Brussels backs Slovakia's bid to join eurozone

By Jan Cienski in Warsaw and Ralph Atkins in Frankfurt

The European Commission yesterday cleared the way for Slovakia to join the eurozone and become the common currency's 16th member, despite the European Central Bank's reservations.

"Slovakia has achieved a high degree of sustainable economic convergence and is ready to adopt the euro on January 1 2009," said Joaquín Almunia, EU commissioner for economic and monetary affairs.

The decision is a triumph for Slovakia, which only gained its independence in 1993. It spent much of the 1990s drifting away from Europe under the autocratic rule of Vladimir Meciar, a former prime minister.

Radical economic reforms begun in 1998 by his successor, Miklas Dzurinda, turned Slovakia into one of the fastest growing economies in Europe and led to membership of Nato and the EU.

The prospect of entering the eurozone has given Robert Fico, the current prime minister, an incentive to pursue sound economic policies. Yesterday he described the decision as "a good report card on our economic and financial policy".

In its convergence report, the Commission found that Slovakia had met all of the Maastricht exchange rate criteria on inflation, public finances and interest rates.

But the ECB was much less positive, saying that it had "considerable concern" over Slovakia's ability to restrain inflation. It said price pressures had been temporarily dampened by the appreciation of the Slovak koruna.

Tight labour markets, higher energy costs and Slovakia's economic "catching-up process" with more developed eurozone economies would add to upward pressure on prices, the central bank added.

Moreover, the ECB warned that the koruna's appreciation against the euro made it more difficult to "analyse how the Slovak economy might operate under conditions of irrevocably fixed exchange rates".

It said Slovakia's fiscal adjustment plans were "not sufficiently ambitious", even though Mr Fico's government has promised to cut the budget deficit to 2 per cent of gross domestic product this year from an original target of 2.3 per cent.

The ECB's comments on inflation reflect the eurozone's experience with Slovenia. Inflation became a problem soon after the country joined the common currency in 2007. Year-on-year inflation in Slovenia last month was 6.2 per cent, the highest in the eurozone.

EU finance ministers are due to confirm the decision to admit Slovakia to the euro at their July meeting. Adopting the currency will reassure foreign investors and slightly boost economic growth, said Viliam Patoprsty, chief economist of UniCredit Bank in Slovakia.