Slovakia's timely euro entry at the time the door to the euro is closing possibly for the forseeable future...

An interesting article about our unique circumstances in Slovakia during the global turmoil...

Slovakia's Euro Entry

By Radoslav Tomek and Andrea Dudikova, Bloomberg news (bloomberg.com)

Dec. 31 (Bloomberg) -- Slovakia, which becomes the 16th member of the euro region tonight, is counting on the currency to help shield it from the brunt of the global crisis that’s pummeling emerging markets.

Slovakia, which joined the European Union in 2004, will be the second former communist country to make the switch after it held down inflation, debt and its budget deficit. The former Yugoslav republic of Slovenia was admitted two years ago.

The nation is making the change while eastern European currencies and economies plunge because of the worldwide credit squeeze. The European Central Bank may balk at further expansion of the euro bloc for now, foiling other countries’ efforts to gain financial support and fend off deeper recessions.

“We are watching our neighboring countries, whose situation is getting more and more complicated because of the crisis,” Finance Minister Jan Pociatek said in a Dec. 23 phone interview from Bratislava, the Slovak capital. “Now it’s clear that we are making the switch at the right time.”

The region’s economic and market slump is prompting most of the EU’s eastern states, including Poland, Hungary and the Baltic states of Latvia and Estonia to follow Slovakia’s lead and push for faster euro-region membership. Whether there are capable of achieving the numbers and convincing eurozone members to accept them now is a big question. The most likely scenario is postponement beyond the end of this worldwide recession.

While the Slovak koruna remained locked and unchanged in value to the euro in preparation for the Jan. 1 changeover, the Polish zloty lost 24 percent, the Czech koruna dropped 11 percent and the Hungarian forint fell 13 percent in the second half.

ECB Aid

Hungary on Oct. 16 was forced to accept a 5 billion-euro ($7.2 billion) loan from the ECB, and the EU is considering an additional aid package for Latvia, a former Soviet republic. Latvia, once the fastest-growing economy in the 27-nation EU, is suffering from the deepest recession in the bloc.

Slovakia contrasts with the Czech Republic, a former federal partner in the defunct Czechoslovakia and the only EU nation without a euro target date. While President Vaclav Klaus opposes adoption, Prime Minister Mirek Topolanek said the Cabinet may set a date by next year.

As other countries in the region struggle, the Slovak administration is negotiating with six investors to spend at least 5 billion koruna ($237 million) each to build factories in Slovakia, Economy Minister Lubomir Jahnatek, 54, said on Dec. 16.

Volkswagen AG, Europe’s largest carmaker, cited the switch as a key reason for choosing to upgrade its Slovak factory and prepare it for a new car model, Jahnatek said. The German carmaker originally planed to put the project in the Czech Republic.

Credit Risk

The spread between Polish and Slovak five-year credit-default swap rates increased to 85 basis points on Dec. 26 from 9.5 points on Sept. 22, meaning it would cost 85,000 euros ($120,900) more to protect 10 million euros of Polish debt from default, compared with Slovak debt.

Though the Frankfurt-based European Central Bank is willing to provide aid to non-members, it will probably be more wary about widening the euro region during the next several years.

Executive board members, including Juergen Stark, say the current monetary union is being tested by the financial meltdown and are concerned that many new members, who founded free-market systems starting in 1989, have yet to prove they have stable- enough economic development, economists say.

“The political case for euro entry may have strengthened in the context of the current crisis, but the economic obstacles to joining have not gone away,” said Audrey Childe-Freeman, a senior currency analyst with Brown Brothers Harriman & Co. in London.

Lithuanian Rejection

The application by Lithuania to adopt the euro at the end of 2006 was vetoed because of concern its inflation rate would soar once in. The rate jumped from 3.6 percent in May 2006, when its bid was rejected, to 12.5 percent in June. Hungary was forced to drop its 2010 target date after the deficit ballooned to the widest in the EU.

“The ECB does not only require a nominal convergence but it wants a sustainable convergence,” said Laurent Bilke, an economist at Nomura International Plc in London.

Slovakia was successful in keeping inflation below the euro- adoption limits because of the record strength of its currency, the koruna, which capped import prices. Its budget deficit was kept under control because of increased revenue from economic growth.

Gross domestic product expanded a record 14.3 percent in the fourth quarter of last year and grew an annual 7 percent in this year’s third quarter. The global crisis will slow growth to 4 percent next year, the Paris-based Organization for Economic Cooperation and Development said on Nov. 25. Still, that contracts with 2.5 percent for the Czechs, 3 percent in Poland and Hungary’s economy may slip into recession, the OECD said.

Currency ‘Shield’

Adoption of the euro will act as “as a shield against the global turmoil,” said Elizabeth Gruie, a currency strategist at BNP Paribas SA in London. “It’s clearly a buffer against the financial stress we’ve had.”

In Slovakia, citizens snapped up 1.2 million packages, which contained a basic set of euro coins, before the switch. Some bank branches and the post office sold out within hours after sales began on Dec. 1, said Igor Barat, the government’s euro coordinator.

“Of course I am happy,” said Marek Farkas, a 37-year old waiter in Bratislava. “It helps Slovakia’s image. Look how envious our neighbors are. They would love to have it too.”

Last Updated: December 30, 2008 18:00 EST