Yves Mersch: Tenth anniversary of the euro in Slovakia
Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at
the International Conference to mark the tenth anniversary of the introduction of the euro in
Slovakia, Bratislava, 11 January 2019.
* * *
Accompany charts of the speech.
I am honoured to be in Bratislava today and to speak before such a distinguished audience. This
conference marks the tenth anniversary of the euro in Slovakia, which in fact is a double
anniversary as it coincides with twenty years of the euro.
What could be a better anniversary gift, or a clearer symbol of the vitality of our single currency,
than Slovakia's success since the introduction of the euro on 1 January 2009?
Slovakia has achieved an impressive real convergence of living standards towards the EU
average. The key ingredients of this success have been the country's willingness to grasp the
opportunities offered by EU membership and the adoption of the euro.
Indeed, on the economic side fundamental institutional reforms allowed Slovakia to transition to a
vibrant market economy and adopt a highly successful export-led growth model, which
underpinned real convergence. Reforms rather than continued devaluation or requests for
financial assistance is the recipe for success.
Nevertheless, this should be no reason for complacency, as the next stage of convergence is
bound to be harder. Neither EU membership nor the single currency offer an "autopilot" for strong
economic growth.
I will therefore argue that relentless efforts in the pursuit of institutional quality and good
governance are essential in order to raise the country's long-term growth capacity.
The drivers of Slovakia's success
Within just three decades, Slovakia has made a remarkable economic transition from a centrally
planned economy to a market economy that is closely integrated into the Single Market. The
significant efforts made during the transition have clearly paid off.
Having all but doubled since the early 1990s, Slovakia's real GDP per capita stands at just over
1
80% of the EU average.
Equally impressive has been the pace of economic convergence, which exceeded expectations
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based on the initial level of Slovak national income. Slovakia has managed to achieve a per
capita GDP level above that of most other countries in central and eastern Europe (CEE), and
close to catching up with that of Slovenia and the Czech Republic (Chart 1).
Much of this success is rooted in the country's remarkable institutional transformation in the
context of joining the EU.
Slovakia's accession to the EU gave momentum to its convergence efforts and provided it with
an external institutional anchor.
Fundamental reforms such as the establishment of a clearly defined system of property rights,
effective economic law enforcement and institutions to curb fraud and anticompetitive behaviour
were crucial in allowing Slovakia to operate in a market economy and to cope with competition
and market forces.
Access to the Single Market and adoption of the acquis communautaire have contributed to
Slovakia's success in two ways.
First, the removal of trade barriers and application of European-wide standards considerably
reduced the cost of doing business across borders, fostering trade and encouraging the
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country's participation in European value chains.
Second, a more stable and predictable legal and regulatory environment improved investor
security and contributed to a rapid inflow of foreign investment, providing the economy with the
necessary foreign capital, know-how and technology to increase its competitiveness.
The Slovak economy became deeply integrated into the Single Market, with an export share of
almost 100% of GDP, well above that of other CEE economies (Chart 2), and almost 20% of
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jobs depending on EU exports to the rest of the world.
The resulting significant economic convergence eventually paved the way for the introduction of
the euro.
Many saw the loss of an independent monetary policy and the inability to respond to external
shocks as the most significant cost of joining the euro area.
However, Slovakia's high degree of openness had made it difficult for its national central bank to
manage the business cycle in the face of volatile capital flows. The exchange rate had more
5
often become a source of shocks rather than a shock absorber.
So the benefits of adopting the euro were compelling.
One immediate benefit was the stabilisation of Slovakia's exchange rate with key trading partners
and the elimination of currency conversion costs. Research shows that euro adoption thereby
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contributed to a 12% increase in Slovakia's exports to the euro area.
A further advantage of the introduction of the euro was the strengthening of Slovakia's
macroeconomic institutions. Adopting the euro gave further impetus to institutional convergence
and allowed Slovakia to anchor its macroeconomic institutions in a stronger European
framework.
In the run-up to euro adoption, numerous amendments to the Slovak institutional framework were
made to ensure convergence with EU requirements, which were closely monitored by the
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European institutions as in the ECB Convergence Report.
High standards were required for the independence of the central bank, particularly for the
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personal independence of executive board members. Safeguarding institutional independence
is crucial when European monetary policy coexists with national financial and labour market
policies and where interests may not always be aligned.
The embedding of Slovak institutions in a stable European institutional framework therefore
contributed to macroeconomic stability during the crisis and increased investment and trade.
Indeed, in comparison with the Czech Republic, which has very similar economic structures,
Slovakia has experienced faster economic growth since 2009. Although the Czech Republic was
able to pursue an independent monetary policy during the crisis, Slovakia managed to maintain a
0.9 percentage point advantage over that country in terms of average annual GDP growth
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between 2009 and 2016.
