Slovakia vs. Czech republic - Economic development

chart: Koruna and GDPBasically Slovakia had an abrupt crisis with a sharp contraction but also an equally large improvement.

Zdenek Tuma, the governor of the Czech National Bank, said being in the euro had helped spare Slovakia the worst of the economic disruption that affected the rest of the region including his country.

For example Slovakia’s cost of borrowing on international markets was cheaper than for the Czech Republic.

Slovakia’s economy is forecast to grow 3.1 per cent in 2010, far greater than the 0.3 per cent forecast by the Czech finance ministry.

As growth returns, investors are trickling back, with some saying they are tempted by the prospect of avoiding currency risk. “The euro allows us to make long-term plans and it eliminates exchange rate risks caused by the volatility of the Slovak crown,” says Vladimir Machalik, a spokesman for Volkswagen Slovakia, which is starting production of a new small car in its factory outside Bratislava.

In a further sign of confidence Taiwan’s AU Optronics signed a €191m agreement last month to open an LCD television component factory in Slovakia.

Although Slovak workers have become slightly more expensive than those of Poland and Hungary, they are still much cheaper than their rivals in western Europe, and investors already in the country are unlikely to make decisions to relocate based on possibly temporary changes in exchange rates.

Politically, joining the euro has proved to be a coup for Robert Fico, the prime minister. A survey shows that almost 80 per cent of Slovaks approve of their new currency, which Mr Fico has called Slovakia's “shield”.

It also proves that despite his faults Robert Fico is a commited left of centre politician that agrees with the overall development strategy of Slovakia, but wanted to make sure that where there are market failures or lack of competition this is rectified and that there are real rules in the game.

However, Czechs have maintained their reservation about rushing towards the common currency. Mirek Topolanek, former prime minister and leader of the centre right Civic Democratic party, says the Czech Republic may be ready in 2015 to begin discussing joining the exchange rate mechanism, a precursor to joining the euro.

But Czech businesses do not seem to share this assessment. “We (Czech republic) need the euro as soon as possible in order to be able to address the current problems caused by the world financial crisis,” says Jaroslav Cerny, spokesman for Skoda Auto, a Volkswagen subsidiary.

“A failure to introduce the euro may drive not only our current suppliers, but also all potential investors, out of the Czech Republic.”

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