The Slovak Republic's Path to Euro Adoption

In the Slovak Republic, there were a number of different attitudes with regards to the introduction of the euro on the 1 January 2009. Three of the most prevalent were:

• Optimistic: It is a positive thing that we should embrace – embodied in the spirit of the slogan: “If we were able to get over the year 1992, there is nothing else that could surprise us.” (The year the Slovak Republic was established as the result of separation of Czechoslovakia).
• Pessimistic: The whole process is too slow and the expenses are too high.
• Realistic: The introduction of the euro is not only a potential opportunity but also a threat of losing welfare for the state, enterprises and inhabitants.

The drawbacks of the euro introduction was seen in the terms of a complex project which not only impacted every corporate and citizen but also brought new risks. For an enterprise, the risks were identified as:

• Enterprise strategy.
• Marketing.
• Information system.
• Human resources.
• Suppliers.
• Financial system.
• Legal system.

Therefore, the implementation, with stress on the aforementioned risks and opportunities, could be characterised in the following way:

• The euro (money) has a lubricating effect on the economy. It is generally accepted that: “Overall, the introduction of euro after 20 years could raise gross domestic product (GDP) by approximately 13% in comparison to a situation without the introduction of euro.”
• The major effect of implementing the euro can be seen in eliminating transaction expenses and market risk.
• The risk inherent in the loss of independence of the National Bank of Slovak Republic (NBS) during the decision-making process connected with interest rates (also in relation with a relatively small and transforming Slovak economy).

Fulfilment of the Maastricht Criteria

The formal condition of country readiness for the adoption of the common currency is meeting nominal convergence criteria – otherwise known as the Maastricht criteria. The aim of these criteria is to ensure a balanced economic position of member countries of the European Monetary Unit (EMU).

The first two criteria are connected with the sphere of government finances: the ratio of the annual government deficit to GDP must not exceed 3% at the end of the preceding fiscal year; and the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year.

Inflation rate criterion is important from the viewpoint of maintaining the price level of the entering country. Accordingly, it takes the average inflation for 12 consecutive months, measured in accordance with the harmonised index of consumer prices (HCIP), and must not exceed the average of three EU countries with the best results in the sphere of price stability more than 1.5%.

The next criterion is the stability of long-term interest rates – the nominal long-term interest rate must not be exceeded by more than 2% in the three member states with the lowest inflation.

Apart from these four criteria, the entering countries have to prove currency stability by participating in the European Exchange Rate Mechanism (ERM II) for at least two years before joining the eurozone. The ERM is based on the concept of fixed currency exchange rate margins, but with variable exchange rates within those margins.

When the Slovak Republic began planning to join the EMU, the European Commission (EC) was concerned about the country being able to meet the inflation rate and government finance deficit criteria. With regards to the latter, the concern revolved around costs connected to state pension reform and highway construction, which were not included in the state expenses in 2005 and 2006. But a re-evaluation of the deficit established that the concern was unfounded.

The Slovak Republic fulfilled the inflation criterion in August 2007 for the first time and has since then maintained the criterion at the acceptable level.

On the basis of Eurostat’s data, the Ministry of Finance worked out a timeline with regards to fulfilling the convergence criteria (see Table 1).

Table 1: Maastricht Criteria Fulfilment

Source: https://www.euroservis.sk/Default.aspx?contentID=plnenie_maastrichtskych_kriterii

The Slovak crown entered the ERM II on 28 November 2005 and so the last criterion was fulfilled. The central parity of the Slovak crown with the euro was set at the level one euro equals SKK38.46. A lower limit for the compulsory intervention was SKK32.69 per euro and an upper limit set at SKK44.22 per euro.

Since then, this central parity has been revaluated twice on the basis of the Slovak Republic’s good economic results. The first 8.5% central parity reduction to the value of SKK35.69 per euro was realised on 17 March 2008. A lower limit for the compulsory intervention was SKK30.13 per euro and an upper limit was set at SKK40.76 per euro. However regarding the continuous currency consolidation and a quick approaching of the exchange rate to the lower limit of the fluctuation zone, the Slovak Republic was forced to move down the central parity again by more than 17% to the value SKK30.13 per euro on 29 May 2008. A lower limit for compulsory intervention was SKK25.61 per euro and an upper limit was SKK34.64 per euro.

