Slovakia making believers of euro target sceptics

SLOVAK analysts and economists are starting to believe the country has a chance of adopting the euro by 2009, in line with the Robert Fico government's plan.

SLOVAK analysts and economists are starting to believe the country has a chance of adopting the euro by 2009, in line with the Robert Fico government's plan.

According to a poll carried out in November by the Institute for Economic and Social Reforms (INEKO) and the Economic Analysts Club (KEA), Slovak analysts now put Slovakia's chances of adopting the euro on January 1, 2009 at 64 percent, up from 56 percent the month before (see chart, page 6).

"The chances of euro adoption increased thanks mainly to more positive expectations regarding inflation. While in October the average estimate for inflation [at the end of March 2008] stood at 2.8 percent, in November the inflation estimate fell to 2.5 percent. The estimate for the public finance deficit stayed unchanged at 3 percent of GDP," reads the INEKO and KEA poll report.

This optimism raises Slovakia above its regional neighbours, as Poland and Hungary have not yet set a date for euro adoption, while the Czech Republic has admitted that its January 2010 date was too optimistic. Economic forecasting company Global Insight has predicted that these countries will not be in a position to adopt the euro until 2012-2014.

The Baltic countries have also been fighting inflation as their economies grow strongly, and may now be looking at euro adoption in the 2009-2010 period.

Despite the increased optimism regarding Slovakia, the analysts quoted in the poll warn that there are still risks that the Maastricht criteria for euro adoption might not be met.

For example, the cabinet could exceed the public finance deficit threshold of 3 percent of GDP in trying to fulfil its pre-election promises. Then there is the risk that higher government spending and accelerated GDP growth could increase inflationary pressures in the economy, causing Slovakia to overshoot its inflation target.

According to the poll, Slovakia could also have difficulties proving it will be able to sustain the criteria after accession to the eurozone.

Nevertheless, local analysts are increasingly positive about Slovakia's chances.

Zdeno Štefanides, the chief analyst of VÚB bank, believes that the chances that Slovakia will meet the Maastricht criteria on time are greater than 80 percent, and that if the country manages that, euro adoption is virtually assured.

"We believe that if the country meets the Maastricht criteria as the European authorities want, it will not be to anybody's advantage to opt out," he told The Slovak Spectator.

"We are now closer to the euro than ever before. The inflation situation is much more optimistic because oil prices have gone down and the prices of regulated energy have grown less than we expected about half a year ago. It seems that the cabinet will also meet the fiscal [deficit] criterion. At the moment - and I emphasize 'at the moment' - there don't seem to be any barriers in the way of the euro," said Juraj Valachy, an analyst with Tatra banka.

Marek Gábriš of ČSOB pointed out that the current cabinet had accepted the 2009 deadline for euro adoption as part of its political agenda, after initially sounding unconvinced on the need for euro adoption immediately following June elections.

"It [the cabinet] will keep making efforts to meet the deadline because it has made quite strong statements that it would meet it. If it does not, some of its voters might see it in a bad light," Gábriš said.

Gábriš added that for Slovakia, the chances of meeting the 2009 deadline hinged on two of the five Maastricht criteria: the fiscal deficit and inflation.

He said that meeting the general government deficit should not be a problem, even though the cabinet set the target quite high at 3 percent, which gives the cabinet no space for possible manoeuvres.

On December 12, government MPs approved a state budget deficit for 2007 with a deficit of 2.94 percent of GDP.

"During recent years, tax revenues have brought some positive surprises, and economic growth has been very strong. This means we could also be pleasantly surprised next year. Of course, it's not good to be relying on "a positive surprise" in the same year that the fiscal criterion is being evaluated," Gábriš said.

"In addition, this cabinet is socially-oriented, and is trying to spend more on social concerns than before. While each cabinet has the right to push through its priorities, it would not be good to be doing this in the same year that the inflation criterion will be evaluated."

While possible higher government spending and economic growth remain inflation risks, energy price developments are generating optimism that Slovakia could sneak under the inflation target even with 7-8 percent GDP growth.

"At the moment, there are no indications that there might be a problem with inflation," Gábriš said. "Gas prices should decrease in January and electricity prices should stay the same as this year. That means that at the beginning of the year, room will be created for a gradual decrease in prices, and inflation will level off at around 2 percent at the end of next year compared to the current 4 percent."

The European Central Bank (ECB) offered advice to Slovakia in its December Convergence Report on how to meet the Maastricht criteria.

"Overall, in order to achieve a high degree of sustainable convergence, it will be important for Slovakia to implement adequately tight fiscal policies in order to help reduce the risk of demand-induced inflationary and current account pressures building up," read the report.

The ECB also called for further structural reforms to the economy, for improvements to the labour market to increase labour mobility, and for wage increases to remain in line with labour productivity growth.

"Such measures, together with an appropriate monetary policy, will help to achieve an environment conducive to price stability, as well as promote competitiveness and employment growth."

What are the Maastricht criteria?

- an inflation rate of no more than 1.5 percentage points higher than the 3 best-performing member states of the EU;
- a ratio of annual government deficit to GDP that is no higher than 3 percent at the end of the preceding fiscal year;
- a ratio of gross government debt to GDP that is no higher than 60 percent at the end of the preceding fiscal year;
- a nominal long-term interest rate of no more than 2 percentage points higher than the 3 best-performing member states;
- must have been part of the second stage of the exchange-rate mechanism (ERM II) under the European Monetary System for 2 consecutive years, and not have devalued their currency during the period.

Euro adoption schedule

Czech Republic 2010
Cyprus 2008
Estonia 2008
Hungary 2014 (?)
Latvia 2010 (?)
Lithuania 2007
Malta 2008
Poland 2012 (?)
Slovakia 2009
Slovenia 2007

Euro-believers increasing in Slovakia, polls say
in 2006
Number of
Eurozone as
of January 1, 2009
Probability of euro
adoption as
of January 1, 2009
Public finance
deficit for 2007*
Inflation** Reference
September 20 10:10 52% 3.1% of GDP 2.8% 2.9%
October 20 11:9 56% 3.0% of GDP 2.8% 2.9%
November 22 16:6 64% 2.5% of GDP 2.5% 2.9%

* Including the impact of the pension reform.
** Forecast average 12-month inflation rate as of the end of March 2008.
*** Maastrict criterion that sets maximum inflation allowed at 1.5 percentage points higher than the 3 best-performing countries of the EU.

Source: ECB, Eurostat, European Commission

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