Slovakia’s euro membership ambitions face key test

While the government in Bratislava is confident that Slovakia is successfully edging its way towards adopting the euro in January 2009, a key report to be released this month on the nation’s deficit raises the risk of the country failing to meet one of the key criteria for joining the common currency. In the meantime, Slovakia has launched its final push to knock its finances into shape before the European Commission rules early next year on its eligibility for joining the eurozone with the majority of analysts expecting Bratislava to secure membership. “We are in line with the consensus,” said Jan Toth, chief economist for Slovakia at ING Bank in Bratislava. “Membership is still the expected scenario” with an ING survey showing 70% of analysts expect Slovakia to meet the January 2009 timetable. Backed up by strong political will, Slovakia hopes to be the second former communist state after Slovenia to adopt the euro with eurozone membership representing the next key step into its European integration after joining 10 largely Central European states in signing up to the EU in May 2004.

However, Slovakia’s leftist Prime Minister Robert Fico has warned that moves were underway to add political conditions to the strict fiscal targets for considering his nation’s euro application saying that the country had been unable to get a clear guarantee that membership was assured if it met the financial targets. “New political criteria that were not here are starting to appear,” he told Slovak Radio last month. A successful push by Slovakia for membership could help to pave the way for other former Soviet bloc nations to sign up to the euro.

But in much the same way, a decision to delay Slovakia’s euro membership could result in the same sort of bitterness among the EU newcomers that followed Lithuania’s rejection last year. This came after Lithuania’s inflation rate fell just short of the strict inflation reference rate for euro membership applicants. But while Slovakia will follow Slovenia, Malta and Cyprus into what is currently the 13-member eurozone, if successful Bratislava will be the first of the leading new EU member states to abandon its national currency and to opt for the euro. Indeed, many analysts believe that it is unlikely that Poland and the Czech Republic will adopt the common currency before 2012 with Hungary possibly two years later. Apart from the risk that elections could hamper moves towards financial convergence with the eurozone, signs of overheating across Central Europe including in Bulgaria and especially in the Baltic states of Lithuania, Estonia and Latvia are also threatening to result in the timetable for membership slipping for many nations.

Data to be released this week is expected to show Slovakia’s inflation climbing to 2.7% in September. However, is likely to translate into an annual rate of 1.6% under the European Commission’s method of harmonizing inflation data. This means that by the time European authorities formally consider Slovakia’s application in March or April next year the nation’s inflation rate should be comfortably within what is expected to be a reference rate for inflation of up to 2.8%. At less that 40%, Slovakia’s debt is well within the 60% of GDP target. However, overhanging Bratislava’s plans for joining the euro are concerns about the revision of the Slovak public deficit by the European Commission’s statistic’s office, Eurostat which is due to be released on October 22. This could result in more items being which added to the calculation for the deficit, which could in turn boost Slovakia’s deficit.

For the moment, however, both analysts and the nation’s political and economic leadership are cautiously optimistic that even with the inclusion of additional items such as some state hospitals and public broadcasters, Slovakia’s deficit should squeeze into the tight 3% target. But underscoring worries in Bratislava that additional possible political hurdles might be placed in Slovakia’s path to the eurozone, the European Central Bank last week expressed doubts about the prospects of further expansion of the currency bloc and readiness of candidates to join. (m&c.com)