On 7 May 2008, the EC and the European Central Bank (ECB), on the basis of meeting all of the convergence criteria, recommended the introduction of a common European currency in Slovak Republic on 1 January 2009. These institutions expressed again their concern about maintaining low inflation into the future, but the Minister of Finance and the governor of NBS assured them that this criterion would continue to be fulfilled.

European Parliament members also supported the Slovak Republic’s entry into the eurozone. However, the Parliament’s role in the process of enlarging EMU is only consultative. The EU Council also expressed approval of the Slovak Republic’s entry into the EMU on 19 and 20 June 2008.

At the beginning of July 2008, the Slovak Republic reached the last important ‘milestone’ on its way towards the euro – the exchange rate determination. Before this date, the financial analysts estimated the exchange rate on the premise that all the countries adopting the euro (with the exception of Portugal and Greece) were changing their national currencies on the basis of the stated central parity. This assumption was correct. On 8 July 2008, the EU Council stated that the official exchange rate was the same as the 40-day old central parity
(SKK30.12 per euro).

However, the conversion rate was officially declared on 24 July 2008. This day was the most important for entrepreneurs because 30 days after the declaration of the conversion rate they were obliged to use a dual price system: the prices had to be recounted and rounded to one cent according to mathematical rules. From 24 August 2008, the shopkeepers in the Slovak Republic had to have marked prices in euro and the Slovak crown. They also had to make public the conversion rate that was applied to all the shop items.

Problem Areas for Euro Introduction

The first problems occurred in August 2008 and revolved around the date that it became compulsory for economic entities to state prices in both currencies. There was an initial 30-day period that started from the determination of official conversion rate by the EU Council; but according to that information, the dual price system is compulsory 30 days after the declaration of the official conversion rate in the order of the Council Regulation, which meant 24 August 2008. Economic entities reacted positively to these problems because it meant they had two more weeks for price tags alterations and other preparations.

The Slovak Commercial Inspection, in co-operation with Trade Licensing Offices, controls the correctness of dual pricing and stating the conversion rate. At the beginning, the problems seemed to be more prominent because there was uncertainty not only in the depiction of prices but also in the depiction of the exchange rate.

During the period August to October 2008, approximately a quarter of more than 20,000 controlled shops struggled with shortcomings. The biggest problems were expected especially in small shops – and this proved to be true.

Another problem, which developed in December 2008, was one of the pre-purchasing of euro cash. Corporates could order necessary euro cash in commercial banks until the end of March 2008. A lot of smaller entrepreneurs did not take up this option. According to the advice of bankers, they decided to use euro packs. NBS prepared 1.2 million euro packs that contained 45 pieces of euro coins with Slovak motifs. The value of one pack was SKK500 (€16.6).

The number of euro packs was fixed following the Slovenian experience because there had been little interest in the packs. The situation in Slovakia was the opposite. In many subsidiaries, euro packs were sold out on the first day. For this reason, NBS recommended restricting the amount of packs per person. In spite of this fact, the euro packs sold out because it wasn’t just the small entrepreneurs and inhabitants that were interested but also larger companies, communities and associations. Many gave the packs as a present for their employees, members and to pensioners; the secondary reason for buying packs was the purpose of doing business with them. For example, on the auction portal eBay, the euro pack was offered for €26, so in effect the seller could make a profit of almost €10 per pack.

The EC reacted to the situation by recommending the NBS should increase the number of euro packs. Subsequently, the NBS released another 90,050 starting packs. Jana Kovácová, a spokesperson for NBS, stated that the increasing of euro packs number was possible thanks to “admissible production tolerance according to the agreement between NBS and Kremnica mint”.

Lastly, corporates found the biggest problem was the late adoption of the General Law of Euro, and execution regulations were not published on the website of NBS until October 2008. In fact, execution regulations were related to all the spheres of preparation for the adoption of euro which is why corporates can only now make final software adjustments to their systems.

Attitude of Corporates and Citizens to the Introduction of the Euro

Results from the survey show that only a small percentage of SME’s (15.8%) believed that there is a strategic opportunity for acquiring new markets with the euro introduction. Big enterprises (global players) did not find any opportunity.

SME’s see the introduction of the euro as a potential threat of in terms of rising competition. Big enterprises perceived this risk at 22% in comparison with SMEs at 46.5%. The attitude of SME and big enterprises to the threat of increasing the costs under the influence of the introduction of euro was quantitatively balanced. Analogically big enterprises did not perceive the introduction of euro to increase the risk of market loss.

