(Refiles to correct typo in first paragraph)
By Marcin Grajewski
BRUSSELS, Jan 28 (Reuters) - Slovakia will face inflationary
pressure if it joins the euro zone next year and must be ready
to fight it with tighter fiscal policies, a draft European
Commission report showed on Monday.
The EU executive's draft opinion on Slovakia's fiscal plans,
due to be adopted on Wednesday, said existing inflationary
pressure from rising oil and food prices could mount due to the
fading effect of the Slovakian crown's appreciation.
"Were Slovakia to join the euro area, the fading out of the
exchange rate appreciation over the last two years, against a
background of growth above potential, would result in
inflationary pressures," said the draft, obtained by Reuters.
This pressure "would require further structural reforms,
measures to increase competition in product market and a tighter
fiscal stance than that envisaged in (Slovakia's) programme."
In a decision closely watched by markets as a precedent for
the whole of central Europe, the Commission is to recommend
around May whether Slovakia, which joined the European Union in
2004, is ready to enter the euro zone on Jan. 1, 2009.
The draft showed as expected that Slovakia would meet the
euro entry criterion on the budget shortfall, which an euro
aspirant must keep below 3 percent of gross domestic product.
It also confirmed the Commission's November forecast that
Bratislava will meet the criterion on inflation nominally.
EU officials say the only hurdle for euro entry next year
could be if the Commission's assesses that Slovakia does not
meet the inflation criterion in a sustainable manner.
Under EU rules, a euro candidate country's average annual
inflation over 12 months must be no higher than 1.5 percentage
points above that of the three best performers in the EU.
Of the 12, mostly ex-communist countries that joined the EU
in 2004 and 2007, only Slovenia, Cyprus and Malta have adopted
the euro so far.
Others, notably Poland, the Czech Republic and Hungary, have
to wait because of wide budget deficits or high inflation. The
EU rejected in 2006 Lithuania's bid to join the euro because it
narrowly missed the nominal inflation target.
Inflation in Slovenia has soared since it adopted the euro,
making the Commission wary about future euro newcomers' ability
to keep prices under control.
Markets have speculated about a possible adjustment of the
crown's parity rate to the euro in the ERM-2 exchange rate
mechanism, a band within which euro applicants must keep their
currency for two years before joining the euro zone.
The crown has been trading on the strong side of the parity
rate, even after its revaluation in March last year, raising a
debate about whether the rate could be adjusted again before
Slovakia's euro entry.
(editing by Paul Taylor)
