Maria Valachyova of Erste Bank -

The European Commission, in its convergence report released May 7, said that Slovakia has met all the necessary conditions for adopting the euro in 2009. The positive assessment was broadly expected, as Slovakia met all the nominal Maastricht criteria; the only disputable issue was the sustainability of meeting the inflation criterion in the years ahead. However, the big buffer with which Slovakia met the inflation limit and the underlying fundamentals were among the arguments that persuaded the European Commission the country's low inflation is no accident. Indeed, the Commission's forecasts (released late April) showed that it expects inflation to stay below the Maastricht limit until the end of 2009. The convergence report from the European Central Bank - which has been burned by other new members whose inflation took off immediately after joining, the prime example being Slovenia - was as expected more ambivalent. "There are considerable concerns regarding the sustainability of inflation convergence," it said.

Despite the risk factors to inflation, the assessment of the European institutions was positive, meaning it will be a formality to get final approval to join. The Economic and Financial Affairs Council (Ecofin) still has to abrogate the excessive deficit procedure against Slovakia, which should be only formality as the Commission confirmed that the excessive deficit has been corrected in a credible and sustainable way below the 3% (of GDP) limit. The final decision about the Slovakia's entry into the Eurozone will be taken by EU finance ministers after consultations with the European Parliament and the European Council.

The only remaining issue is the setting of the conversion exchange rate. The final conversion rate will be announced in the beginning of July. We believe that a revaluation of the central parity might happen before that time and the new central parity will serve as the final conversion rate. The setting of the parity will likely happen at the (future) spot rate in the time of fixing. Our expectations for the conversion rate are in the band between 32.0-32.5 SKK/EUR although current spot rates present risks for the yet stronger conversion rate.

After the release of the reports, the koruna temporarily weakened to 32.12 SKK/EUR from earlier 32.07 SKK/EUR, but later returned near to its all-time high of 32.05 SKK/EUR.

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