Photo: Konstantin Burkut, Creative Commons License.
Given all the turmoil of recent weeks over the EU constitution and the fact that many member states are taking time out to ponder the EU’s future let alone where they stand on the single currency, Slovenia’s undimmed enthusiasm for adopting the euro comes as a surprise.
This country of two million people has successfully liberalised parts of its economy and reorientated its trade towards Western Europe in the run-up to and since becoming one of 10 new EU entrant countries in May last year.
Slovenia’s gross domestic product per head is the highest of those recent joiners at about 77 per cent of the EU average (higher than Portugal’s).
Among the latest accession states, only two others — Estonia and Lithuania — are actively seeking to sign up for membership of economic and monetary union (EMU) in 2007. But Slovenia’s support for the euro seems the most ardent. It remains so despite the problems over the EU constitution and doubts being expressed over the currency by both Italy and Germany.
Despite having established itself as the currency that is the second most widely held after the US dollar by central banks, the euro has become something of a “bogeyman” in discussions about the EU’s future.
Italians now blame the euro for pushing up prices and handicapping their industries. They are no longer in a position to use lira devaluations to boost competitiveness. Earlier this month, Italy’s welfare minister Roberto Maroni even called for a referendum to bring back the lira.
Senior officials in Germany are believed to have examined a secret plan about euro implosion at a meeting attended by finance minister Hans Eichel. The influential Stern magazine blamed the euro for turning swathes of the EU into economic disaster zones and a survey it published found 56 per cent of Germans favour a return to the mark.
In the Netherlands, dissatisfaction with the euro played a big part in voters’ rejection of the EU constitution. However, other commentators say it is wrong to blame the euro for slow growth. Instead they point the finger at European governments, which have little appetite for economic reform.
Jean-Claude Trichet, president of the European Central Bank has dismissed talk of a euro crisis as “absurd”.
In Slovenia, support for the euro and the European Union appears as strong as ever, even though some officials admit that having to meet the “Maastricht criteria” for EMU membership is having a negative effect on their economy and reform programme.
The EU flag flutters proudly alongside the Slovenian tricolour on all government and municipal buildings in the capital, Ljubljana.
Tanja Rupnik, of the Slovenian Chamber of Commerce and Industry, says: “There’s no political opposition to joining the euro, although consumers do fear prices will rise. One way of avoiding this is to bring in double pricing earlier.”
Following pressure from consumer groups double pricing is to be introduced next March — a full nine months before Slovenia’s expected euro joining date.
Ivo Vajgl, a former journalist and foreign affairs adviser to Slovenian president Janez Drnovsek, says: “It is unimaginable we would not take the first opportunity to join [the EU]. It has enabled us to become a part of the free world and the progressive world.”
Bozo Jasovic, the Bank of Slovenia governor, says: “Thirty-eight per cent of Slovenes want immediate adoption of the euro and 66 per cent are personally happy to see the euro replace the tolar. Slovenia ranks first among all EU states in answer to these questions”
This echoes the result of a referendum held in Slovenia in March 2003, when 90 per cent of voters approved of EU membership (with 66 per cent approving of Nato membership).
Vajgl says: “If there was another referendum today there would be the same result.”
Vajgl jokes that he so favoured the new EU constitution that Slovenia became the first EU member to ratify it. He admits that, in his previous role as foreign minister, he signed it without even reading it. But he believes that any failure to agree the EU’s budget after 2007, would be a much more serious blow than any failure to agree the new constitution.
Despite the “no” votes in France and the Netherlands, Slovenia is still working on the basis that the EU constitution is going to be ratified, says Marcel Koprol, state secretary in the office of European affairs.
But it is not a one-way street.
Potential downsides of joining the Euro for Slovenia include that it will make country’s exports less competitive in the event that the euro continues to appreciate against the dollar and having to meet the Maastricht criteria for membership.
Many Slovenian commentators believe the centre-right government of prime minister Janez Jansa, which came to power in October 2004, has been obliged to delay many of its proposed policy changes for fear of upsetting the delicately balanced economic applecart ahead of EMU membership.
This means that many policy changes the electorate voted for in the last elections won’t see the light of day until after January 2007. And Jasovic concedes that the central bank’s hands have been tied over interest rates — which currently stand at 4.5 per cent against 2 per cent for the eurozone.
“If we were to raise rates too sharply, it could boost the value of the tolar, ” he says. This would, in turn, lead to the tolar bursting out of ERM2 — the exchange rate system under which its value is not allowed to fluctuate beyond plus or minus 15 per cent from 239.64 tolar to the euro.
Jasovic adds: “We have become subordinate to factors that are independent of the bank, notably interest rates in the eurozone.”
He concedes there are risks in having interest rates at an artificially low rate. It could provoke a credit-generated boom that would overheat the economy and fuel inflation.
He points to growth in household loans of 20 per cent per annum and house-price growth of 20 per cent-25 per cent. “Being in the ERM is difficult,” he says.
With interest rates in a Maastricht straitjacket, he says Slovenia is having to use fiscal policy to ensure price stability and generally manage its economy. And he is also concerned that Slovenia’s strong GDP growth — 4.6 per cent in 2004, with 3.9 per cent forecast for 2005 — could lead to demands for wage rises which, if delivered, would also provoke inflation.
Even though Slovenia has managed to rein in inflation from more than 20 per cent in 1994 to 3.6 per cent in 2004, this is one Maastricht criteria that is not currently being met.
Jasovic, governor of the Slovenian central bank, believes preventing shocks that could jeopardise meeting the Maastricht criteria is of critical importance. So while some members begin to fantasise about leaving the euro, Slovenia is ready to deal with the economic realities of signing up.
SLOVENIA FACTFILE
Population: 2,011,070
Labour force: services 55 per cent, industry 40 per cent, agriculture 6 per cent.
Unemployment: 6.4 per cent
Main industries: Steel, electronics, military, textiles, chemicals and wood products
GDP per capita: $19,600
Joined EU: 1 May 2004
This article was published in the Sunday Herald on 19 June 2005