As a result, the gap between Slovak and Czech GDP per capita narrowed from 21% in 2008 to
13.8% in 2017.
The importance of institutional quality for long-term convergence
May Slovakia's success continue for many years to come. In the long run, though, it cannot be
taken for granted that Slovakia's growth model will continue to deliver strong growth;
convergence with EU countries could slow. Slovakia risks falling into the so-called
middleincome trap, whereby middle-income economies tend to follow a lower growth trajectory.
Much of the country's growth depends on its ability to attract foreign investment, skills and
technology to raise productivity. However, the country has now started to experience a slowdown
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in foreign investment, technology diffusion and labour productivity.
For Slovakia to avoid the middle-income trap, it could be useful to develop new strategies
focused on domestic innovation. Above all, this would lead to more productive firms, more private
capital and more skilled labour to spur long-term growth.
Such improvements, however, often depend on setting the right institutional conditions. Indeed,
institutional quality has proved to be an important factor in achieving higher incomes in the long
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run. Factors such as inefficient public administration, weak control of rent seeking, tax evasion
and corruption hamper competition and economic inclusion.
Slovakia ranks below the euro area average in some of these areas, as measured by the most
commonly used institutional governance indicators. More importantly, while most other new euro
area countries showed some improvement over the past decade, reform momentum in Slovakia
appears to have slowed after the euro was adopted (Chart 3).
By improving in two key areas, Slovakia could help foster the right domestic conditions for
businesses to thrive.
One area is improving the business environment. According to the World Bank's Doing Business
Indicator, Slovakia ranks below the new euro area countries, in particular in areas such as
starting a business, protecting minority investors or dealing with construction permits (Chart 4).
Moreover, 55% of entrepreneurs perceived corruption as a problem for doing business in the
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country, according to the Eurobarometer in 2017.
Another area for potential improvement is the judicial system. According to the Organisation for
Economic Co-Operation and Development (OECD), the integrity of the legal system and
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independence of the judiciary are perceived as insufficient (Chart 5). Improving the
independence and transparency of the judicial system could help in the fight against corruption
and increase public confidence in the state.
Addressing these issues would also create the conditions for national businesses to fully exploit
the potential of the Single Market and contribute to sound and inclusive growth.
Conclusion
As we celebrate ten years of euro adoption, Slovakia has become a success story for the
convergence process in the EU. The country can be proud of having achieved impressive
economic and institutional convergence in such a short time.
Slovakia's success shows that EU accession and the adoption of the euro can create
considerable opportunities - opportunities that can be seized, or wasted. Slovakia is a positive
example of a country that has seized the opportunities of European integration through
fundamental institutional reforms.
Nevertheless, continued efforts in the pursuit of institutional quality and good governance are
needed in all euro area countries in order to reap lasting benefits from Monetary Union. This
includes strict compliance with the doctrine of central bank independence.
For Slovakia, further improving the business environment and judicial system would help
promote continued economic success over the next ten years.
I'm confident that sound domestic and European institutions will support sustainable growth and
contribute to maintaining confidence in the euro and the European project.
1
Real GDP per capita in terms of purchasing power parity as a percentage of the EU28 average in 2016.
2
See Economic Convergence in the Czech Republic and Slovakia, European Commission, 2018.
3
See Blind, K., Mangelsdorf, A. Niebel, C. and Ramel, F. (2018), "Standards in the global value chains of the
European Single Market", Review of International Political Economy, Volume 25, Issue 1.
4
See ec.europa.eu/trade/policy/in-focus/trade-and-jobs/
5
See Suster, M. (2006), "The effects of euro adoption on the Slovak economy", BIATEC, Volume XIV, 6/2006.
6
See www.banque-france.fr/sites/default/files/slidesjaanikamerikull.pdf
7
ECB Convergence Report, May 2008.
8
ECB Opinion of 27 October 2009 on Národná banka Slovenska's independence (CON/2009/85).
9
See ec.europa.eu/info/sites/info/files/economy-finance/eb034_en.pdf
10
See Chiacchio, F., Gradeva, K. and Lopez-Garcia. P. (2018), " The post-crisis TFP growth slowdown in CEE
countries: Exploring the role of Global Value Chains", Working Papers Series, No 2143, ECB, April.
11
See Masuch, K., Moshammer, E. and Pierluigie, B. (2016), "Institutions and Growth in Europe" CEPS, April.
12
Flash Eurobarometer 457, Businesses' attitudes towards corruption in the EU, October 2017.
13
OECD, Economic Surveys, Slovak Republic, June 2017.