Slovakia: linking currency, the koruna, to the euro in the European Exchange Rate Mechanism

Slovakia took a major step toward joining the euro-zone Friday by linking its currency, the koruna, to the euro in the European Exchange Rate Mechanism.

The decision was announced by the European Union and is in line with Slovakia's plan to adopt the euro on Jan. 1, 2009. Slovakia joined the EU in May 2004 along with nine other new members.

Under the mechanism, the koruna will be pegged to the euro within a 15 percent margin above or below a central rate of 38.4550 koruna to the euro.

Six other new EU members Latvia, Malta, Cyprus, Slovenia, Estonia and Lithuania have already joined the system. Nations must be in the system for at least two years before they can join the euro zone.

Poland, Hungary and the Czech Republic have yet to join the system.

In order to join, nations must meet targets of low inflation, low budget deficits and low national debt, as well as limiting currency fluctuations against the euro.

Slovakia was accepted into the system on the basis of its commitment "to achieving price stability in a sustainable manner, and to pursue sound fiscal policies which are essential for preserving macroeconomic stability, including low inflation," the EU said in a statement.

EU estimates released this month showed Slovakia within the inflation and debt targets, but its deficit of 4.1 percent of gross domestic product was above the 3-percent threshold set for euro-zone membership.

The EU said "strict monitoring of budget execution will be required, aimed at a timely detection and correction of slippages." EU finance ministers approved Slovakia's entry into the Exchange Rate Mechanism at the request of Slovak authorities.

The decision was made Friday evening and not announced until after the close of markets in Europe and North America.

The Slovak government adopted a plan in July to prepare for the switch to the euro. The document said the process would be one of the most important logistical operations in the history of the country, which gained its independence in the 1993 split of Czechoslovakia into separate states.

Twelve EU nations currently use the euro as their shared currency.

Estonia, Lithuania and Slovenia are the frontrunners to adopt the euro, hoping to join the currency bloc in 2007. Cyprus, Latvia and Malta aim to join in 2008. The Czech Republic and Hungary are planning for 2010, while Poland has not set a target date, reported AP. P.T.