Slovakia gets green light to join euro zone in 2009

BRUSSELS Wed May 7, 2008 6:03pm EDT

BRUSSELS (Reuters) - Slovakia received the green light on Wednesday to join the euro zone on Jan. 1, 2009, outpacing bigger, ex-communist European Union newcomers after years of ambitious economic reforms.

In a keenly awaited recommendation, the European Commission said the nation of 5.4 million people is ready to switch its crown to the currency now shared by 15 states.

The move is likely to boost already impressive growth rates in a country that is becoming the world's major car producer.

If given the go-ahead by EU finance ministers in July as expected, Slovakia will become the fourth EU new member state -- which joined the bloc since 2004 -- to adopt the euro.

Much smaller Slovenia entered the euro zone in 2007 followed by Cyprus and Malta this year.

"The European Commission today concluded that Slovakia meets the criteria for adopting the euro," the Commission said in a statement.

In separate assessments, the Commission said fellow EU newcomers from central and eastern Europe -- Poland, the Czech Republic, Hungary, Estonia, Latvia and Lithuania, Bulgaria and Romania -- were not yet ready for the euro.

This is because their inflation rates are too high, budget deficits too wide or because they have not yet joined the ERM II currency system, a stability test for the euro.

Those countries are expected to join the euro well after 2010. Poland, by far the largest country in the region, has tentatively targeted 2012 for its euro zone entry.

Older EU members Britain and Denmark have opted to stay outside the euro zone for now.

Sweden voted against euro entry in a referendum in 2003.

The recommendation crowns Slovakia's ambitious economic reforms launched by the previous right-wing government that have turned the country, once burdened by inefficient Soviet-era industries, into an investor darling.

Only 10 years ago, Slovakia faced exclusion from talks to the join the EU because of former Prime Minister Vladimir Meciar's anti-Western, autocratic style.

TURNAROUND

But under the subsequent government of Prime Minister Mikulas Dzurinda, Slovakia has introduced an investor-friendly flat tax, launched private pension funds and cracked down on abuses of the welfare system, allowing the economy to grow by more than 10 percent last year.

Using the euro will make life easier for Slovakia's biggest investors -- car makers Volkswagen (VOWG.DE), PSA Peugeot Citroen (PEUP.PA) and Kia Motors Corp. (000270.KS) -- by removing the risk of currency fluctuations.

But many ordinary people, notably pensioners, are worried the euro will bring higher prices, opinion polls shows.

The Commission said Slovakia, which accounts for just a small fraction of the euro zone's 9 trillion-euro ($13.9 trillion) economy, met all euro zone entry criteria on inflation, interest rates, budget deficit, public debt and currency stability.

The biggest hurdle on Slovakia's euro path was meeting the inflation criterion in a sustainable way.

A country wanting to join the euro must have inflation no higher than 1.5 percentage points above the average of the three EU members with the lowest inflation rates.

The Commission confirmed Slovakia's 12-month average inflation was 2.2 percent in March, comfortably below the permitted ceiling of 3.2 percent.

Slovakia's left-wing Prime Minister Robert Fico worked hard to convince the EU about his determination to fight inflation.

In April, the two-year-old government passed a fiscal plan aimed at quicker budget deficit reduction, although many EU officials believe fiscal tightening should be more ambitious.

The EU's 27 finance ministers will in early July set the final exchange rate between the crown and euro.

Fico has said he will aim for the strongest possible switchover exchange rate. The market has expected a rate of 32.50 crowns to the euro, according to a Reuters poll, compared with an all-time high of 32.160 reached earlier on Tuesday.

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