EU newcomers should step up efforts to join the eurozone as their progress on cutting inflation and high budget deficits is patchy, the European Commission and the European Central Bank (ECB) said.
In reports issued on Tuesday on the newcomers' fitness to adopt the euro, the European Union executive and the ECB confirmed Cyprus and Malta were ahead of the pack. High budget gaps were a problem for countries including Hungary, Poland and the Czech Republic, the reports said.
"Although the road to the euro is proving more difficult than some may have thought originally, the reward is well worth the effort," EU Monetary Affairs Commissioner Joaquin Almunia said in a statement.
The ECB said: "Compared with the situation described in the convergence report prepared in 2004, many of the countries under review have made progress with economic convergence, but in some countries there have also been setbacks ... Further fiscal consolidation is required in most of the countries."
High price growth remains a major challenge for the small and fast-growing Baltic republics of Estonia and Latvia, and to a lesser degree for Malta and Slovakia, the reports said.
They did not forecast how quickly the countries might join the euro, but they suggested Cyprus and Malta could meet their goals of adopting the currency in 2008.
"At the moment these two countries are in a good position (to join in 2008), Cyprus is in a very good position and Malta seems to be on the right road," Amelia Torres, Commission spokeswoman for monetary affairs, told a news conference.
Hungary, which has launched an austerity programme after its budget deficit soared to the highest level in the 25-nation EU, is the only euro candidate that meets none of the criteria.
The two reports assessed whether euro candidates met criteria on central bank laws, inflation, budget deficits, exchange rate stability and long-term interest rates.
They assessed eight of the 10 countries that joined the EU in 2004, and Sweden. They did not review Slovenia, which has secured entry from the start of 2007, or Lithuania, which was assessed earlier this year and failed due to too-high inflation.
Of the 10, mostly ex-communist countries from central and eastern Europe that joined the EU in 2004, only Estonia has central bank law fully compatible with EU legislation.
Poland, the biggest EU newcomer, has sufficiently low inflation and long-term interest rates, but its budget deficit is too high, the zloty volatile and central bank legislation not compatible with euro norms. Warsaw has no euro entry date.
The Commission report did not mention political factors, but Poland's conservative, euro-sceptic leaders plan a national referendum on the issue. Prime Minister Jaroslaw Kaczynski has said quick euro entry could harm the economy.
The Commission's Torres reiterated that Poland should not hold a referendum on the euro, because the Poles had already voted on the move in a ballot on joining the EU.
"The adoption of the euro is part and parcel of being a member of the EU, it is both a right and obligation," she said. Britain and Denmark are the only EU members with official opt-outs from joining the currency.
The reports said Cyprus met three of the five criteria and was close to fulfilling the remaining two, on central bank legislation and foreign exchange stability.
Malta now fulfils only one euro criterion, on long-term interest rates, but looks on track to meet three others - on the central bank, budget deficit and exchange rates, next year.
Slovakia, with efforts on fighting inflation and cutting its budget deficit, was moving towards reaching its target of joining the euro in 2009, some Commission officials have said.
Slovakia meets only the criterion on long-term rates but is close to fulfilling the requirements on the central bank, exchange rate stability and, with effort, the budget deficit. Average annual inflation in Estonia was 4.3 percent and the country met four of the five euro entry criteria.
Estonia last week became the latest euro hopeful to drop its entry target, after Hungary, Lithuania and the Czech Republic, saying its price growth outlook made adopting the currency unrealistic in 2008.
"Looking ahead, the outlook for inflation developments in most countries is very much shaped by the expectations of continued strong growth in both domestic and external demand, which, in conjunction with tightening labour market conditions, could lead to upward pressure on prices," the ECB said. In Latvia, the central bank has warned that with such price rises the country would be unable to join, even in 2010.