Slovakia: Has the euro been worth it?
16 May 2011
Adopted just before the financial crisis hit, the single currency is still seen as the recipe for prosperity by most Slovaks. But many economists are beginning to wonder if Bratislava made the right choice.
Over the past few months Slovak politicians have been confronted by problems that not even the worst-case scenario had envisaged in the lead-in to Slovakia’s entry into the eurozone. The government of Iveta Radičová, although refusing to take part in the loan to Greece, afterwards did have to contribute to the loans to Ireland and Portugal, since Slovakia is a member of the euro bulwark – the eurozone’s various financial stabilisation mechanisms. Slovakia is now helping Ireland out with almost 320 million euros, while our share of the aid to Portugal is not yet clear. We do already know, though, that we will pay 659 million euros in cash into the new euro bulwark, which will take effect from 2013.
Even Finance Minister Ivan Miklos, the man who brought the euro to Slovakia, recently admitted indirectly that, based on what we know today, he would no longer be in any hurry to enter the eurozone. In an interview he stated that he “fully understands the position of the Czech government, which announced that under these circumstances they will not be setting a deadline to adopt the euro.”
Despite everything, Slovaks still believe in the euro as few others in Europe do. According to the February Eurobarometer survey, nearly 70 percent of Slovak citizens think that the euro has dampened down the impact of the economic crisis in our country. In other countries the ratios are reversed, and only about 40 percent of EU citizens believe that the euro was a good currency to have in tough times. Has the euro, which we in Slovakia adopted just as a major crisis was breaking out, really helped us till now?
There is no simple answer to that. An analysis by the National Bank of Slovakia, which looked at the impact of the euro on the competitiveness of our businesses, determined that the effects of the single currency cannot be measured even after a longer period since it is impossible to know how our economy would have developed had we stuck with the crown.
Would Slovakia be better off staying out?
Martin Šuster, head of the research department at the central bank, says that given the fact that we have been using the euro for only two years, it is almost impossible to determine its impact from such a small amount of data. In the economic community, which a few years ago mostly supported the quick adoption of the euro, an argument is already underway on whether the euro has truly been of any help – and if joining the eurozone, in view of the euro bulwark and the states slowly sliding into bankruptcy, will not harm us in the long run.
According to the head analyst at Volksbank, Vladimír Vaňo, “at the time of the most serious global recession since the Second World War, for us the euro was a gift from heaven. It came literally at five minutes to midnight. Our legislature approved the euro just a few weeks before all hell broke loose on the world’s financial markets in September 2008. Slovaks bought more at Christmas in 2008 than they had at Christmas in 2007, while the Czechs bought less. And that was also thanks to the fact that we had already fixed the exchange rate, while the currencies in surrounding states weakened dramatically…. The euro makes Slovakia a unique combination: a country that lies right in the middle of the eastern European market of more than 90 middle people, and yet one that also offers the stability of a full member of the eurozone, with all the benefits related to that.”
The euro, adds the economist, was the sole logical outcome of Slovakia’s economic integration. “About 85 percent of our exports go to the EU and more than half to countries in the eurozone.”
Perhaps Slovakia would be better off staying out of the euro financial stability mechanisms? To the contrary, says Vaňo, who thinks today's situation is good for Slovakia. “A country like Slovakia benefits from the euro bulwark, because its obligations are backed up by bigger and stronger members of the eurozone with the highest investment ratings.”
The timing of our entry was rather bad
Martin Šuster, the NBS economist mentioned above, also supported the rapid adoption of the euro, which in the long run he sees as a tool to boost Slovakia’s international trade and economic growth. However, what astonished the country was the problems that some other states got themselves into and, in particular, how the notion of solidarity was interpreted. “The principle that each country is responsible for itself was abandoned. This goes completely against the spirit of the treaties that the EU was grounded in.”
Šuster, however, has faith in the euro over the long term. “It shows that our economic cycle is better aligned with the cycle of the eurozone than the countries of southern Europe are. Our commercial trade and links with industrial production in Germany have grown. Moreover, available studies suggest that foreign trade within the eurozone should increase by about 60 percent, and it should do so within 15 years.”
Ján Tóth, director of the Institute for Financial Policy, which falls under the Ministry of Finance, does not at all agree that the euro at this time was a gift from heaven for Slovakia.
“The timing of our entry was rather bad. However, nobody could have predicted it. It was an unfortunate accident… If you look back at the forecasts for economic development for each country made by the European Commission some years ago, the cumulative decline in production was higher in Slovakia than in the Czech Republic, Hungary and Poland. Similarly, growth in unemployment was highest in Slovakia.”
"Give me 200 years first and then I’ll tell you"
For the moment, Tóth thinks that the cons outweigh the pros. “It has hurt us more than it would have had we not had the euro, in that the crisis hit our business model – namely, an export-oriented economy based for example on automobile production – across the board, and the exchange rate wasn’t able to react to that, i.e. flexibly.”
Nor does the example of Greece, which may blame its current problems on irresponsible policy, bother Ján Tóth. “Ireland, however, did only good things and grew a lot faster than Germany and France. But the monetary policy was steered more by the needs of France and Germany. The eurozone thus implies that economic reforms may also be risky, according to the risk model, when I’m carrying out good reforms, which sets me apart from other countries – but the monetary policy is not to my advantage.”
Tóth doesn’t like the thinking behind the euro bulwark. According to him, it should not be there to bail out countries like Greece, but rather to rescue banks following possible bankruptcies.
Having the euro became worse for us
If he were in the Czechs’ position, Tóth would be in no hurry. “When the governor of the central bank of the UK (the Bank of England) was asked whether it would be good for the British to adopt the euro, he said, in effect: ‘Give me 200 years first and then I’ll tell you.’”
INESS analyst Juraj Karpiš was among those warning against the euro. His introduction, therefore, catches us by surprise. “When the crisis blew up, I was glad that we had the euro, because I honestly believe that during such turmoil it’s good to have a currency that is being used over a large economic area.”
At the same time, Karpiš adds that had we remained outside the eurozone during the crisis, nothing too awful would have happened. “Just look at the Czech Republic. They suffered no negative consequences from staying outside.” For Karpiša, therefore, assessing the impact of the euro on our economy is not a very exciting topic.
Apparently, it is something else that is significant. “After the leaders of the eurozone decided to set up the euro bulwark, in May 2010, having the euro became worse for us than had we remained with the crown. The nature of the European monetary union had changed. If the Lisbon Treaty had been complied with and the debt of one country had remained the debt of that one country, things would have been all right. Unfortunately, the existence of the euro stabilisation and stability mechanisms has teamed up with fiscal centralisation, which is bad. With this step, our competitiveness and ability to catch up with richer economies was reduced. Because if we are going to contribute to pensions getting paid in Greece and German banks paying off their creditors, it means we’ll have to raise our own taxes. Even now it’s creating serious outlays for us. Whether it will be, in the end, a total disaster or merely just bad depends on what happens next.