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May 11th, 2008
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Slovakia set to adopt common currency next year

Czech adoption plans stalled while neighbor anticipates approval

By Michael Heitmann
Staff Writer, The Prague Post
May 7th, 2008 issue

Barring an unexpected reversal, Slovakia will see its bid to join the euro next year approved by the European Union May 7.
According to a draft document leaked to the EU Observer news server, the European Commission, the EU’s executive arm, will officially announce that Slovakia has fulfilled the conditions for euro adoption at that time.
Since the news broke April 28, many in the Czech Republic’s financial community have done some soul searching. While the country’s close cousin is set to adopt the euro Jan. 1, government officials have said the common currency won’t come to the Czech Republic until after 2012.
“The Slovak economy has been growing faster than the Czech Republic’s for a number of years,” said Petr Mach, executive director of the Center for Economics and Politics.
Slovakia’s inflation rate is lower and it has enacted deeper reforms than the Czech Republic, he said. Despite that, Slovaks are still poorer than their Czech neighbors, although they are making gains, he added.
The Czech Republic remains comfortably ahead of Slovakia in terms of purchasing power, according to Eurostat figures. The former will reach 82 percent of the average EU purchasing power in 2008, while Slovakia will rise to 70.7 percent.
The gap between the countries has been shrinking over the past decade, especially in the last couple of years, as Slovak reforms adopted between 2002 and 2006 have started to bear fruit.
For the first time, Slovakia is poised to surpass one of the “old” EU member states in terms of purchasing power. It should soon finish ahead of Portugal, which has 72.2 percent of the EU average.
Inflated numbers
While Slovakia’s reforms have been deeper than the Czech Republic’s, the domestic inflation rate only increased this year because of the public finance reforms, said Pavel Sobíšek, chief economist at UniCredit. The reforms increased the value-added tax and introduced healthcare fees, both of which boosted inflation.
Mach is more critical of Slovakia’s achievements. So far, it has been able to maintain its low inflation numbers only because it allowed the Slovak crown to appreciate, he said.
“With the euro as its currency, Slovakia will have higher inflation than under the crown,” Mach said. While persistent capital inflow leads to currency appreciation now, it will cause prices to skyrocket under the euro, as it happened in Slovenia, he added.
Due to the faster rise in prices, Slovak consumer spending will take a hit, said Markéta Šichtařová, director of Next Finance. In turn, the standard of living, measured by gross domestic product, will grow less rapidly under the euro, she said.
In fact, it might take Slovakia a long time to catch up to the Czech Republic — if ever.
“Some theories even say that it will never happen,” Šichtařová said. “Even within one country, regional distinctions persist for tens or hundreds of years. New York will always be richer than Nevada.”
Slovenia’s adoption of the euro in 2007 is seen by many as a precedent. In January, Slovenian Prime Minister Janez Jansa faulted the common currency for a surge in inflation in the small South European state.
“High inflation is a problem for Slovenia,” he told reporters. The country’s 12-month rate of inflation soared to 5.7 percent in 2007, nearly doubling from 3 percent in 2006.
This surge wasn’t entirely caused by the euro.
“Slovenia joined the economic and monetary union at a time of a mounting inflation wave in Europe, which multiplied the effect of an otherwise small rise in price levels,” Sobíšek said.
In the case of Slovakia, the artificially low level of energy prices could well be a potential risk factor, he added.
No matter how high the risks, there is always the initial advantage of being first. Should inflationary pressures arise in Slovakia after euro entry, subsequent candidates will be at a disadvantage, Sobíšek said, as the European Union might raise the macroeconomic bar for entry.
And, some say, Slovakia’s big bet on the euro could be a windfall for the country.
“The Slovak economy … will definitely speed up with the adoption of the euro, which will provide it an additional competitive advantage against its peers in the region,” said Erste Bank analyst Juraj Kotian.

Michael Heitmann can be reached at mheitmann@praguepost.com


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