Slovenia joins the euro club as faster-growing neighbors wait
Slovenia on January 1 becomes the first former communist state to adopt the euro, less than three years after joining the European Union. It may be the last for some time.
Other eastern EU nations may take as long as seven years to follow suit, owing to terms laid down 15 years ago for joining the euro region. Those rules, which were devised to introduce the shared currency in Western Europe, may penalize most of the EU's newest members, analysts say. „It's difficult for the countries in the region that are converging quite rapidly towards Western living standards to meet all these criteria,” said Christoph Rosenberg, head of the International Monetary Fund's mission to the EU's eight eastern states, in an interview in Warsaw.
The criteria, he said, were „designed for a different time.” Joining the monetary union is likely to reduce transaction costs for Slovene businesses and better insulate the nation from the risk of economic shocks. Quick adoption of the euro was a common goal of the eight eastern European nations that joined the EU in May 2004, the final step in their transition to free-market economies. So far, the euro-entry rules have tended to work against nations such as Hungary and Lithuania, where dynamic economic growth has sparked inflation. Slovenia, meanwhile, has found its slower growth rewarded with early entry. After Slovenia, the next nation to switch to the euro may be Slovakia in 2009, according to a Bloomberg survey of 18 economists. Hungary may be the laggard, waiting until 2014; the rest are likely to fall somewhere in between.
The rules governing euro adoption were set out in the 1992 Maastricht Treaty, establishing a framework for 12 countries to share the euro, abolishing exchange-rate fluctuations and controlling inflation in an area encompassing 350 million people. The signing of the treaty took place a year after Estonia, Latvia and Lithuania broke from the Soviet Union and a year before Slovakia split from the Czech Republic. By 2002, nations from Austria to Portugal gave up their currencies for the euro, which reached a record 1.3666 against the dollar on December 30, 2004.
The European Commission and the European Central Bank say changing or relaxing the rules to speed the entry of eastern nations is out of the question, and would destabilize the euro. „We will stick to our methodology,” ECB President Jean-Claude Trichet said in a December 20 interview in Brussels. „We will apply the treaty. There is no change in this respect.” Trichet, in the interview, denied that the euro-entry rules were too restrictive. „We are not a closed shop,” he said, adding „it is in the interests” of all EU nations „that when a new economy and country enters, it has converged, not only in terms of a snapshot, but also in terms of sustainable convergence.” Not everyone agrees. The system is „not working,” Viktor Kotlan, a former head of monetary policy strategy at the Czech central bank, said in a telephone interview.
The admission rules, he said, only „made sense prior to the establishment of the ECB.” To adopt the euro, a candidate nation needs to bring its debts to within 60% of gross domestic product, its budget deficit to 3% of GDP and inflation to within 1.5 percentage points of the 12-month average of the three EU nations with the slowest consumer-price growth. Potential euro adoptees also need to lock their currencies to the euro for at least two years in the exchange-rate mechanism, a test of currency stability. Slovenia, Estonia and Lithuania all entered the mechanism in June 2004, aiming for a switchover on January 1. The commission rejected Lithuania's bid on May 16, and Estonia dropped out before suffering the same fate.
The two nations failed to meet the inflation criteria because of record economic growth. Slovenia succeeded because its growth has been the slowest among the eight. It expanded an average 3.2% in the past five years, compared with 8.1% in Estonia. That kept Slovenia's 12-month inflation rate at 2.3% in November, below the 2.8% limit, while Estonia's rate was 4.6%. Lithuanian inflation accelerated to 4.4% in November. „If the commission had closed its eyes in May, as many had suggested, Lithuania would be about to enter the euro area clearly above” the limit, commission spokeswoman Amelia Torres said in a December 15 e-mail.
Slovenia was also first in purchasing power, at 82% of the average of the 15 older EU members in 2005, about on a par with Greece and ahead of Portugal. Latvia's purchasing power was 48% of the average. Poland, the Czech Republic and Hungary, whose combined economies account for about 80% of the new members' total GDP, don't have adoption dates. Nor are many governments under public pressure to quickly join: In the Czech Republic, for instance, only 16% of respondents in a November survey by STEM said they were enthusiastic about joining the euro.
„There's really no need to hurry,” Kotlan said. In Slovenia, on the other hand, Ljubljana taxi driver Vladimir Peterka says he will happily reset his meter to the euro, adding that the new currency is final proof that his nation has made it to the free-market club. „Since we are in Europe, it makes sense,” said Peterka, standing beside his new white Volkswagen Passat. „A lot of small things get rounded up to €1. But I'm sure we are going to get used to it pretty quickly.” (Bloomberg)
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