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Slovakia + the Euro: A good match?

Jaimie Kanwar

What positive impact is the single currency likely to have on the Slovakian economy...?

In early May, Slovakia got the go-ahead from the European Commission to join the eurozone on 1 January 2009, but, what positive impact is the single currency likely to have on the Slovak population, businesses, economic development, and importantly, local property prices?

Domestic and foreign analysts agree that the euro adoption will be beneficial to Slovak citizens as well as businesses. The most obvious benefit will be reduction of transaction costs (on trades in euros) and removal of exchange rate risks - all good news for GDP growth.

Currently, the transaction and administration costs on trades in euro are approx 0.36% of GDP - according to the National Bank of Slovakia, NBS – costs which will decrease after Jan 2009.

Slovakia's foreign trade turnover is over 160% of GDP and more than 80% of this is trade with the EU (in euros). So the advantages here are obvious.

Euro adoption should also bring lower cost of capital for businesses and individuals and hence stimulate investment. Although interest rates in Slovakia are already quite low, there is still potential for reduction by 1% or so.

Indirect benefits

Apart from the obvious direct benefits of the euro, there are many - much wider - indirect ones.

Economists forecast a growth in foreign direct investment (FDI) and foreign trade, which in turn contribute to higher GDP growth and fast rising prosperity of Slovak population.

NBS expects Slovakia's trade with eurozone members to gradually increase (in the long run) by up to 90% after euro adoption. FDI will be boosted in many ways - thanks to the perception of higher stability of Slovakia due to the euro, investors savings on transaction costs as well as elimination of exchange risks.

According to NBS the total increase of GDP (in the long term, over 20 years) thanks to growth of international trade and rising FDI as a result of euro adoption should amount to 7-20%. The euro is estimated to contribute to economic growth by 0.7% (of GDP) annually on average - at stronger rate in the first few years after joining the euro and to a lesser extent in the later years.

Rise in property prices?

Most experts seem to expect an accelerated rise in property prices imminently after euro adoption. In truth, there is little that would indicate this to be a sure thing - at least in the very short term.

As with other goods, it may be more a matter of perception of the general public that euro brings increased prices. As proven by statistics, the rounding up effect in the 15 countries that adopted the single currency was negligible.

A possible hike in property prices might, however, come as a result of somewhat miscalculated expectations of the sellers - refusing to sell their property for its market value in the months prior to euro adoption, in expectation of strongly increased values after January 2009.

Slovakia has seen a similar situation in the six months or so prior to the country's EU entry. Sellers, expecting a strong appreciation imminently after the May 2004 EU entry, were holding onto their flats to sell after May. The resulting extremely low supply of properties on the market and the usual strong demand from buyers have caused prices to shoot up prior to May 2004.

As the market stabilized and many more properties were offered for sale, prices returned close to the normal pre-May values. It is possible that the euro adoption will cause a similar euforia among property owners and sellers. However, any out of order price hike purely due to the introduction of the new currency should be just a short term anomaly.

Influx of FDI?

The medium to long term benefits for property prices are of course a whole different matter. The advantages here are the same as the benefits of the euro for the entire Slovak economy.

A spokesperson for Slovakia Investment Property commented: “This vote of confidence will bring a new influx of foreign direct investment into Slovakia, increased confidence of international investors and even higher growth. And all that is certainly excellent news for the property market as well.

“The conversion rate for SKK into euro has not yet been decided. At the current market rate of just above 32 SKK/EUR the koruna is significantly stronger than the previously set central parity of 35.44 SKK/EUR. It is expected that the final conversion rate will be more closely aligned with the current market level”.