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Slovakia may hinder euro zone expansion

Analysis

If adopting the euro is followed by high inflation in Slovakia, the other countries planning to join the Euro zone before 2015 will suffer a delay, states the recent weekly survey on emerging markets by London-based financial analyst JP Morgan.

The current deflation is not sustainable because Slovakia’s convergence process has not finished yet. GDP per capita was 62% and price level about 60% of those in the Euro zone at the end of 2007. If Slovak inflation is 1 or 2 percentage points higher than the target set by the European Central Bank (ECB) and the macro economy is relatively balanced, ECB will probably cease to worry about admitting the other countries.

Otherwise ECB might even veto that they enter the ERM 2 (Exchange Rate Mechanism 2). The relatively high inflation in the convergence economies of the region is not a failure of economic policy but a natural process, says the survey, adding that it has been considered that the conditions for Euro adoption should be adjusted to the inherent nature of the emerging economies, or there should be new conditions added, e.g. that of a minimum GDP per capita or a price level near that in the Euro zone. (Népszava, Gazdasági Rádió)

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