By AOIFE WHITE
The Associated Press
Tuesday, May 16, 2006; 4:36 PM
STRASBOURG, France -- The euro area is likely to swell to 13 nations next year after the European Commission said Tuesday that Slovenia could become the first new user of the common currency since it was launched four years ago.
The euro rapidly became the world's second major currency after the dollar, but is still not used in all 25 EU member states.
That will start changing in the coming years, as seven other new EU members queue up to join _ but only after meeting strict economic standards that some of the initial euro nations managed to skip.
Widening the euro area bolsters the currency's credibility in the eyes of the world, said Peter Morici, a professor of international business at the University of Maryland.
Filling in the "holes in the map" makes the euro more legitimate as a reserve currency, he said. "As the euro expands into Eastern Europe, its stability and credibility will be improved."
But for EU officials, that legitimacy rests on a strict set of rules governing inflation and public debt that are designed to keep the euro economy stable _ even though EU governments bent the rules in 2001 to allow Italy, Belgium and Greece to sign up for the euro when their public debt was well above the legal limits.
Lithuania's high inflation scuppered its chances to join next year, EU Economic and Monetary Affairs Commissioner Joaquin Almunia said in a statement Tuesday. "Lithuania meets all the convergence criteria except the one on inflation," he said.
Lithuanian officials acted angrily to the EU rebuff which was based on figures showing that the average inflation rate in Lithuania during the 12 months to March 2006 was 2.7 percent, just above a 2.6 percent guideline.
Almunia said he expected Lithuania's inflation to rise to 3.5 percent on average this year. Natural gas prices rose by around 40 percent in January after the expiration of a long-term agreement with a major gas exporter.
The commission's report said the country was yet to feel the main impact of this energy price hike. "Buoyant domestic demand, energy price increases and increases in indirect taxes represent risk factors for inflation," it warned, saying the country had to take care to keep wage growth in line with productivity.
Lithuania's EU Commissioner Dalia Grybauskaite _ who voted against the decision to reject the bid _ said the rules had been applied dogmatically.
Jonas Lionginas, chairman of the Lithuanian parliament's finance and budget committee, said the EU decision showed "disrespect" toward the country. "It seems now that declarations of equality of all member states are not worth anything," he said.
Reinoldijus Sarkinas, chairman of Lithuania's central bank, said the nation had done everything it could to join the euro zone in 2007, "but Brussels' decision was motivated by both economic and political reasons."
Slovenia, however, is on track to become the first new member to join the common currency if EU finance ministers approve its bid _ as is likely _ on July 11.
The EU's decision is "very good news," Slovene Prime Minister Janez Jansa told reporters in Ljubljana. "Slovenia will get a chance to become even stronger and make further positive (economic) steps," he said.
The country of 2 million, one of the most prosperous in southeast Europe, has an inflation rate below 3 percent and economic growth at about 4 percent.
Almunia warned that Slovenia now had to speed up crucial practical preparations to ensure a smooth changeover, including efforts to prevent unjustified price hikes.
Hoping and expecting a positive decision from the EU, Slovenia earlier this year started marking prices of goods and services in both Slovene tolar and euro.
The Central Bank also plans to distribute handy calculators to all households in the fall, to make it easier to Slovenes to calculate a price in euro once it's fully introduced.
Instant euro membership seems far more important for the EU's smaller members. Malta, Cyprus, Estonia and Latvia have set a 2008 target although Latvia may choose to delay this deadline to tackle its inflation _ the highest in the EU. Estonia has already postponed its bid to join the euro from 2007 to next year.
The larger Eastern European economies are ready to wait a little longer. Slovakia wants to join in 2009, followed by Czech Republic and Hungary _ if it manages to lower its massive public debt. Poland has not set a target date at all.
Morici said adopting the euro has bigger benefits for smaller countries. "I think small countries gain a lot more. They have higher costs of borrowing and it is easier to attract them," he said.
EU finance ministers said last month they were worried about differences across the euro zone as some economies _ Spain and Ireland _ overheat and others, such as Germany and Italy, struggle to grow at all.
They blamed the slow pace of labor, product and capital market reforms for these imbalances.
European countries decide their own level of spending and are reluctant to take any steps toward a bigger shared EU budget or common tax.
A wider euro area may pressure euro-skeptic nations to think again. Britain, Sweden and Denmark have so far chosen stay out of the common currency for political reasons.
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Associated Press Writer Liudas Dapkus in Vilnius, Lithuania, contributed to this report.