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POST-EUROZONE INFLATION IS THE BIGGEST QUESTION

PM courts Brussels with anti-inflation plan

WITH the coalition crisis still smouldering at home, Prime Minister Robert Fico went to Brussels to convince the European Commission that Slovakia is serious about joining the eurozone in January 2009.

WITH the coalition crisis still smouldering at home, Prime Minister Robert Fico went to Brussels to convince the European Commission that Slovakia is serious about joining the eurozone in January 2009.

Fico met EC officials at a time when the European Parliament is calling for more powers to evaluate the readiness of countries that want to adopt the EU currency. Meanwhile, back home, his team was about to push through parliament a state budget described as euro-friendly.

The prime minister brought a package of anti-inflationary measures to Brussels on December 3 and 4 to court the EC and calm EU worries about the country’s ability to contain inflation within the Maastricht limits. He also promised to cut public spending.

The package includes a code of ethics for businesses, an agreement with employers and unions on not letting wage growth exceed the level of labour productivity, and penalties for monopolies that abuse their position on the market.

“The measures that Mr. Prime Minister was speaking about are basic rules of economic theory,” Finance Ministry spokesman Miroslav Šmál told The Slovak Spectator. “For example, there is a basic economic rule that the growth of wages should not exceed the growth of labour productivity.

“Of course, we cannot say that following all these rules will eliminate the chance that the fate of Slovenia will reach us,” he continued. “We cannot control the development of oil and food prices. But if these rules are kept, we’re heading in a good direction.”

Inflation in Slovenia has recently shot past five percent, which is more than double its inflation rate from the same period in 2006. Inflation in Slovenia was 2.3 percent shortly before it entered the European Monetary Union.

But it seems that Slovakia has the European Commission’s confidence that it will walk the euro walk.

European Commission President José Manuel Barroso said that the efforts that Slovakia has so far made to join the eurozone send a good signal to Europe.

“I believe that Slovakia will enter the eurozone in 2009,” Barroso said, as reported by the SITA newswire.

Internal politics disregarded?

There has been much guessing in the local media about what impact the turbulence on the local political scene could have on Slovakia’s eurozone prospects. Fico has several times rejected these speculations, saying political criteria cannot be used to judge Slovakia.

Fico has also assured Barroso that things are stable in Slovakia’s ruling coalition.

“Local democratic institutions solved the problem of the illegal land deals,” the prime minister said, as quoted by SITA.

Fico’s ruling coalition was shaken by a scandal around illegal land transfers involving a nominee from the Movement for a Democratic Slovakia party (HZDS) and millions of crowns. Fico sacked HZDS nominee Miroslav Jureňa from the post of agriculture minister in response to the scandal, which sparked a blame game between the HZDS and Fico’s Smer party and threats to dissolve the coalition.

According to Barroso, the objective fulfillment of Maastricht criteria will be a decisive factor in evaluating the country’s preparedness.

“I therefore believe that Slovakia will manage to keep up the pressure on fulfilling the criteria in the future, as well,” Barroso said.

Fico stressed that economic conditions have been favourable in Slovakia, and suggested that the country is undergoing an ambitious fiscal consolidation under a socially-oriented government.

There have been comments from Brussels that the consolidation of public finances should be going faster. But Fico told the EU Commissioner for Economic and Monetary Affairs, Joaquim Almunia, that the reduction of the country’s public finance deficit and its fiscal consolidation is enough to get it to the eurozone.

Brussels also assured the Slovak government that the European Commission and the Council are going to decide on the country’s eurozone entry. According to the draft European Treaty, the European Parliament is to receive more significant powers in these issues as of January 1, 2009. But by then, Slovakia will already be a eurozone member if it fulfills the Maastricht criteria, SITA wrote.

Fico met with members of the European Parliament, including David Casa, the EP rapporteur for Slovakia’s euro changeover.

“Fico is determined to make a success story out of Slovakia’s application to join the eurozone,” Casa told The Slovak Spectator. “Taking into consideration the timetable we have, once the Maastricht criteria are met there will be no problem for Slovakia to join in January 2009.”

Casa praised Slovakia as an “ex-communist country that has made huge steps since democracy was re-installed.”

“It is an example to all the Eastern European countries,” Casa said. “The economy is flourishing and there is a set path which the government wants to follow. There is also a general consensus about euro adoption. There will obviously be obstacles on the way, but I am sure the determination of Slovaks will overcome them.”

Slovakia meeting targets

The general government budget has a projected deficit of 2.3 percent of the GDP in 2008. Fico said that his government plans to cut the public finance deficit to 0.8 percent of the GDP in 2010.

Slovakia started meeting the most feared criterion for adopting the euro in August, when the country’s inflation dipped thanks to cheaper clothing and food. EU-harmonised inflation reached 1.2 percent year-on-year in August, which was enough to push the 12-month average inflation under the limit required for entering the eurozone.

Slovakia has to keep its inflation within 1.5 percentage points above the average for the three European Union countries with the lowest inflation rates.

Slovakia’s inflation rate was one of the lowest in the EU-27 in August, said Tatra Banka analyst Juraj Valachy.

However, market watchers and the business community are not that enthusiastic about Fico’s anti-inflation steps.

“Efforts to politically manipulate price indexes through a forced agreement between employers and trade unions on a temporary halt to the growth of wages, or state pressures on the price creation policies of private companies, might temporarily stop inflation; but the effect of such measures is necessarily only a short-term one,” said Juraj Karpiš, an analyst with the INESS economic think-tank.

In the long-term, the political manipulation of market processes will lead to negative effects, Karpiš told The Slovak Spectator.

Market watchers and experts have been speculating on whether the inflation developments in Slovenia could make it harder for Slovakia to persuade Brussels that it can control inflation after it joins the European Monetary Union.

“It is possible that the Slovenian experience will increase Brussels’ caution,” Karpiš told The Slovak Spectator. “However, it is not certain what weight the inherently subjective evaluation of inflation sustainability will have in evaluating Slovakia’s entry to the EMU, if Slovakia manages to meet all the specifically-defined Maastricht criteria.”

Slovenia, however, has undergone political manipulation of its prices to meet the inflation criterion, in the form of limits to the growth of regulated prices and pressures on slowing down wage growth, Karpiš added.

As for Slovakia’s ability to sustain its inflation within the Maastricht levels even after entering the eurozone, Karpiš said it depends on many factors, including local monetary policy, prices on the world commodity markets, economic cycles, and the way price indexes develop in other eurozone countries.

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