(Updates with EU commissioner's news conference, credit rating)
By Marcin Grajewski
BRUSSELS, May 7 (Reuters) - Slovakia won the green light on
Wednesday to adopt the euro in 2009 when it will become the 16th
member of the currency area after years of deep reforms that
have turned its lagging economy into an investor darling.
Despite European Central Bank doubts about how long Slovakia
can hold down inflation, the European Union's executive arm said
the nation of 5.4 million people was ready for the euro, unlike
bigger EU newcomers Poland, Hungary and the Czech Republic.
If given the final go-ahead by EU finance ministers in July,
as expected, Slovakia will become the fourth of the bloc's new
member states to join the bloc since 2004 to adopt the euro.
Much smaller Slovenia entered the euro zone in 2007, followed by
Cyprus and Malta this year.
"This is a significant, historic decision for Slovakia and
its people. We are entering an elite group of nations," Slovak
Prime Minister Robert Fico said.
The Slovak crown firmed to a new record high versus the euro
<EURSKK=>, breaking a psychological barrier of 32.00, in
reaction to the European Commission's recommendation.
Credit rating agency Fitch said it expected to upgrade its
rating for Slovakian debt.
In a separate report, the ECB said Slovakia met the euro
zone entry benchmarks as of March this year but noted there were
"considerable concerns" about the country's inflation outlook.
"Looking ahead, the latest available inflation forecasts
from major international institutions ... suggest that annual
average inflation is likely to rise considerably in 2008 and
decrease slightly in 2009," the ECB said.
European Economic and Monetary Affairs Commissioner Joaquin
Almunia said Brussels shared the ECB's concerns but finally
decided to recommend letting Slovakia in.
"We had some doubts to the extent Slovakia was fulfilling
its sustainability aspects of the inflation criterion... Finally
our assessment is positive."
The ECB is anxious that euro zone entrants should not only
get their inflation down before joining but also keep it down
afterwards. Inflation has soared in Slovenia since it adopted
the common currency to the highest level in the euro zone,
despite a Commission forecast that the rate would remain muted.
The Commission said on Wednesday that new EU member states
Poland, the Czech Republic, Hungary, Estonia, Latvia and
Lithuania, Bulgaria and Romania were not yet ready for the euro.
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 euro zone membership, it said.
Those countries are likely to join the euro well after 2010.
Polish Finance Minister Jacek Rostowski said his country's
chances for adopting the euro had improved after the
Commission's decision on Slovakia.
He confirmed Poland, by far the largest EU newcomer, would
try to be ready for the euro in 2011-2012.
TURNAROUND
The recommendation crowns Slovakia's ambitious economic
reforms, launched by a previous right-wing government, that have
turned the country, once burdened by inefficient Soviet-era
industries, into an investors' favourite.
Only 10 years ago, Slovakia faced exclusion from talks to
join the EU because of former Prime Minister Vladimir Meciar's
anti-Western, autocratic style.
But Slovakia later introduced a flat tax rate and 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 show.
The Commission said Slovakia, which accounts for a small
fraction of the euro zone's 9 trillion-euro ($14 trillion)
economy, met all the entry criteria on inflation, interest
rates, its budget deficit, public debt and currency stability.
A country wanting to join the euro must have inflation which
is 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 percent in March, below the permitted 3.2 percent cap.
It urged the country to tighten fiscal policies and keep wage
growth under control to combat inflation.
The EU's 27 finance ministers are scheduled to set the final
exchange rate between the Slovak crown and euro in early July.
Fico reiterated on Wednesday that he would aim for the
strongest possible switchover exchange rate, saying that would
allow Slovaks to earn more in euros.
(Additional reporting by Krista Hughes in Frankfurt, Jan
Lopatka and Michael Winfrey in Prague, Peter Laca in Bratislava;
editing by William Schomberg/Ron Askew)
