EU Finance Ministers Endorse Slovak Euro Entry, Rate (Update4)

EU Finance Ministers Endorse Slovak Euro Entry, Rate (Update4)
http://www.bloomberg.com/apps/news?pid=20601095&sid=a9wjOP8D.TcI&refer=east_europe


By Meera Louis and Radoslav Tomek




July 8 (Bloomberg) -- European Union finance ministers agreed
to allow Slovakia to become the second East European country to
adopt the euro, endorsing a proposal to convert the Slovak koruna
to the common currency at a rate of 30.126.

Ministers backed the European Commission's proposal to widen
the euro region to 16 nations on Jan. 1 and exchange the koruna at
the so-called central parity rate. That rate was set in May when
the EU allowed the koruna to strengthen within the exchange-rate
mechanism, the pre-adoption test of currency stability.

Slovakia, which follows the former Yugoslav republic of
Slovenia into the euro zone, expects the economy to benefit from
the scrapping of foreign exchange charges while the strength of
the conversion rate contains inflation. The forint and zloty are
among currencies that will benefit the most from Slovakia adopting
the euro at the current peg, according to Barclays Plc.

``We managed to negotiate the strongest possible rate,'' said
Slovak Finance Minister Jan Pociatek in a phone interview from
Brussels. ``It is beneficial for citizens and their savings as
well as for companies.''

The Slovak koruna declined to 30.275 at 12:52 p.m. in
Bratislava, from 30.226 late yesterday.

Koruna Strength
The koruna is the second-best performer among the 26
emerging-market currencies tracked by Bloomberg so far this year,
up 11 percent against the euro. Its strength helps cap inflation,
even with record economic growth, because it holds down import
prices.

Prime Minister Robert Fico and Pociatek had pushed for an
even stronger rate to ensure that inflation would remain under
control after the koruna no longer exists. They backed down in
recent days after it emerged the European Commission was proposing
the current peg as the final lock-in rate.

``With Prime Minister Fico changing his tone saying central
parity is good, then it wasn't a surprise,'' said Agata
Urbanska, central European economist at ING Bank in London.

The government had lobbied for conversion at a higher rate to
control inflation, which has accelerated to 4 percent in May from
1.2 percent in August. Pociatek said he was satisfied with the
decision and is confident it will hold down inflation next year.
``We actually reached the maximum possible rate, so of course
we are happy,'' he said.

Euro Rules
To adopt the euro, the 12-month average inflation rate, based
on EU methodology, needs to be no more than 1.5 percentage points
above the average 12-month rate of the three EU nations with the
slowest consumer-price growth.

Slovakia's 12-month inflation rate was 2.6 percent in May,
below the 3.6 percent limit that month. The government also has to
show that inflation will remain under the limit after adoption. A
stronger koruna would keep import prices from rising.

Slovak central bank Governor Ivan Sramko, who will join the
European Central Bank's governing council in January, said that
inflation pressures are not just a Slovak concern and the euro
region needs to fight against price growth, spurred by fuel,
commodity and food prices.

``I'm sure this is the main topic and the main task of the
ECB is to fight against inflation,'' Sramko said.
Slovakia won approval from the commission to adopt Europe's
common currency on May 7.

Raising the Band
The EU on May 28 approved allowing the koruna to strengthen
beyond its previous trading band. The central parity rate was
lifted 15 percent to 30.1260 per euro from 35.4424 and the new
trading range was set at 25.6071-34.6449.
Narodna Banka Slovenska, the Slovak central bank, has said
euro adoption will boost the $89 billion economy by as much as 1
percentage point and help exporters with Slovak units including
Volkswagen AG to avoid the risk of currency fluctuations that
erode revenue.
Prime Minister Robert Fico's government, which came to power
two years ago, trimmed the budget deficit below the required level
of 3 percent of gross domestic product and convinced the EU that
inflation will stay in check after adoption.
To contact the reporter on this story:
Meera Louis in Brussels at
mlouis1@bloomberg.net.




Last Updated: July 8, 2008 07:14 EDT