Euro-Underdog Comes Through

Hungry for some sort of financial news now, at the beginning of a brand-new year, that’s actually good, that reflects things flawlessly going ahead according to plan? How about this: As of 1 JAN 2009 Slovakia adopted the euro as its currency, just as the European Central Bank (ECB) and various other responsible Euro-authorities had authorized it to do last May. That’s right: Slovakia – I mean, who even knows where that place is? It was only a separate country as of 1 JAN 1993, yet it has beaten out (among others) its former big-brother state, the Czech Republic (which could be said to date back to Greater Moravia of 833 AD if you’re willing to stretch the affiliations a little bit), and Poland (dating from 966 AD) to the safe-haven of the euro. And make no mistake: these days the euro-zone is definitely the sort of currency safe-haven that all sorts of countries still standing outside it (e.g. Poland, Denmark, Iceland) wish that they were within, given the demonstrated weakness of numerous small-state-currency regimes.

Against this background, it’s amusing to take a look at comments from the Czech press. Probably unavoidably, you have there your “sour grapes”-type pieces, like the article in Právo entitled “After many years the Slovaks are standing in lines again for the euro.” (I don’t give the link to that because apparently Právo puts its articles behind a subscription-wall around one day after their initial open-to-all-readers appearance on the website. That’s an annoying problem, and in this case I’m particularly disappointed that I could not read more of that article’s actual text – I know of its existence and headline simply from my RSS reader. For you see, in the past and with the name Rudé Právo this was the official organ of the Czechoslovak Communist Party, so it’s rather rich to see it invoking the endless standing-in-line which was a leading feature of life under the Communist regime – as if the euro is taking the Slovaks back to Communism!) Or a similar article in Lidové noviny (which you can see in its entirety), entitled Euro-coins are lacking, Slovaks despair. Yeah right, “despair” (zoufají si); like this isn’t something that will just solve itself in a few days, and in the meantime (in fact, up through15 January) the old Slovak koruna is still legal tender, so it’s not like there’s some sort of money-shortage.

Then there is the Prague opinion-weekly Respekt, which you can almost always rely upon for some pretty spot-on commentary – but which, on the other hand, likes to make most of its content subscription-only. Here we’re in luck, as it turns out that we are all allowed access to a quite palatable commentary on the new Slovak euro from Luboš Palata: The euro to the East.

As Palata tastefully points out, at the inception of the Slovak koruna back at the beginning of 1993 you could have gotten some steep odds for any betting proposition that the Slovaks would end up besting the Czechs by any economic or financial measure. Back then the Czech and the Slovak korunas emerged from the common Czechslovak koruna at a one-to-one ratio. Indeed, that was an unavoidable consequence of the mechanism used to split the currencies, which was namely putting a sticker on each Czechoslovak koruna banknote to denote whether from here on out it was to be construed in Czech or a Slovak korunas. But that did not mean that there was any sort of requirement that they stay that way, and in fact the Slovak koruna in short order fell below parity to the Czech crown and has stayed that way up to the present day, when the Czech crown commands around a 15% premium to the euro compared to the Slovak crown. (Palata claims that there was a brief period at the end of 1996/beginning of 1997 when the Slovak crown in fact was worth more than the Czech crown. I had just moved out of Prague by then and so was no longer directly on-the-scene, but I still maintain that I don’t remember that happening. It’s actually something that’s hard to believe, but he says it did occur.)

Economics Counts, Not Politics

The thing is, it’s not the currencies that are “worth more” that are allowed by the ECB and the European Commission’s Monetary Directorate to fold themselves into the euro. After all, Italy was allowed into the euro-zone from the very beginning at a fixed lira-to-euro exchange rate of around 1,936. Rather, accession to the euro-zone is gained (or is supposed to be gained – but enough of that) only by satisfying certain economic criteria that attest to a national economy’s stability: inflation below a certain level, government budget deficit at or below 3% of GDP, total government debt at or below 60% of GDP, long-term interest rates below a certain level (full criteria here).

