Running budget deficits to finance infrastructure spending can cause problems, "not least because it sets in motion a dynamic that is difficult to contain", according to Dr Lucas Papademos, European Central Bank (ECB) vice-president.
"Deficit spending is never unproblematic," he said in a speech in Dublin yesterday, pointing to the experience of his own country, Greece, where a decade of borrowing in the 1980s more than doubled national debt to more than 120 per cent of gross domestic product.
Dr Papademos, addressing the Institute of European Affairs on EU enlargement and the euro, said the danger of borrowing to fund infrastructure was one of the lessons the accession states needed to learn.
Membership of the revised EU exchange rate mechanism - the so-called ERM 2 - could provide a useful testing phase for the currencies of these countries ahead of joining the euro, according to Dr Papademos. Under current EU treaty rules, currencies joining the euro must have been members of ERM 2 for at least two years and have a record of stability within the system.
In the ERM 2 system, currencies are allowed to vary 15 per cent in either direction against a central rate set against the euro, although Dr Papademos made clear that tighter fluctuation margins could be set by agreement.
A "careful and differentiated" assessment would be needed to judge the appropriate time for each of the accession states to enter ERM2, he said. Membership of the system could help the convergence process, he said, by anchoring the nominal exchange rate and affecting expectations.
"In view of all this, but also for other reasons related to the sustainability of convergence, a longer period of ERM 2 membership - that is , more than the minimum two years required by the EU treaty - could certainly be desirable, at least for some of the accession countries," he said.
Meanwhile, a new voting system was agreed - but has yet to be ratified by member-states - to allow the ECB governing council to cope with enlargement.
While this "is not as simple as we would have liked", Dr Papademos said, the required system of rotating voting council members was inevitably going to involve some complexity.
