Dec 12 (Reuters) - Slovakia will adopt the euro on Jan. 1 but the country
first had endure the ERM-2 exchange rate mechanism, a necessary currency
stability test Slovakia entered in November 2005.
Following are some facts about ERM-2 and other hurdles a country must clear
before being able to adopt the euro.
Click on <EMUPOLL30> for market estimates of when other countries are
expected to join.
JOINING ERM-2
To qualify for the euro, a country must stay in the ERM-2 for two years. To
pass the test, the euro hopeful's currency must trade within a band of +/-15
percent around a central parity rate. The currency can be revalued, but not
devalued.
To join ERM-2, a country must get the approval of the Economic and Financial
Committee (EFC) -- an EU body composed of officials from the executive
Commission, deputy central bank governors and deputy finance ministers.
This process usually takes several months.
Final decisions on ERM-2 entry and the central parity rates are taken by the
EFC. Once in the ERM-2, the candidate's central bank and the ECB are obliged to
intervene on the currency market to keep the currency within the system.
The candidate country can set its own, narrower band, for the currency that
it wants to defend.
MAASTRICHT CRITERIA TO JOIN EURO
To join the euro zone, aspirants must prove they can meet the following five
Maastricht criteria in a sustainable manner:
* Their currencies must stay for two years in ERM-2.
* They must have a consolidated fiscal deficit of no more than 3.0 percent
of gross domestic product.
* Their gross public debt must not exceed 60 percent of GDP. If it does, the
Commission may still conclude a candidate meets the criterion if the debt level
has consistently moved towards the required ratio.
* They must prove they can sustainably keep inflation at no more than 1.5
percentage points above the average of the three lowest inflation rates in the
now 27-nation European Union.
This measure blocked Lithuania from adopting the euro in 2006 when it missed
the goal by one-tenth of a percentage point at the cut off date. Afterwards its
inflation rate rose further.
* Nominal long-term interest rates must be no more than two percentage
points higher than the average of the three lowest inflation member states.
THE HOME STRETCH
- A country may ask for permission to join the euro zone at any given time.
Even without such a request the Commission reviews candidates' fitness to join
the euro every second year. The last such review was in May this year.
- The Commission makes a binding recommendation on applications while the
ECB makes a non-binding evaluation.
- EU finance ministers then make an initial decision whether to follow the
recommendation. European Parliament and EU leaders are asked for their opinions,
usually in June.
- EU finance ministers give the candidate the formal green light to adopt
the euro and set the irrevocable exchange rate versus the euro, usually in early
July.
- In the months preceding the switch to the euro, the country's private and
public sectors must adapt administrative, financial, accounting and invoicing
systems.
- Prices are displayed in both the national currency and euro ahead of and
following "E-day" -- usually for around six months so consumers can get used to
the euro -- either on a voluntary or mandatory basis, depending on the country's
laws.
(Source: European Commission Website, reporting from Reuters bureaus; Compiled
by Michael Winfrey, Editing by Andy Bruce)
