Slovakia: Approaching the euro

[John S]

http://www.nbs.sk/INDEXA.HTM

PDF File (additional report):

http://www.nbs.sk/MEDZINAR/EU/STRATEGY.PDF

Approaching the euro


Ladies and Gentlemen,

I welcome the opportunity to address you tonight and I would like to thank the CNB for including me into this panel, where I can speak and discuss the most challenging and demanding topic, which is the EMU accession.

We all, central bankers, know that the main role will not be played by us, but crucial will be the decision and actual steps of national governemnts.

Let me present the views and approach of the National Bank of Slovakia, which, however, cannot be considered as the official statement of the Slovak Republic. Nowadays, there is the joint strategy of the central bank and the government under preparation, which will be approved by the Slovak Government in the second quarter and which will also be a part of our PEP (pre-accession economic programme). The intention here is to officially announce the term of our preparedness for examination, which also serves as the yardstick and anchor for all our current and future decisions.

The general approach of the NBS, which can be slightly (in terms of its schedule) modified by our government, is the earliest possible approach towards the euro adoption and EMU membership. At the same time, we prefer the shortest possible membership in the ERM II mechanism.

The main idea behind the formulation of the earliest possible strategy of EMU accession is our belief that Slovakia may enter the EMU earlier, but must not become a member of the eurozone later than other associated countries. This is based on our latest experience, when we were treated as an outsider in the second wave of the EU, OECD and NATO enlargement, with a long lasting effect on FDI inflows, costs of debt service and the overall macroeconomic development.

I do not want to bother you with all these well-known and clear reasons for entering the EMU, which are, above all, the savings on transaction costs and a decline in the exchange rate volatility and exchange rate risk. This is extremely important for Slovakia with its high level of openness. The share of exports and imports of goods and services in GDP increased to 156.5% in 2001 from 117.3% in 1993, while 60% of exports and 50% of imports were related to EU countries in 2001. After including the CEC5, these shares would increase to 89% for exports and 71% for imports. Considering the large share of the Slovak foreign trade in GDP and the territorial structure of the foreign trade, the probable positive impact of the increased openness due to the EMU membership (an estimated increase of 1.6 percentage points) on the GDP per capita growth may oscillate around 1%.

We are also aware of disadvantages which could be connected with the EMU membership. Among frequently mentioned disadvantages of the euro adoption belong the ongoing process of catching up with EU levels, the insufficiently synchronised business cycles and the loss of the exchange rate stabiliser. Along with this, we get the common monetary policy which is doubtful to fit to all, especially to a country with structural changes still ahead.

With regard to the above mentioned possibly problematic areas, in our view, the real and nominal convergence can be seen as complementary to each other, and should be pursued in parallel. Over the short period of time, a contradiction between the real and nominal convergence has become evident where GDP growth could slow down. However, at the same time, conditions for more dynamic and, mainly, sustainable growth will be created. Under these conditions Slovakia has a potential for the GDP grow of around 4-5% in the medium term.

Regarding the independent monetary policy and the automatic stabiliser of the exchange rate, let me ask the question: Is it possible, in such a small and open country, that they would work freely and independently?

I can openly say that we do not see any serious problem in meeting all Maastricht criteria in the medium-term horizon. However, what could negatively effect fulfilment of fiscal criteria and slightly postpone the process of integration is the treatment of the pension reform expenditures, which is now also in question in many associated as well as member countries.

In the end, let me stress that there is a strong incentive and first steps have already been carried out in the area of structural reforms, particularly those related to the pension, health-care and social benefits policies, and decentralisation. The price distortions are expected to narrow in 2004. The plan of the Ministry of Finance is to lower the fiscal deficit from around 6% in 2002 to 5% in 2003 and to 3,4% in 2004, so that Slovakia could be ready for the examination in 2005 or 2006.

Thank you for your attention.

[Olivier]

John, on your mind, what kind of consequences would happen after the enlargement of the euro-zone?
When Slovakia (and the 9 other new members) will get the euro, will the euro get more value (compared to the dollar, the yen, the pound... )?

What will be the consequences on the enlargement for North-America?

[John S]

John, on your mind, what kind of consequences would happen after the enlargement of the euro-zone?
When Slovakia (and the 9 other new members) will get the euro, will the euro get more value (compared to the dollar, the yen, the pound... )?

