VZCZCXRO8966
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSL #0601/01 3101115
ZNR UUUUU ZZH
P 061115Z NOV 07
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 1307
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 BRATISLAVA 000601 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR ALIKONIS 
USDOC FOR 4232/ITA/MAC/EUR/MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN LO
SUBJECT: SLOVAKS COMMITTED TO EURO ADOPTION IF EU WILL HAVE 
THEM 
 
REF: A. BRATISLAVA 165 
     ¶B. BRATISLAVA 585 
 
¶1. (U) Summary - With the steadfast backing of Prime Minister 
Fico, Slovakia is now meeting the Maastricht economic 
criteria with the goal of adopting the Euro in January 2009. 
The concern now turns to the sustainability of the criteria, 
both in advance of the EU decision and after 2009.  The 
strong appreciation of the Slovak Koruna has led to doubts 
about the medium-term inflation outlook, while the recent 
recalculation of the 2006 budget has raised questions about 
the fiscal targets.  The biggest worry, however, is that 
Slovakia could be held back due to political factors outside 
of the government's control such as the potential impact of 
future Euro-zone applications by larger Central European 
countries.  The Central Bank Governor remains confident that 
Slovakia will soon be a part of the Euro-zone, sentiments 
that are supported by a strong majority of economic analysts 
and respected credit rating agencies. End Summary. 
 
NUMBERS LOOK GOOD, BUT ARE THEY SUSTAINABLE? 
-------------------------------------------- 
¶2. (U) Slovakia has been on track to meet the Maastricht 
criteria since entering the European Exchange Rate Mechanism 
II (ERM-2) in November, 2005, but officially met all of the 
fiscal criteria for the first time when the country posted an 
inflation rate of 2.4 percent in August.  Public debt and 
long-term interest rates have been well within their targets 
for some time, and the budget deficit for 2007 is forecast at 
2.9 percent, just below the 3 percent cutoff.  After a strong 
appreciation of the currency, the central parity was revalued 
by 8.5 percent in March to 35.4442 SKK/EUR and is currently 
trading at 33.3 SKK/EUR (Reftel A). 
 
¶3. (U) The biggest concern is whether these benchmarks are 
sustainable, both through the remaining period of ERM-2 and 
after January 1, 2009, when Slovakia is scheduled to join the 
Euro-zone.  The European Central Bank (ECB) questioned the 
sustainability of inflation in an internal memo in June, 
arguing that the significant drop in inflation was caused by 
a combination of the strong appreciation of the Slovak Koruna 
and government efforts to hold down energy prices.  The fear 
is that once Euro-zone entry eliminates currency as an 
inflation-control tool, price growth will take off again. 
Analysts regularly point to Lithuania, which was denied entry 
because its inflation was 0.06 above the threshold, as a 
cautionary tale for Slovakia.  Increasing energy prices are 
also a concern since the energy-intensive Slovak economy is 
more sensitive to price changes than other EU countries, and 
also more dependent on Russian energy supplies than current 
Euro-zone members. 
 
¶4. (U) Eurostat's October 22 recalculation of the Slovak 
budget deficit for 2006, raising it 0.3 percentage points to 
3.69 percent of GDP, has also raised concerns that the 2007 
end-year numbers could go above the 3 percent threshold. 
Eurostat determined that Slovakia needed to include debts of 
the public service media and other public finance items. 
What is not yet clear is whether Eurostat will require 
Slovakia to include debts from the National Highway Company 
in the deficit, which some estimate as high as 0.2 percent of 
GDP.  The Ministry of Finance is on record as saying the 
final deficit for 2007 will be 2.9 percent, though it may 
require some number shifting - such as paying out Prime 
Minister Fico's promised Christmas bonuses in January 2008 
instead of December 2007.  In an October 29 meeting with 
Ambassador, the Governor of the National Bank of Slovakia 
(NBS) said that the government will meet the deficit criteria 
whether or not the highway costs are included in the 
calculation. 
 
