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Wednesday, May 7, 2008

Slovakia's Euro Entry Bid Accepted

Slovakia today won EU approval to adopt the euro on Jan. 1 2009, thus becoming the 16th member of the European single currency zone. The EU Commission announced today on its Web site that Slovakia had reduced both the fiscal deficit and inflation sufficiently to qualify. At the same time the Commission announced that they were terminating the excess deficit procedure, a move which is a mandatory to joining the euro region.

EU finance ministers must now endorse the commission's recommendation in July. Not everybody is entirely convinced it seems, and the European Central Bank still has "considerable concerns'' about the sustainability of the inflation path, according to a report published by the bank today in Frankfurt. I share many of these concerns - as I have already explained at great length in this post here.

Even in Slovakia itself people retain their own reservations as according to a survey conducted by the Slovak Statistical Office between March 1-7 some 72 percent of respondents had a negative attitude towards the proposed change due to the perception that - in a way which is similar to what happened in countries like Spain and Greece after adoption - prices may well rise faster than anticipated and household budgets become strained.

However I do think that today is really not the time to pursue these concerns, since at this point they would smack more of sour grapes than of anything else. I would really simply like to take this opportunity to congratulate Slovakia on all the hard work they have put in to preparing their membership bid, and wish them every success in the introduction of what now looks like it is soon set to become their new currency.

``To ensure that the adoption of the euro is a success, Slovakia must pursue its efforts to maintain a low-inflation environment, be more ambitious with regard to budgetary consolidation and strengthen its competitiveness position,'' EU Monetary Affairs Commissioner Joaquin Almunia

Of course eyes well beyond Slovakia will now be watching the month by month movements in the Slovak CPI, since should the more optimistic expectations on the future inflation path not be fulfilled, then this will only make further applications from other EU10 countries - Bulgaria, Latvia, Lithuania, the Czech Republic, Estonia, Romania, Poland and Hungary - much more difficult in the future.

Update 13 May 2008

Slovakia's inflation rate rose in April to a 17-month high, increasing pressure on the government to convert the koruna to the euro at the strongest possible rate before Jan. 1 adoption to tame price growth. The rate advanced to 4.3 percent from 4.2 percent in March, the Bratislava-based Slovak Statistical Office said in a statement today. Prices rose a monthly 0.2 percent, compared with a 0.3 percent gain in March.

To adopt the euro, Slovakia has to keep its 12-month average inflation rate, using the EU HICP methodology no the one reported on here, to within 1.5 percentage points of the average 12-month rate of the three EU nations with the slowest price growth.

If final approval for Slovakia's application is secured, the Central Bank and the government may well try to lock the koruna rate to the euro one - at a higher rate -final time before the national currency is discontinued. Securing the strongest exchange rate possible at the time of adoption is seen by many as a way of continuing the damping effect the Slovak koruna now has on capping imported prices, thus helping tame inflation once the koruna no longer exists. This approach, however, does have its dangers, as It may make exports more expensive in the future, especially if Slovak prices and wages get a strong kick upwards from euro adoption. Thus Slovakia - if she is not careful could face the difficulty of having a longer term trade deficit.

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