What will be the consequences on the enlargement for North-America?

That is a very good question. I wish I had a crystal ball and then I could give you a definitive answer. But, I'm sure we can make some positive guesses.

Befores such a question can be answered, we have to divide the economy of the affected areas into various "spheres" and view them individually. The spheres could be short term, long term, macroeconomic structure and microeconomic structure.

Any short term change, whether it be monetary units, or something else, entails adjustment. People abhor change, especially rapid change and no doubt, the short term period will be a period of enease and adjustment. A smart government will however, do its best to ease the transition so as to make the short term adjustments as easy as possible.

In the long term, I feel the euro area will experience the same benefits from a single currency that the US has experienced from the single use of the dollar. Just as it would be foolish to image the US operating on 50 different currencies, why should one expect other regions of the world to continue to operate on regional currencies and prosper equally?

I feel the long term effects have already been realised in much of the present euro-area and in those non-euro countries where the national currency is in step with the euro. That is the stability of the national economies. Think back, not to long ago when there was only the dollar as the only currency with real power. Whenever there was major trouble in the world, the nations of the world turned to the dollar for refuge and all the other currencies devalued. This time this did not happen. Once the euro became a bonafide currency on 2001-01-01, its value soared despite a weak economy in Europe. And despite efforts by the US government and Wall Street to destabilise the euro in the form of a war with Iraq, the effort failed to destabilise the euro. There is no inflation in the "traditional unstabile countries" surrounding the Mediterranean. And interest rates and government deficits, even though above Maastrict limits, are under control. This is the early long term effect of the euro.

I see the long term effects as promoting greater economic stability in the EU and hopefully elsewhere. I think the euro can do for the world, not just the EU, what the dollar had done for the US. I don't think the EU will ever be able to create euro hegemony, but we will see the euro's strength rely on strong multi-lateral relationships among nations and trade blocks. The US's unilateral attitude is the beginning of its downfall.

In the macroeconomic structure, the euro will bring balance and stability to the EU economies as is already being seen. As the euro strengthens, it will help reduce the costs of doing business in Europe allowing for the EU to pay for social programs, that the US economy can not afford. The EU will experience greater and long term investment to help finance many new adventures as well as increasing modernisation of the new countries.

It is the microeconomic structure that may be the one to suffer. Some businesses in the present euro area will take advantage of lower wage costs in the new states and locate there, increasing unemployment in former regions. But, if the EU plans correctly, they can easily replace these lost industries in affected regions with new ones. We may see a greater migration of peoples in the EU then ever before, seeking opportunities as they move around.

On a political and cultural front, a greater push will be required for a common government, a completed and functional constitution, and maybe a common language. Some may not like the last one, but let's face it, the EU can not be a super power without it. With so many people already speaking English in Europe, this move may already be in progress. However, if it were my choice, I'd choose Esperanto. A language easy to learn and use, and more "European" in nature.

As for the US, I see no bright future. The US frittered its future away on dollar hegemony. Exporting its job base in order give value to over-printed paper dollars; incuring high deficits, expecting others to pay for them. As "others" put their faith and trust in the euro, the dollar will suffer. The US government continues to spend heavily making no attempt to control the debts and deficits. They think they can bully the rest of the world into paying for American extravagance. That attitude is going to be paid for with a heavy cost.

What happens to Canada and/or Mexico all depends on how fast they decouple themselves from the US. Canada is a country half-way culturally from the EU and the US. Canada can go either way. Mexico belongs with its brethern in South America.

When you ask if the euro will gain more value when the new countries join, All I can say is if so, only a little. But, when we say gain value, against what currency(ies) are we referring to? I think once these countries do join and they "prove" that their economies have benefited from euroisation, I feel we will see more investments in the euro area, which can make the euro stronger. But, more important, we may see dollar commodities being priced in euros, a much greater victory.

Whatever the eruo does, it will for sure be noticed and have an effect on the economy of the whole world. And in my opinion, a very positive effect.

I hope I answered your questions.

Now, what do you and the others think?

[John S]

Does “Euroisation” harm the poor through macroeconomic
volatility? The Case of Economies of Transition.

Xavier Cirera
Institute of Development Studies
University of Sussex
September 2000.

http://www.tinbergen.nl/~phare/xavier.PDF