Nagovor guvernerja na dogodku Bulgaria in the Eurozone – Benefits and Opportunities

Velja govorjena beseda.

This year, on the twentieth anniversary of the introduction of euro banknotes and coins, we received good news regarding the further enlargement of the euro area.

I am pleased that not only will the euro family grow to include Croatia in less than a month, but that adoption of the euro has also been announced as a priority for Bulgaria.[1]

The further expansion of the euro area strengthens the international role of the euro and the euro economy, and adds to the economic resilience of the EU, which is of particular importance in a world of increased geopolitical tensions.

“We are only as strong as we are united”, if I may borrow J.K. Rowling’s words. And the public seem to agree on this, if we are to judge from the results of the most recent (November) Eurobarometer survey, showing one of the highest ever approval rates for the euro.

The common currency is perceived as a good thing for the EU by almost 8 out of 10 EU citizens, with Slovenians being among the top supporters of the euro.[2]

Slovenia adopted the euro more than fifteen years ago. In January 2007 we joined the euro area as the 13th EU Member State, which was in this case actually a lucky number.

Slovenia was the first of the so-called new EU member states to adopt the currency. It was also the first country in which the euro was introduced as book money and as cash on the same date, without a 3-year transitional period typical for the previous euro adopters.

Slovenia's adoption of the euro thus represented an interesting case study for other new EU member states. Our positive experience with the so-called "big bang" approach confirmed its status as the favoured option compared to a phase-out scenario with a transitional period for legal documents to be denoted in euros.[3]

Slovenia adopted the euro less than three years after joining the EU.

Regarding the Maastricht convergence criteria, inflation was the biggest challenge.

With a combination of disinflationary monetary[4] and fiscal policies and pro-market structural reforms - including de-indexation of wages and contracts[5] - in just six years (2000-2006) Slovenia managed to reduce inflation from almost 9% to just over 2%, and long-term interest rates from almost 10% to below 4%, very close to the euro area average. At the same time economic growth remained relatively robust.

The depreciation of the Slovene tolar, typical of the previous decade, was eliminated only gradually. The strategy of gradual stabilisation of the exchange rate of the tolar against the euro[6] prolonged the disinflation process for a couple of years, but it may have facilitated the adjustment of the real economy.

There were several success factors for the swift and smooth introduction of the euro in Slovenia.

First and probably most important was the unified pro-euro attitude of policy makers, political parties and professionals, and a commitment to reforms and the achievement of the Maastricht criteria.

Another crucial factor was the comprehensive preparations starting three years in advance, along with good project management. These preparations concerned two overarching areas.

One was the technical aspect of the changeover in the public and private sector (including adopting and adjusting the relevant legislation, setting up a 16-month mandatory dual display of prices in tolars and euros, adjustments of IT systems, conversion of ATMs and POS terminals, frontloading of euro banknotes, etc).

Another success factor was a good communication strategy, with timely sharing of the details of the national changeover plan with the private sector, targeted training, a dedicated web page, strong advertising campaign and the distribution of euro calculators among households.

The familiarity of Slovenes with the euro also played an important role. Specifically, the euro was already legal tender in neighbouring Austria and Italy, and many Slovenians already held a significant part of their savings in euros, a phenomenon which had roots in the former state of Yugoslavia, where low trust in the dinar as a store of value lead to massive savings in Deutschmarks.

All these factors contributed to strong public support for the euro. In the 2006 Eurobarometer survey, 72% of Slovenes welcomed the introduction of the currency. This number then rose further after the adoption of the euro, showing that people's positive expectations had been satisfied.

The euro, which has become part of the European identity, has brought us many economic and other benefits.[7]

Accession to the EU and the decision to adopt the euro were supportive of the momentum to reform and contributed to greater stability of the economic environment.

Euro adoption simplified our lives by increasing the transparency of prices and reducing both transaction costs and exposure to exchange rate fluctuations.

It made it easier and cheaper for business to trade and invest across borders, and contributed to the rise in the volume of international trade in Slovenia. 

On joining the euro area Slovenia imported the ECB's credibility, which helped ease the country’s access to capital markets and reduce the cost of funding and its volatility.

Being part of the larger currency union in general mitigates the impact of external shocks on our small open economy.[8] This was also the case during the covid crisis and after the Russian invasion of Ukraine, when with our own currency we would probably have faced greater depreciation and inflationary pressures and more volatile and less favourable financing conditions.

Like the euro coin, membership in the euro area has two sides, advantages and challenges.

A challenge often exposed is that a country gives up the independence to formulate its own monetary policy, which can complicate its adjustment to shocks. I would add two thoughts to this.

First, this challenge can also be an opportunity for a country to reform, to increase its flexibility and resilience to shocks and build up shock absorption capacity.

Second, even in small open economies with their own currencies, the scope for independent monetary policy is limited, as in this highly integrated world such nations will still be importing the monetary stances of major central banks.

Another challenge, related to gaining public support for the adoption of the euro, is the fear of price increases at the time of the changeover. Upon the introduction of the euro in Germany, there was a joke that the name of the new currency was actually “teuro”, as teuer means expensive in German.

In Slovenia, the adoption of the euro did not cause a significant change in the general level of prices, but it had a more significant effect on the prices of some items, especially catering services and products with low prices, as well due to the effects of rounding up. This is probably why the public perception of price increases is generally higher than the reality.

The short-term effect is estimated at 0.3 percentage points, while the medium-term effect is more difficult to estimate due to many overlapping factors.

The last challenge I would touch upon is related to dealing with improved access to cross-border funding and the lowering of interest rates, after Slovenia entered the ERM 2.

Domestic bank borrowing on international wholesale markets quadrupled in the period from 2004-2008,[9] which allowed the rapid expansion of bank lending to firms and households.[10]

This contributed to the overheating of the economy, especially in the construction and real estate sectors, and – together with bank financing of management buyouts –contributed significantly to the banking and public finance crisis.

The global financial crisis revealed the shortcomings of banking regulation and oversight in the euro area in general, and prompted comprehensive EU reforms in this regard. Bulgaria's steps towards adopting the euro thus take place in a strengthened institutional framework.[11]

To sum up. Two of the key factors for the successful adoption of the euro in Slovenia were - in addition to thorough preparations - broad social consensus[12] and credible communication from key stakeholders.

Adoption of the euro brings both opportunities and challenges. In the case of Slovenia, the opportunities prevailed. The institutional framework of Economic and Monetary Union (EMU) is not yet complete, and with further progress in this area I anticipate that the scale will tip even more in favour of the benefits of joining the single currency.