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Skeptical Slovaks fear price jump after euro entry

Slovakia’s invitation to join the single European currency will cap a decade of rapid economic development, but the transition is worrying some people in the former communist country.

“It will be quite difficult for us who have already retired. I’ll get what, €200 ($309), how much is that?,” said Gabriela Burcinova, 73, fretting about next January, when she will start getting her monthly pension in euros instead of Slovak koruna. “Prices are still going up, energy, gas, food, rent, one has to pay for it all. I’m not overjoyed,” she said in the small eastern Slovak town of Humenne.

The European Union’s executive commission will invite Slovakia on Wednesday to become the 16th member of the euro zone from 2009, making it the poorest country to join. An opinion poll showed last week that nearly three quarters of Slovaks fear the euro will be bad for them, mainly because they are worried it will push up prices. Euro adoption follow reforms which have attracted billions of euros in foreign investment, made Slovakia the world’s largest car maker per capita and pushed economic growth to 10.4% last year -- the highest in the EU. Once seen as lagging central European neighbors in introducing market-friendly policies, the country of 5.4 million people will join the eurozone before Poland, the Czech Republic and Hungary.

Euro entry will be the biggest international achievement  for leftist Prime Minister Robert Fico, elected in 2006 with promises to take better care of the poor. Rapid economic growth, which Fico says is the result of Slovaks’ willingness to work hard for low wages, has boosted state budget revenues and financed part of his welfare plans. But he has had to scale down social spending plans to curb fiscal shortfalls and qualify for euro adoption.

Fico is now preparing to devote time and money to make sure that euro entry does not backfire and undermine his popularity. “Those most worried about the single currency are elderly and people with lower education. That is not good news for ruling coalition parties, as these layers account for a significant part of their electorates,” said Ivan Stulajter, a columnist at the broadsheet daily Sme. “It is no coincidence that they are preparing some ‘rescue packages’, or, at least, they are talking about them.”

The government has approved measures to compensate people for an eventual euro adoption impact, including unspecified Christmas bonuses and pension hikes. It also plans to monitor retailers to prevent abuses during the currency transition. “If needed, the government will resort to regulating prices,” Fico told a crowd of supporters celebrating Labor Day in the northern town of Liptovsky Mikulas. “If needed, the government will make speculative price increases a crime,” he added.

Inflation in Slovakia has already hit a 15-month high of 3.6% in March, mainly because of higher costs of food and oil, factors which are pushing prices up around the globe. The Slovak koruna has been strengthening and making imports cheaper. The worry is that inflation will jump once this effect disappears with the koruna’s demise. This could combine with potential rounding up of prices in the conversion process. As the examples of IrelandSlovenia showed, the common euro zone monetary policy may not suit the small, open and fast-growing economy. “Of course there is some risk that Slovakia might follow Slovenia’s example: After euro adoption (in 2007) the inflation rate shot up there,” said Ulrich Leuchtman, an analyst at Commerzbank. “To avoid such a scenario, a strong koruna conversion rate will have to be chosen.” (Reuters) and