In 2007 the authors carried out an e-mail questionnaire survey, which found that:

• Exchange rate risk elimination was perceived as the most important positive of the introduction of euro by about 80% of respondents.
• 25% of corporates expected that the turnover would rise to 5% as a result of the introduction of euro; 50% did not expect any change.
• 87% of corporates did not expect any positive influence on enterprise export.
• 33% of corporates expected the profit to rise to 5%; 40% did not expect any influence on the profits.
• An increase in competitive pressure and cost were considered the main negatives resulting from the introduction of euro.
• 33% of corporates assumed that the preparation for the euro introduction would begin in the second half of the year 2008.
• 80% of corporates considered the level of awareness to be adequate or almost adequate.

It follows on from the rest of answers that:

• Expected costs for euro introduction will range from 0.1%-1.0 % of the annual turnover (85 %).
• Up to 63% did not assume that the cashflow would be a potentially important problem connected with the introduction of euro.
• 63% of entrepreneurial subjects assumed that with the introduction of euro interest rates in banks would decrease.

The biggest system shortcomings, which were reflected in the preparation of Slovak enterprises, were:

• Low project preference, which was followed by a lack of project management preparation.
• The chance of elimination of risks connected with the introduction of euro by investing into training programmes, which improves the knowledge and prepares employees.

The survey results in 2007 and at the beginning of 2008 showed that there was a spectrum of difference in terms of preparation for the introduction of euro. For many entrepreneurs (not just the small ones), the problems stemmed from a lack of agility in the information system.

From March to June 2008, a repeated questionnaire survey was carried out with Slovakian corporates. Its aim was monitoring the changing attitudes towards the introduction of the euro. From a limited sample of respondents, the following data was obtained:

• Three important positives were elimination of the exchange rate risk, price transparency in the eurozone and simplification of doing business with the partners in the eurozone.
• As far as the impact of the introduction of euro on the enterprise turnover, 43% of the respondents expected an increase in the range from 1%-20%. However, 46% did not expect any change.
• As far as the impact of the introduction of euro on the export of the enterprise, 26% of the respondents expected an increase in the range from 1%-20%. However, 67% did not expect any change.
• As far as the impact of the introduction of the euro on the profit of the enterprise, 50% expected an increase in the range from 1%-20%. However, 41% did not expect any change.
• The balance between for and against answers signals the uncertainty of respondents in anticipation of consequences of the introduction of euro.
• According to respondents, increased cost and competition pressure are the negatives connected with the introduction of the euro.
• Problem areas: up to 75% of respondents identified the information system adaptation, 68% of them stated price fixing, 69% stated the conversion of the accountancy, and 60% said cashflow.
• Expected costs: 62 % of respondents expect costs in the range from 0.1%-1% of the annual turnover. However, up to 22% of them do not expect any additional costs.
• 25% of respondents intended to start preparation in the second half of 2008, while 39% of them did not intend to appoint the competent person (project group) responsible for the preparation and introduction of the project in the enterprise.
• Marketing expectations: 70 % did not expect any impact of the introduction of the euro on the number of customers.

From the obtained answers and their comparison with the results from 2007, we can conclude that:

• With regard to the objectively changed situation, the number of corporates that were prepared for the introduction of the euro was rising.
• The introduction of euro did not markedly change project management. (However, this could be influenced by a relatively high amount of respondents in the category microenterprises with 0-9 employees).
• As far as the expected impacts (turnover, profit, export), respondents were more uncertain in comparison with the past.
• When defining the negatives of the introduction of the euro, there was no change (cost rise and increasing of the competition pressure).

Conclusion

The advantages and disadvantages of introducing the euro in the Slovak Republic was not conflicting, whereas the situation in the Czech Republic is very different. In general, we can say that entrepreneurs understood the introduction of the euro as a driver that would increase the position of the corporate, as well as the Slovak economy. At the same time, all political parties defended the introduction of the euro. Christian Democracy representatives expressed a critical attitude but not in a noticeable way. The cost connected with the conversion was considered the biggest disadvantage. At that time, the question of currency stability was not ‘;the topic of the day’. At present, the consequences of the financial crisis are affecting the Slovak economy too (lost jobs, decreasing production, etc). The euro adoption is considered to be one of the factors which will reduce the impact of the financial crisis on the Slovak economy.