(Adds details, writes through)
By Marcin Grajewski
BRUSSELS, May 7 (Reuters) - Slovakia got the green light on
Wednesday to adopt the euro in 2009, outpacing bigger EU
newcomer nations despite European Central Bank doubts about how
long it can hold down inflation.
In a keenly awaited recommendation, the European Commission
said the nation of 5.4 million people is ready to switch to the
currency now shared by 15 states, crowning years of ambitious
economic reforms in Slovakia.
If given the go-ahead by European Union 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 crown firmed to a record high of 32.055 per euro
<EURSKK=> in reaction to the Commission's recommendation.
In a separate report, the ECB acknowledged that Slovakia had
met the euro zone entry benchmarks as of March this year, but it
was worried about Bratislava's ability to keep inflation down.
"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.
"To sum up, although the 12-month average rate of ...
inflation in Slovakia is currently well below the reference
value, there are considerable concerns regarding the
sustainability of inflation convergence," it said.
The ECB is anxious that euro zone entrants should not only
get their inflation down before joining, but 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 also 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 likely to join the euro well after 2010.
"The other member states ... (not in the euro zone) are making
good progress towards the euro, though at different paces,"
Almunia said.
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
the join the EU because of former Prime Minister Vladimir
Meciar's anti-Western, autocratic style.
TURNAROUND
But Slovakia later introduced an investor-friendly flat tax
rate, launched 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.
"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 are scheduled to set the final
exchange rate between the Slovak crown and euro in early July.
Slovak Prime Minister Robert Fico has said he will aim for
the strongest possible switchover exchange rate.
(Additional reporting by Krista Hughes in Frankfurt, Jan
Lopatka and Michael Winfrey in Prague, Peter Laca in Bratislava)
