Slovakia gets green light to join euro zone in 2009

In a keenly awaited recommendation, the European Commission said the nation of 5.4 million people, which is a major car maker, is ready to switch to the currency shared by 15 states. If given the go-ahead by EU finance ministers in July as expected, Slovakia will become the fourth of the EU’s new member states -- 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. “Slovakia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on Jan. 1, 2009,” EU Monetary Affairs Joaquin Almunia said in a statement. The Slovak koruna firmed to a record high of 32.055 per euro in reaction to the Commission’s recommendation.

Separately, the European Central Bank agreed Slovakia met the euro zone entry criteria but said there were “considerable concerns” about its ability to keep prices under control. The Commission said new EU member states 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 of the new EU states, has tentatively targeted 2012 for its euro zone entry. “The other member states...(not in the euro zone) are making good progress towards the euro, though at different paces,” Almunia said.

The recommendation koruna 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% last year. Using the euro will make life easier for Slovakia’s biggest investors -- car makers Volkswagen, PSA Peugeot Citroen and Kia Motors Corp. -- 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 fraction of the euro zone’s €9 trillion ($13.9 trillion) economy, met all the entry criteria on inflation, interest rates, budget deficit, public debt and currency stability. 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 said Slovakia’s 12-month average inflation was 2.2% in March, below the permitted, 3.2% cap. “Slovakia will need to remain vigilant to keep inflation at a low level, notably by maintaining wage discipline, adopting a more ambitious fiscal stance and further advancing structural reforms,” the Commission said. The EU’s 27 finance ministers in early July are scheduled to set the final exchange rate between the koruna and euro. Slovak Prime Minister Robert Fico has said he will aim for the strongest possible switchover exchange rate. (Reuters)