Euro expectations build

AS MAY 7, the day on which Slovakia will hear the European Commission's verdict on its application to join the eurozone, approaches, debate about the new currency is growing more intense in Slovakia. Slovak state officials are confident that Slovakia now meets all the nominal economic criteria for the country to adopt the euro and say that the battle is now shifting from economics to diplomacy.

AS MAY 7, the day on which Slovakia will hear the European Commission's verdict on its application to join the eurozone, approaches, debate about the new currency is growing more intense in Slovakia. Slovak state officials are confident that Slovakia now meets all the nominal economic criteria for the country to adopt the euro and say that the battle is now shifting from economics to diplomacy.

"If someone says today that Slovakia should not have euro, they must be thinking in political and not in economic terms," Prime Minister Robert Fico told the press on April 22, after announcing that the country has met all the Maastricht criteria for euro membership, some with considerable room to spare.

On April 18, the Slovak Statistics authority for the first time confirmed that Slovakia is meeting the two fiscal Maastricht criteria: general government deficit and general government debt. The deficit stood at Sk40.02 billion, which is 2.16 percent of GDP, well below the 3 percent threshold. General government debt stood at Sk543.85 billion, which is 29.37 percent of GDP according to the Slovak Statistics Office, far below the required 60 percent.

Still, the most anxiously-watched criterion has been inflation, since that has looked the most likely area for any possible slip-up.

Slovakia has succeeded in containing its inflation within Maastricht requirements: 1.5 percentage points above the average for the three EU countries with the lowest inflation rates, a figure which now stands at 3.2 percent.

Last year Slovakia's harmonised inflation rate stood at 2.2 percent, thus nominally meeting the criterion, as the EU statistics authority also confirmed in mid April.
However, trimming inflation is only the beginning of an uncertain road, since the European Commission and the European Central Bank will also be assessing the country's potential to sustain low inflation.

"The growth of prices is dangerous for every government and thus we will monitor [its development] and take all the legal anti-inflationary steps that are available," Prime Minister Robert Fico told public service Slovak Television (STV) on April 21.

Meanwhile, local media, quoting a Bloomberg newswire release, reported information apparently leaked from the European Central Bank (ECB) which suggested that the bank has concerns about the future development of inflation in Slovakia.

The Finance Ministry has dismissed the concerns as baseless.
However, Miroslav Šmál, spokesman of the Finance Ministry, has confirmed that inflation has been the only sensitive criterion in the long run, since the European authorities will also be looking at its sustainability.

"The criterion [of sustainability] is not clearly defined, and can thus be interpreted in different ways," Šmál told The Slovak Spectator. "Currently, however, the inflation criterion cannot be considered unfulfilled, since the country has met the nominal criterion with a considerable reserve and this reduces any room for assumptions about failing to meet the sustainability criterion, which is judged based on estimations of future development and as such is always uncertain."

An analyst with Unicredit Bank, Ľubomír Krošnák, agrees with Šmál that when it comes to the sustainability of the inflation criterion, it is rather difficult to tell whether a country applying for euro membership has or hasn't been meeting it.

"Thus the discussion is moving from the economic to the political domain" Krošnák told The Slovak Spectator. "There is the assumption that Slovakia, after entering the eurozone, will not be able to keep inflation at record low levels, but that nor should inflation deviate considerably from the inflation criterion level."

According to Krošnák, requiring a country which is already in the convergence process to maintain the criteria after entering the eurozone is very strict, and is not supported by much of the previous experience.

"Out of all the countries of the eurozone, only Germany and Austria have continuously met the inflation criterion," Krošnák said, adding that economically weaker members such as Greece, Portugal, Spain or Ireland - to whom Slovakia should be compared - have not met the inflation criterion for most of the period since they adopted the euro.

Krošnák also said that a difference of opinion between domestic and European institutions on the sustainability of the inflation criterion should not be a reason to reject a country's entry to the eurozone.

"Slovakia, unlike some other countries such as Slovenia, has not applied, prior to eurozone entry, any administrative measures or agreements to artificially push down inflation," Krošnák said.
In the case of Slovenia these measures were seen as one of the fundamental reasons for the rise in prices there after it entered the eurozone, he added.

As for the country's ability to keep the public finance deficit within the required limits, Šmál is confident that Slovakia will have no problems doing so.

"Slovakia will be able to keep to the public finance deficit [criterion] in the long term," Šmál told The Slovak Spectator adding that the approved state budget plans fully reflect the conditions for adopting the euro and healthy economic development.

Public finance deficit and general government debt data has not surprised Krošnák either.
"If we look at the predictions from the end of last year, which assumed the public finance deficit at a level of 2.5 percent of GDP, the final numbers have been even better," Krošnák told The Slovak Spectator. "The large reserve in meeting this criterion has also ended discussions about the possible inclusion of other items, such as the National Highway Company, into the public finance deficit, since even with its inclusion, Slovakia would meet the criterion."

Krošnák agrees with Šmál that the public finance deficit is likely to move within the required limits during forthcoming years.

"With the economic growth that Slovakia has been posting recently, it should not be a problem," Krošnák said.

Meanwhile, Fico on April 21 repeatedly called for a fair approach on the part of European institutions and said that no conditions other than the Maastricht criteria should decide the country's entry into the eurozone.

According to Krošnák, rejecting Slovakia's application for political reasons would carry serious political risks for the European Union itself.

"Such a decision would kill even the last islands of euro-optimism in countries which have not yet adopted the euro," Krošnák said.

Krošnák views the leaked information from the convergence report prepared by the European Central Bank as an obligatory exercise, allowing the ECB to cover its back in the event that Slovakia repeats Slovenia's example.

"However, the ECB report is only advisory, and most important will be the evaluation by the European Commision," Krošnák said.

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