Adoption of the euro in 2009 looks near certain, which would eliminate the exchange rate risk of the appreciating local currency.
You couldn’t blame the top brass at Kia Motors for feeling a bit smug. The company got a lot, when it chose Slovakia in 2004 over Poland, Hungary and the Czech Republic to build its new Central European automotive plant: A lucrative investment package, a business-friendly tax regime, an inexpensive workforce. On top of that, Slovakia has met its early potential, becoming one of Europe’s peppiest economies and leading reformers.
Indeed, it’d be hard to argue the company’s choice—especially since the South Koreans just got another reason to think they were pretty damn smart. In this 2005 photo, power company and KIA executives throw the switch on a transformer station serving KIA’s new plant in Teplicka nad Vahom, Slovakia. Stredoslovenská energetika photo. At a time, when rapidly appreciating national currencies are cutting into the margins of major Central and Eastern European exporters such as Kia, it and other Slovak manufacturers look poised for deliverance with Slovakia’s euro adoption in 2009 now all but certain. Highly anticipated data released in the European Commission’s spring economic forecasts showed Slovakia is meeting Brussels’ strict criteria for euro zone entry.
Under the so-called Maastricht criteria, aspirants must keep finance deficits below 3% of GDP and public debt under 60% of GDP; and inflation cannot exceed the average of the three lowest inflation rates of EU members by more than 1.5%. According to the 28 April economic report, Slovakia’s finance deficit and debt are below their thresholds and expected to remain so. While the data don’t include the most recent 12-month average inflation rate used to evaluate euro hopefuls, Slovak inflation well undershot the 3.2% limit in March, and the commission projects price growth will stay below the forecasted ceilings for 2008 and 2009. This makes the EC’s support of Slovakia’s euro bid all but a lock in its official recommendation expected this week.
Of the Central and East European EU members, Slovakia would be the second to adopt the euro, behind Slovenia, with its euro-apathetic neighbors two to three years away at best. While many Slovaks are divided on the currency change—concerns about inflation are high—businesses such as Kia should be chilling the champagne. From cost cutting to new trade and financing opportunities, euro introduction will benefit Slovak companies, both large and small.
GOOD FOR BUSINESS
“This is definitely a positive,” says Dusan Dvorak, public relations manager at Kia Motors’ Slovak subsidiary. The immediate positive will be eliminating the transaction costs companies pay for dealing in both Slovak korunas and euros. Businesses will also be happy to say goodbye to exchange rate risk, which has been particularly high in Slovakia and the Czech Republic as their respective currencies have been appreciating against the euro, making domestic goods dearer abroad. In Slovakia, jettisoning these costs will save companies the equivalent of around 0.5% of GDP, according to the National Bank of Slovakia.
The large manufacturers and exporters currently driving Slovakia’s growth will save the most because the majority of their business is conducted in the euro area. Smaller companies should also benefit. Eliminating currency volatility should allow them to trade with other euro zone countries previously off limits because they couldn’t afford to offset costly fluctuations in the crown through hedging, commonly used by larger corporations.
Small businesses won’t be the only ones with new trade opportunities, though. This currency streamlining, which also increases pricing transparency, will invigorate the entire trade economy by making cross-border purchases easier. Overall growth will spike as a result, landing companies in a livelier economy that’s also more open and transparent. And there’s another bonus worth mentioning. Euro zone entry brings with it a sense of legitimacy that allows countries to borrow money at lower interest rates, which means cheaper access to capital. The Slovak central bank predicts interest rates on corporate loans could fall to as low as 1% after adoption.
To be fair, adopting the euro also carries costs to businesses. Most of them one off, they include upgrades to information and accountancy systems and, for many smaller companies, retiring cash registers for new, euro compatible models. There are also concerns that the strong euro could hurt exports, particularly to the United States. The benefits of the currency, however, appear to overshadow the costs, which is why Slovak companies have pushed for it—and why major corporations in Slovakia’s euro-laggard neighbors are begging their governments to get proactive on adoption. Skoda Auto in the Czech Republic is an example of the latter.
The Slovaks’ euro bid isn’t a done deal yet. EU finance ministers won’t make the final decision until June, and the European Central Bank, which cooperates with the EC on evaluating euro aspirants, is concerned whether Slovakia can indeed keep inflation under EU targets. For the EC, this issue is particularly touchy as euro zone price growth soared to record levels last year.
In Slovenia, inflation rose after euro adoption, but Slovak economic analysts counter that inflation spiked in Slovenia, because the government intervened to keep price growth artificially low to meet the Maastricht criteria. The Slovak government hasn’t done this, they argue, so the EC isn’t risking another embarrassment. We’ll have to wait to see whether the EC buys this argument. But it seems unlikely the commission will reject Slovakia now, if only to avoid discouraging the country’s neighbors from setting and meeting their own euro targets. “We see the chance [of adoption] as close to 100 percent,” says Viliam Patoprsty, chief analyst at UniCredit Bank Slovakia. “We cannot exclude some objection, but this is extremely unlikely.”
So, once again, Slovakia is the touchstone of Central and Eastern European economies — and no doubt a source of considerable back-patting in the boardrooms of Kia Motors. (Business Week)