Slovakia plots a steady course to the euro

Slovakia is still on track to become the 14th member of the eurozone from January 2009 despite warnings from the European Commission to keep its public spending under control.

Joaquín Almunia, the European commissioner for economic and monetary affairs, told Slovakia last Wednesday (30 January) that it had to do more to "contain possible inflationary pressures", but he confirmed that the country was on course to reduce its deficit.

Presenting the Commission’s assessment of Slovakia’s revised convergence programme, which it submitted at the end of November 2007, Almunia said that it was "consistent with a correction of the excessive deficit by 2007", although he noted that Slovakia’s efforts to reduce its deficit to below 1% of gross domestic product would slow down this year despite strong growth prospects (7.0% this year and 6.2% in 2009). He urged Slovakia to introduce further structural reforms and adopt a tighter fiscal stance to contain possible inflationary pressures. The Commission warned that inflation would pick up again on the back of rising food and energy prices, strong growth, a tightening labour market and the fading of earlier (deflationary) effects of exchange rate appreciation.

From a rate of 1.7% in 2007, inflation is expected to rise to 2.5% this year and to 3.0% in 2009.

Juraj Kotian, head of central and eastern European macro and fixed income research at Austrian Erste Group bank in Vienna, said that "there isn’t any serious threat" that Slovakia would not qualify for joining the eurozone. He said that the Commission’s warning was a "signal to the government to cut the deficit and adopt measures to improve labour market flexibility necessary for the country to better absorb external shocks". Further improvements would have to come from structural reforms because interest rates had already converged to eurozone levels, so raising rates to bear down on inflation was not an option, Kotian said.

He dismissed suggestions that EU leaders might raise concerns about Slovakia’s inflation performance to keep it out of the eurozone because of the experience of Slovenia, which joined the eurozone in 2007.

"The European authorities monitor inflation. They know what was behind inflation in Slovenia," he said, referring to food and energy prices which have been rising across the EU.

Slovakia is still on track to become the 14th member of the eurozone from January 2009 despite warnings from the European Commission to keep its public spending under control.