Slovakia applies to join the Euro

Slovakia today made a formal application to join the single European currency and bid to become the fourth of Europe’s new member states to progress to the next stage of economic integration by locking themselves into the Euro. A verdict on entry is likely to come as early as May 7th when the EU commission publishes new economic forecasts which will include data on the key convergence criteria for wannabee euro zone members. If all goes well, Slovakia will enter the single currency system on 1st January 2009.

Here is a reminder of the convergence criteria:

Inflation: EU nations can only join the euro if recent inflation does not exceed a figure based on the average three lowest inflation euro-zone countries and it is not forecast to accelerate in the months ahead of entry

Annual government budget deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%.

Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for 2 consecutive years and should not have devaluated its currency during the period.

Long-term interest rates: The nominal long-term interest rate must not be more than two percentage points higher than in the three lowest inflation member states

Slovakia has enjoyed tremendously strong economic growth in recent years bolstered by high levels of inward investment particularly in industrial sectors such as automotives. But super charged growth brings costs as well as benefits. Consumer price inflation has been accelerating and wage growth is running at almost ten per cent a year threatening Slovakia’s competitiveness in the medium term. That said, some of the most recent rise in inflation has been something over which Slovakia has little or no direct control – rampant food and energy price rises. As our chart shows, both Slovakia and the Euro Zone are seeing a pick up in inflation at present. The key is whether Slovakia has the economic institutions in place to cement and sustain her recent strong economic performance.

The Slovakian motor car industry is featured heavily in the OCR2888 case study paper for June 2008 – so this news might be worth bearing in mind by students preparing for this paper.

Tutor2u revision presentations on the European Union