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Slovakia says on track for euro zone entry

Slovakia’s finance minister said on Tuesday his country was on track in its bid to join the euro zone in 2009 and he did not see any problem with inflation.

“Everything is under control. I don’t see anything unexpected about Slovak inflation compared with the euro zone,” Jan Pociatek told Reuters before a meeting of European Union finance ministers due to discuss his country’s budget plan to meet euro entry criteria. In a decision closely watched by markets as a precedent for the whole of central Europe, the Commission is to recommend whether Slovakia, which joined the EU in 2004, is ready to enter the euro zone on Jan. 1, 2009. Senior EU officials and diplomats say they expect Slovakia’s candidacy to become the 16th country to adopt the single currency to be approved in May, provided it continues to meet the criteria, notably on inflation. “Our message to Slovakia is ‘do your homework between now and May’,” a senior EU source said, noting that the Commission and finance ministers were not discouraging Bratislava from applying, as they did in 2005 with Lithuania.

The Slovak koruna rose to a two-month high against the euro on Tuesday on market rumors of a possible revaluation of the unit in the ERM-2 exchange rate mechanism, a band within which euro applicants must keep their currency before joining the euro zone.  But the senior EU source said Brussels considered the right homework for Bratislava involved strict fiscal policy and more structural reforms rather than revaluing the Slovakian koruna upwards against the euro. In its assessment of Slovakia’s so-called convergence program, the European Commission said last month that Bratislava should adopt additional fiscal measures to counter inflationary pressures after euro zone entry.

Central bank Governor Ivan Sramko said in response that the assessment pointed to risks that are already known. “The report brings nothing fundamentally new, it points to risks, which I think are well-enough known in Slovakia,” he told reporters on Jan. 30. German Finance Minister Peer Steinbrueck, asked on Tuesday about Slovakia’s prospects of joining the euro, told reporters: “It’s up to the ECB and the Commission to assess that under the rubric of equal treatment for all candidates. They will submit a report on this in May.” Sramko repeated his long-held stance that the Slovak central bank had a different view to the European Commission on the possible inflation risks from economic growth and on the effect of koruna strengthening on consumer prices. The EU executive said existing inflationary pressure from rising oil and food prices could mount due to the fading effect of the koruna’s past appreciation. “The (Slovak) government should stand ready to adopt a tighter fiscal stance than that envisaged in the program,” it said.

The government of leftist Prime Minister Robert Fico wants to bring the overall public finance deficit down to 0.8% of GDP in 2010, including the cost of pension system reform, from 2.3% planned for this year. The Commission said Slovakia would meet the euro entry criterion on the budget shortfall, which a euro aspirant must keep below 3% of gross domestic product. “Slovakia’s planned budgetary consolidation is consistent with a correction of the excessive deficit in 2007,” said Monetary Affairs Commissioner Joaquin Almunia. “But looking beyond the correction of the excessive deficit, faster progress towards the medium-term objective is advised, in particular to contain possible inflationary pressures.” The Commission also confirmed its November forecast that Bratislava would meet the criterion on inflation nominally. EU officials say the only hurdle for euro entry next year could be if the Commission assesses that Slovakia does not meet the inflation criterion in a sustainable manner. (Reuters)