CEE Special Report: EURO - Slovak lessons
Slovakia is celebrating 10 years since the adoption of the euro. We outline key lessons learned from Slovak euro adoption, both for the euro area as well as for other candidate countries that might want to adopt the common currency in future.
1/ It seems that European authorities might be more
inclined to allow revaluation(s) to a stronger exchange rate in
attempt to avoid later inflationary pressures in a candidate
country. Two revaluations were nevertheless rather exceptional,
and are not very likely to be repeated, especially as capital flows
and nominal convergence are not as strong as before the crisis.
2/ The standard situation would be to set the conversion
exchange rate at the market level, but the Slovak case shows that
setting an exchange rate off the market rate cannot be excluded.
3/ The euro might give a competitive advantage, especially
to a small and open economy (as was the Slovak case), but it is
no substitute for continuous smart local policies.
Currently, three countries have officially expressed interest in joining the euro area: Croatia, Bulgaria and Romania. The first two have made concrete steps to join the EA – Croatia has committed to a euro adoption strategy and Bulgaria started informal negotiations to enter ERM-2 and the Single Supervisory Mechanism (SSM). Romania is still only at the level of political declarations, and through real policies actually drifted away from accepting the euro target.
Croatia might already this year ask European institutions for closer cooperation in joining the banking union. The process might be easier than in the Bulgarian case, as the Croatian central bank undertook stress tests for local banks back in 2014; hence compliance with SSM and SRM should be smoother. Also, the level of economic convergence is higher, so Croatia has in our view a greater chance of being the next country to join the euro area than Bulgaria or Romania.