to enter the ERM-2
mechanism this year, a risky step given swings in the zloty,
which could tear up the +/-15 percent ERM-2 band.
"It is not very practical for these countries to be talking
about entering ERM-2 when the currencies are so volatile," said
Jon Harrison, foreign exchange strategist at Dresdner Kleinwort.
Hungary, tapping $25 billion in IMF-led aid, has abandoned
several target dates in the past due to vast budget deficits but
the government still wants to join as soon as possible.
Hungary and the Baltic states stand to gain the most from a
reasonably rapid euro entry, said Raffaella Tenconi, an
economist at brokerage Wood & Co.
"As for the pegs (of the Baltic states and Bulgaria) I think
this crisis is a pretty strong alarm bell for them and will push
governments in serious efforts to adopt the euro as soon as
possible."
Latvia's currency, which is pegged to the euro, has been
under strain and the government has approved spending cuts worth
4 percent of GDP to prop it up. But the government still aims
for quick euro entry, targeting 2013.
Miroslav Plojhar, a London-based analyst at JP Morgan, saw
no country making it until the middle of the next decade, not
least because the euro zone, torn by crises in its own ranks,
was unlikely to relax any of the entry rules.
"As long as the criteria are as they are ... it is unlikely
that any country would enter the euro zone in the next four to
five years," he said.