Slovakia, obviously, has satisfied those criteria and so now has the euro, while the Czechs have not. But the intriguing point in Palata’s article is how lucky those Slovaks-in-the-know feel that the criteria are purely economic and financial, and not political. Because in that latter case Slovakia’s acceptance for the euro would have become considerably more doubtful. The current Slovak premier is a certain Robert Fico (that last name is properly pronounced [fee’-tso], by the way), head of a political party he formed as his own political vehicle (called Smer, or “direction”), who is probably best described as a populist. It’s more the company he keeps, in the political coalition that enables him to form a government, that raises eyebrows, namely the SNS, or Slovak National Party, which is noted for its hostility to fellow citizens who are not Slovaks by nationality (namely Hungarians and the gypsies), and the HZDS (“Movement for a Democratic Slovakia”) of Vladimir Meciar, who up through 1998 seemed to be working hard to bring a one-man dictatorship to the country. You can see, then, that to eyes across the border, the make-up of the current Slovak government is somewhat ugly – but again, that doesn’t count towards the decision of whether to award the euro or not.

(For that matter, it’s clear that a EU member-state’s internal political situation does not really affect its eligibility to take up the EU presidency. This weblog has already discussed how the Czech president Václav Klaus makes many in the EU uncomfortable, and the Czech government of Mirek Topolánek is also liable to fall at any moment. Nevertheless, the official EU calendar of which country becomes president when simply marches on with its iron logic. Of course, the presidency is just a six-month thing, whereas euro-zone membership presumably is a bit more permanent.)

“Wait,” you might now say, “you mean that these Slovak politicians, as disreputable as they seem to be, still managed to get the economics right to bring their country into the euro-zone?” No, not really; the credit for that rather goes to the Slovak Democratic Coalition (in Slovak the SDK), and specifically to its leader, Mikuláš Dzurinda. It was during his time as Slovak premier (namely from 1998 through 2006) that the country enacted the economic reforms whose payoff now is euro-adoption. More broadly, of course, the “payoff” was the inspiration of Slovak economic performance that truly does shine when compared to that of neighboring countries. Slovakia actually has a “flat” income tax, and the Dzurinda government put through a number of other reforms particularly with a view towards attracting foreign investment. One result of this is that Slovakia has so many auto factories and related businesses that it is sort of the European Detroit – the Detroit of the good old days, that is, like the 1950s (although that may not be the best position to be in to make it through 2009 and beyond). Taxes and inflation are low, economic growth is high: 8.9% in 2006, for example.

No Credit to Mickey in the End

Of course, these sorts of economic reforms naturally caused quite a bit of short-term pain, which in the end was enough to get Dzurinda and his government voted out of office in 2006 and replaced by Fico and his rather disreputable coalition. Wisely, Fico more-or-less just kept the economic reforms in place, and so is now positioned to get his almost entirely-undeserved reward of the euro. That’s one really sour aspect to this underdog’s tale: the politician who did the yeoman work to bring the euro to Slovakia gets none of the credit; indeed, as Palata reports, the speech of Slovakia’s central bank governor on New Year’s Day inaugurating the euro contained absolutely no mention of Dzurinda. Another is that this accomplishment justifiably allows the Slovaks to get a little “in your face” to its neighbors, particularly to the Czechs and the Hungarians, neither of which is at all close to the euro, and with both of which it has rather traumatic histories (each traumatic in its own way) – and Fico and his fellow top Slovak politicians are precisely the sort of fellows who would be inclined to get all loud and boastful in this way. What is more, for any upcoming deterioration in Slovak economic conditions (which seems inevitable for the Slovaks in 2009, as it does for us all), the euro enables politicians to point to it and the qualification requirements to get it as an excuse, rather than to their mistaken policies which might really be to blame – and, again, Fico is the sort of politician who is particularly inclined to take advantage of this.

Let me add here in passing that I am really aching to finally get my hands on some authentic Slovak euro-coins. Nice, eh? – particularly the two- and one-euro pieces, with the Slovak national emblem, the double-cross. (No cheap jokes allowed.) I might be in Prague again soon, am wondering whether it would be worth it to take a quick trip to Bratislava to gather some Slovak change. I estimate that it will be a while before I come across these “naturally” in Amsterdam – maybe only next summer at the soonest, since last summer I seemed to come across Slovaks all the time paying a visit here. What would be the analog-country, for comparison purposes, within the 2002 time-frame when the euro-coins were first introduced in the original 12 euro-zone states? Maybe Finland, in terms of both distance from Amsterdam and size of population; and it’s still rather rare here, in my experience, to come across Finnish euro-coins.

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