SLOVAKIA's Finance Ministry and the National Bank of Slovakia (NBS) have told the cabinet that the country should take all preventive measures against inflation as soon as possible and start preparing the prerequisites for the introduction of the euro currency by late 2006.
Governor of the NBS Marián Jusko said that the advantages of introducing the common EU currency outweighed the drawbacks that the change would bring.
"The advantage is a more stable economic environment. It will not be necessary to face risks resulting from moving rates, and expenses related to the exchange of [Western] currencies will also be dropped," Jusko told the Slovak daily Pravda.
In a document on the financial aspects of Slovakia's accession into the European Economic and Monetary Union (EMU), officials from the Finance Ministry and the NBS said that it is significant that Slovakia is no longer asking whether it should join the euro, but when.
The commitment to accept the single European currency is an inseparable part of the decision on EU membership, say the ministry and the NBS. Moreover, decisive reforms in price deregulation and the country's tax system, as well as the reduction of state expenditures, must be carried out regardless of EMU membership, they say.
"Effective public finances, education and health systems, and a flexible labour market are prerequisites for a well-functioning economy," say the document's authors, adding that the reforms will reduce financial and monetary risks and attract more foreign capital.
According to the report, the government should put forth such salary changes in collective bargaining that would take into consideration a drop in inflation rates in the future.
"It isn't possible to allow real wages to grow faster than labour productivity," reads the document.
Consolidation of the state budget and the required reduction of the budget deficit to under 3 percent of GDP, should be made chiefly through the reduction of expenditures and improved methods of collecting taxes, the document reads.
The main advantages of EMU membership are lower currency-conversion costs for Slovak citizens and companies, as well as the elimination of risks associated with fluctuating exchange rates between the Slovak crown and its euro peg. Exchange-rate developments are currently increasing the price of foreign capital by as much as 2 percent annually, reads the report.
The biggest disadvantage of EMU membership cited in the report is the loss of independent monetary policy. The adoption of the euro will prevent Slovak officials from using the exchange rate to balance the country's economy. There are also fears that stabilisation efforts leading towards reduced inflation could pose a threat to economic growth.
One of the strongest arguments made by the Finance Ministry and the NBS for joining the EMU at the earliest possible date is what they see as the extraordinary openness of the Slovak economy and the significant orientation of Slovak exports towards EU markets, to which 60 percent of the country's exports currently go.
The report's authors say that if the current 10 candidate countries join the EU and the EMU, this share will rise to as much as 90 percent of total exports.
The country still faces tough economic and financial challenges to meet the Maastricht criteria for euro membership. Headline inflation cannot be higher than 1.5 percent above the inflation average of the three EU states with the lowest inflation.
At the end of May, Slovakia was showing a year-on-year headline inflation rate of 7.6 percent, and core inflation of 1.9 percent, levels the NBS said were in line with expectations. Some analysts, however, say that ongoing government austerity measures and increased excise taxes from July could drive inflation above 9 percent by the end of the year.
Besides controlling inflation, Slovakia will have to keep its budget deficit below 3 percent of gross domestic product, and its debt cannot exceed 60 percent of GDP. In the draft budget for 2004 approved by cabinet on June 5, Finance Minister Ivan Mikloš predicted a deficit of 3.9 percent of GDP for next year, dropping to 2.8 percent by 2006.
On June 3, the NBS reduced its current-account deficit forecast for 2003 from 6.2 percent of GDP to 4.5 percent, largely due to faster than expected GDP growth. The bank raised its 2003 growth forecast from 3.9 percent to 4.4 percent.
To join the euro, Slovakia must also keep its interest rate no higher than 2 percent above the average in the EU countries with the lowest inflation. Under the Maastricht agreement, the fluctuation of the Slovak crown on currency markets must stay within 15 percent of a central rate against the euro.
In late May, however, the European Commission and EU monetary affairs commissioner Pedro Solbes suggested accession countries should be required to keep their currencies in a much narrower band of 2.25 percent against the euro, drawing fire from EU accession countries hoping to soon adopt the common currency.
"The treatment of candidate countries on entry to the European single currency should be the same as countries that already have the currency," said Jusko on the plans.
16. Jun 2003 at 0:00 | Dewey Smolka