Slovakia overcame a hurdle on the road to adopting the euro on Monday after the European Commission’s economic forecast predicted inflation would fall next year, allaying fears the country would be unable to restrain prices after joining the common currency.
The Commission forecasts that inflation in Slovakia will reach 3.8 per cent this year and fall to 3.2 per cent in 2009.
Jan Pociatek, Slovakia’s finance minister, told reporters: “The European Commission forecasts confirm we are able to meet the inflation criterion in a sustainable way in the future.”
Slovakia, which joined the European Union four years ago, has met all of the Maastricht criteria for joining the euro with respect to the size of its budget deficit, public debt, interest rates and is in the ERM-2 exchange rate mechanism. With an average inflation rate of 2.2 per cent over the last 12 months – the criterion used to assess fitness to join the euro – Slovakia is comfortably below the 3.2 per cent threshold.
“Today’s figures make it very, very difficult for the Commission to reject Slovakia,” said Jan Toth, chief economist for ING Bank’s Slovakian subsidiary. “It’s close to a certainty that Slovakia will get in.”
Slovakia is in a better position than Lithuania, rejected for admission to the euro in 2007 after it just missed the inflation target. The problem for Slovakia had been fears that it could not sustain the low rate of inflation after joining the euro.
According to the Commission’s forecast, Slovakia will be the EU’s fastest growing economy, with gross domestic product set to expand this year at 7 per cent and 6.2 per cent in 2009.
The Commission is due to issue a final assessment of Slovakia’s fitness for the euro on May 7, but the decision to allow it to join is likely to be as much political as economic. If Slovakia were rejected despite meeting the criteria it could send a damaging signal to other central European countries.
“Because we are fulfilling the criteria and sustainability is not precisely defined, it will be very difficult for the European Commission to reject us,” said Ivan Miklos, a former finance minister and one of the architects of the economic reforms that turned Slovakia into one of Europe’s tiger economies.
The European Central Bank will also publish a non-binding report on Slovakia’s readiness to join the eurozone on May 7, and is likely to take a cautious stance on the country’s inflation outlook. The Frankfurt-based institution may not reach a clear conclusion on whether Slovakia should join, leaving the decision to politicians.
But the ECB is wary of letting countries join too early. Recent experience has not been encouraging: Slovenia, which joined the eurozone at the start of 2007, now has the highest inflation rate in the 15-country region. Malta and Cyprus, which joined in January this year, also have inflation rates well above the eurozone average.
The news from Brussels on Monday briefly pushed the Slovak koruna to a record 32.2 to the euro. The expected conversion rate if Slovakia joins the euro in January is expected to be between 32 and 33.
