(Updates with Commission draft, background)
By Marcin Grajewski and Martin Santa
BRUSSELS/BRATISLAVA, April 29 (Reuters) - The European
Commission will give Slovakia the green light next week to join
the euro zone on Jan. 1, 2009, a draft proposal from the
European Union's executive arm showed on Tuesday.
If backed by EU finance ministers as expected, the
recommendation will clear the way for the ex-communist country
of 5.4 million people to exchange its crown <EURSKK=> for the
currency now shared by 15 nations.
"Slovakia fulfills the necessary conditions for the adoption
of the single currency," the Commission's document, obtained by
Reuters, said.
The recommendation is set to be backed by the whole European
Commission on May 7 and passed on for approval in June by
European Union finance ministers, probably a formality.
The European Central Bank will make a separate
recommendation.
The Commission draft, drawn up by European Economic and
Monetary Affairs Commissioner Joaquin Almunia and discussed by
senior officials on Tuesday, said Slovakia met all euro zone
entry criteria on inflation, interest rates, budget deficit,
public debt and currency stability.
Slovakia joined the EU in 2004, along with nine other,
mostly ex-communist countries from central and eastern Europe.
EU newcomer Slovenia adopted the euro on Jan. 1, 2007, with
Cyprus and Malta following suit this year.
Other EU new members -- the Czech Republic, Hungary, Poland,
Estonia, Latvia, Lithuania, Bulgaria and Romania -- are expected
to adopt the currency only after 2010.
The Commission will say on May 7 those countries are not
ready for the euro either because of their high inflation or
wide budget deficits or because they have not yet joined the ERM
II currency grid, a proving ground for the euro.
Old EU members Britain, Denmark and Sweden have opted to
stay outside the euro zone.
INFLATION HURDLE
Joining the euro will crown 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 and a major car producer.
The biggest hurdle on Slovakia's euro path was meeting the
inflation criterion in a sustainable way, a tough job for a
country that had double-digit economic growth last year.
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 draft confirmed Slovakia's 12-month average
inflation was 2.2 percent in March, comfortably below the
permitted ceiling of 3.2 percent.
"The average inflation rate in Slovakia ... is likely to
remain below the reference value in the months ahead, albeit
with a narrowing margin," it said.
Slovak left-wing Prime Minister Robert Fico has worked hard
to convince the Commission about his determination in fighting
inflation. In April, the government passed a fiscal package
aimed at quicker budget deficit reduction.
The EU's 27 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 so far expects a rate of
32.50, according to a Reuters poll, compared with its all-time
high of 32.200 reached on Monday.
The Slovak central bank left its main interest rate
unchanged on Tuesday at 4.25 percent, 25 basis points above the
euro zone equivalent.
(Editing by Dale Hudson)
