By Peter Laca
BRATISLAVA, Dec 12 (Reuters) - Slovakia will leap-frog its
bigger east European peers by adopting the euro on Jan. 1, hoping this will
shield it from the global crisis just as it dawns on its neighbours that staying
out has left them exposed.
Adopting the euro, now shared by 15 nations, will crown a decade of
transition from the region's laggard to a leader in economic growth, and the
timing could have hardly been better.
The deepening global crisis magnifies the challenges the EU's ex-communist
newcomers face on the road to monetary union, cementing expectations that
Slovakia, an EU member since 2004, will be the last entrant from the region for
years.
"Slovakia had excellent timing. It may have been a coincidence, but
everything just happened at the right moment," said Miroslav Plojhar, a
London-based economist at JP Morgan.
"The decision came at the peak of the cycle."
Slovakia's effort was boosted by record growth peaking at 10.4 percent last
year, which allowed the leftist government to cut its fiscal gap -- a harder
goal to achieve if the crisis had hit the export-reliant economy earlier.
Bratislava has reaped the benefits of fixing the crown to the euro at an
irrevocable rate in July. It protected it from the turmoil that swept emerging
markets from Iceland to Slovak neighbours Poland, Hungary and Ukraine in the
following months.
Poland, whose zloty has lost almost a quarter of its value against the euro
since summer, has set 2012 as its euro adoption target, but the government faces
tough political opposition.
Hungary averted financial meltdown in October thanks to a $25 billion rescue
package led by the International Monetary Fund, but its economy is expected to
contract in 2009 and its central bank has urged structural reforms to avoid more
crises.
Hungary's forint has fallen by 11 percent since the summer.
"I can say that neighbouring countries envy us for adopting this goal in
2006, that we fulfilled the criteria, and that we can be backed by this strong
European currency today," Slovak Prime Minister Robert Fico told Reuters on Dec.
8.
The Czech Republic, whose crown has fallen by 12 percent from all-time highs
in July, is not rushing to the euro.
It says its floating currency and independent monetary policy give it a more
flexible framework while the economy catches up with the richer West.
CHALLENGES FOR OTHERS
The EU's eastern states, all of whom must adopt the euro at some point under
their membership obligations, need to tame inflation and trim fiscal deficits
before they are eligible to join the economic and monetary union.
Rapid cooling of economic growth will help bring price growth down. But an
outlook for weaker growth can put pressure on fiscal balance in countries like
Poland, which based its 2009 budget revenue projections of 3.7 percent economic
growth for the year, an assumption analysts say is too optimistic.
"With the exception of Slovakia and some reform of public finance there
under the previous government, everywhere else the budgets have improved only
because economies grew faster than everyone thought," Plojhar said.
"But the (fiscal) problems did not disappear. They were just temporarily
overshadowed by strong growth."
The euro might not be a silver bullet, however. Analysts said political
leaders should not forget the potential risks to preparing for and joining when
calling for faster adoption.
For example, a country that enters the ERM-2 waiting room, a required
precursor to euro zone entry, loses the ability to let its currency weaken,
which can expose it to speculative attacks.
And once in the euro, the country no longer has a flexible exchange rate that
can be used as shock absorber to correct wide external deficits.
"I agree that the euro provides some protection, but it is also taking away
some policy instruments," said Lars Christensen, chief economist at Danske Bank.
"It will give protection against disorderly currency moves, but it wil not
solve the fundamental problem of economic imbalances. This is a fact that
politicians tend to forget."
(Editing by Andy Bruce)
