SLOVAKIA is now officially in the home stretch to adopt the euro in January 2009. On April 5 the country asked the European Commission and the European Central Bank to assess its readiness to switch to the EU currency. Both government officials and market watchers are confident that Slovakia is meeting all the Maastricht criteria for joining the euro, including the ever-sensitive inflation requirement. Any heated discussion in Brussels about Slovakia's prospects will certainly be about the country's ability to sustain these criteria, analysts said.
Slovakia's Finance Minister Ján Počiatek handed over the official request in Brdo, Slovenia, during a discussion of EU finance ministers. Počiatek said he was optimistic about the country's chances of entering the eurozone, which he put at 90 percent, the Reuters newswire reported.
State officials said that submitting the application was the culmination of the country's efforts to join the euro. However, Deputy Finance Minister František Palko told the media that Slovakia was not obliged to submit this request since the European Commission evaluates the aspiring countries' convergence programmes every two years and Slovakia's turn is this year.
"We wanted to declare an eminent interest in Slovakia's entry," Palko told the Sme daily.
In order to qualify for the euro, the country's general government deficit must be less than 3 percent of national GDP, long-term interest rates should be no more than 2 percentage points above the average for the three EU countries with the lowest long-term interest rates, and the public debt must not exceed 60 percent of GDP. The applicant country must also maintain its currency's exchange rate within the European Exchange Rate Mechanism (ERM) II for at least two years, and its harmonised inflation rate must remain no more than 1.5 percentage points above the average for the three EU countries with the lowest inflation rates.
Slovakia has been meeting these basic criteria, said analysts.
"It has been evident for some time that as far as the formal meeting of criteria is concerned there won't be any stormy discussion," Robert Prega an analyst with Tatra Banka told The Slovak Spectator. "Although, Slovakia has not yet released all its results for 2007, we assume that all the criteria will be met with a considerable reserve."
The discussion will mostly focus on the country's ability to sustain the criteria, which promises to make for a challenging debate since it is not clearly defined for how long Slovakia should sustain the numbers, said Prega. A negative response on Slovakia's readiness to enter the eurozone would, first of all, be a huge surprise to the analysts, according to Prega.
"We do not expect anything like that to happen," Prega told The Slovak Spectator.
However, the impact of a negative assessment would in fact depend not just on the response of professionals, but also the government and its determination to continue meeting the criteria, he said.
"Any disappointment could result for example in the loosening of strict budgetary policies," Prega said. "However, I stress that regardless of the EC statement our economy is moving within restricted frames and even if the crown were to weaken and interest rates rise, it would all be stabilised after a certain time."
Silvia Čechovičová, an analyst with CSOB Bank, agrees that an eventual negative assessment would result in a temporary loss of strength by the Slovak currency.
"It would only be a short term move and the crown would gradually return to its strengthening path," Čechovičová said. "There would be no reason for a long term weakening, since the development of long-term economic fundamentals speaks unambiguously in favour of the appreciation of the currency."
According to Prega, the rise of food prices is a development vulnerable to European Commission and European Central Bank criticism.
"However, Slovakia's strong argument is that we are keeping the inflation with a huge reserve, by one percentage point, and it is still beneath the EU average," Prega said.
Čechovičová also said that Slovakia can afford to be confident about the inflation criteria even though the last inflation numbers, which will be based on a 12-month cumulative average, will be published in mid April. The numbers should not change Slovakia's chances, she added.
Analysts assume that in Slovakia the situation will develop very similarly to Slovenia, the country to which Slovakia is often compared, said Prega.
"That's why we can presume that in a couple years the inflation might double," said Prega. "Some circumstances though imply that in 2009 inflation might in fact be lower than it is currently."
It would not be surprising at all if, after the adoption of the euro, inflation actually rises, since the growth of Slovakia's economy is above average while the prices are below the average, Prega concluded.
Čechovičová said that the country also met the public finance deficit criterion too, though not all the relevant numbers, only so-called flash estimates, have so far been released.
"We do not expect that the final numbers will differ greatly from the preliminary one, which was 2.2 percent of GDP," Čechovičová told The Slovak Spectator. "Compared to the 3 percent limit, there is still a great reserve."
The European Commission has several times warned Slovakia to be more restrained in its fiscal policies, Čechovičová said.
"The approved fiscal plan for 2008 and 2010, which reduces the public finance deficit to 2.0 percent of the GDP in 2008 and to 1.7 percent of GDP in 2009, implies that the government has taken the restriction call into consideration," Čechovičová concluded.
In the long term, Slovakia has had the fewest problems with its long-term interest rates and the general government debt-to-GDP ratio. The currency target also seems achievable so far. Slovakia entered the Exchange Rate Mechanism II (ERM II) when it pegged the crown to the euro on November 25, 2005. The crown was originally pegged at the prevailing market exchange rate of Sk38.4550 to the euro. After the crown strengthened in late 2006 and early 2007 the peg was re-set at Sk35.4424 to the euro in March last year. It is permitted to fluctuate in a band of plus or minus 15 percent, i.e. between Sk30.1260 and Sk40.7588 to the euro.
With files from Dominika Uhríková