FRANKFURT (Reuters) - The European Central Bank on Wednesday gave Lithuania the all clear to join the euro zone next year as its 19th member, but raised concerns about future inflation in the Baltic state.
If also signed off by European heads of state, Lithuania's adoption of the euro would also change the way the ECB takes monetary policy decision as its Governing Council would then reach a size that required a different voting pattern.
In its convergence report, the ECB examined eight European Union countries - Bulgaria, the Czech Republic, Lithuania, Hungary, Poland, Romania, Sweden and for the first time Croatia - but only Lithuania met all relevant criteria.
Lithuania managed to stay below the ECB reference rates in terms of budget deficit, government debt ratio and inflation between May 2013 and April this year, the ECB concluded, but warned about maintaining low inflation rates going forward.
"Looking ahead, maintaining low inflation rates on a sustainable basis in Lithuania will be challenging in the medium term, as it may be difficult to control domestic prices pressures and avoid economic overheating in an environment
of fixed exchange rates," the ECB said.
The catching-up process was likely to drive up the inflation differential between Lithuania and the euro zone over the medium term. "In sum, there are concerns, therefore, regarding the sustainability of inflation convergence in Lithuania," it said.
The ECB also called for fiscal and labour market reforms.
This is Lithuania's second attempt to join the bloc after it exceeded the required inflation level in 2007. It now aims for January 2015 to follow its Baltic neighbours Estonia and Latvia, which joined in 2011 and earlier this year, respectively.
However, once national central bank governors, who gather twice a month to discuss monetary policy, exceed 18 - their current number - they will be divided into groups of smaller and larger economies to ensure efficient decision making at the ECB.
Taking turns to vote will affect all euro zone members, but the damage will be more keenly felt in Germany whose once-mighty Bundesbank served as a blueprint for the ECB. German politicians have called for a change of the "one member, one vote" principle to reflect their country's economic influence.
(Reporting by Eva Taylor; Editing by Toby Chopra)