The effects of euro adoption on the Slovak economy
Martin Šuster, Marek Árendáš, Michal Benčík, Pavel Gertler, František Hajnovič, Zora Komínková, Tibor Lalinský, Marián Nemec, Dušan Preisinger, Vladimír Solanič, Anna Strachotová, Marcel Tirpák, Tomáš Tózsér, Juraj Zeman
National Bank of Slovakia

Abstract: We analyze the costs and benefits of adopting euro in Slovakia. The study comprehensively assesses all aspects of euro adoption in Slovakia and makes quantitative estimates of partial effects whenever possible. We incorporate recent information and political decisions, in particular the official euro adoption date and the changeover scenario. We also draw implications of euro adoption on various economic actors, consumers, businesses and the public sector. Direct benefits of euro adoption are estimated to save almost 0.4% GDP annually. The most important indirect benefit of Slovak entry into the eurozone is its potential to boost annual economic growth by approximately 0.7% in the medium term. The most important disadvantages of euro adoption are one-off costs. The costs of losing independent monetary policy are estimated to be small. Overall, the quantifiable costs of euro adoption are around 0.1% GDP in annualized terms. This is significantly lower than the expected benefits. In addition, we also assess some risks connected with euro adoption. The most significant ones are the likelihood of slightly higher inflation after euro is introduced and the implications of administrative barriers to labor flows and trade in services in EU countries. The expected positive effects of euro adoption in Slovakia hinge on appropriate economic policies, which will have to support stability and flexibility of the economy in the absence of national monetary policy. Provided these policies are in place, the official target of adopting euro in 2009 is optimal. Entering the euro area at a later date implies a loss of some of the potential benefits of euro adoption.