FICO'S SUPPORT UNWAVERING 
------------------------- 
¶5. (SBU) After overcoming some initial doubts in the first 
weeks following his election victory in June 2006 about 
becoming the first Central European country to join the 
Euro-zone, Prime Minister Fico has been a strong and 
consistent supporter of Euro-adoption.  He has reduced the 
scope and extended the implementation period of his social 
reform agenda to ensure that his government would meet the 
deficit criteria.  He certainly has been helped by a booming 
economy that has provided increased tax revenues to help fund 
some of these initiatives, but he has also set an ambitious 
deficit target of 2.4 percent of GDP in the budget proposal 
submitted to Parliament.  Smer MP and Chair of the Foreign 
Affairs Committee in Parliament Boris Zala told Ambassador 
that Fico was unwilling to consider early elections despite 
 
BRATISLAVA 00000601  002 OF 002 
 
 
recent coalition turmoil (Reftel B) because he wanted to pass 
a budget that would meet the Euro criteria.  Central Bank 
Governor Sramko, who played a significant role in changing 
Fico's opinion about the Euro shortly after the 2006 
election, noted to Ambassador that Fico had become a true 
believer who now viewed Euro adoption as an important part of 
his legacy.  Finance Minister Jan Pociatek jokes that the PM 
now supports Euro adoption more strongly than he does. 
 
BUT ARE SOLID NUMBERS AND GOVERNMENT SUPPORT ENOUGH? 
--------------------------------------------- ------- 
¶6. (U) There has been widespread speculation in recent weeks 
that meeting the nominal fiscal criteria may not be enough, 
and that Slovakia could have its entry into the Euro-zone 
delayed for what are seen as "political" reasons.  Eurostat's 
recalculation of the budget deficit to include additional 
expenses was seen as an initial sign by many in Slovakia that 
playing by the rules may not be enough.  Comments in early 
October by two European Central Bank board members that 
economic growth in the new EU member states has been a result 
of the transition and is not "a renewable source of 
convergence for the future - when the transition is over" 
were seen as directed at Slovakia since none of the other new 
EU members are expected to adopt the Euro before 2012. 
Economic analysts recognize that Slovakia -- more so than 
Slovenia or even Lithuania -- because of its size and the 
make-up of its economy, will set the standard for other Euro 
candidates.  The so-called sustainability criteria, which 
cannot be readily defined as the Maastricht targets and are 
thus considered "political," are expected to play a factor in 
the final decision. 
 
¶7. (U) Fico has made several public comments against 
additional criteria being applied, noting recently that "some 
new political rules, which were not present before, are 
beginning to emerge."  He has also reportedly raised the 
issue with several EU heads of state, including France's 
Nicolas Sarkozy during their early October meeting.  The 
Central Bank Governor told Ambassador that Fico is concerned 
that some members of the European Socialist Party (PES), 
which has suspended membership of Fico's Smer party in the 
grouping because its coalition partners are viewed as 
"unacceptable," could use the decision on Euro adoption to 
make a political point.  Sramko does not believe this will 
happen, and said he has been assured by his EU counterparts 
that the decision will be based solely on economic criteria. 
 
ANALYST REMAIN BULLISH 
---------------------- 
¶8. (U) Slovak economic analysts for the most part remain 
confident that Slovakia will adopt the Euro in 2009.  A 
September survey by the local economic think tank, INEKO, 
indicated that the level of confidence among economic 
analysts about Euro adoption was 70 percent, down from 77 
percent, but still more than twice the level following the 
2006 elections.  Both Fitch and Standard and Poors maintain 
positive assessments of Slovakia's chances, noting that 
inflation continues to provide the greatest risk. 
 
COMMENT 
------- 
¶9. (SBU) Much to the surprise of most local political and 
economic observers, Fico has become one of the strongest 
advocates for Euro adoption.  At the very least, he seems to 
want to avoid giving the opposition ammunition to attack him 
for reversing Slovakia's economic progress.  Given the 
subjective nature of judging the sustainability of the 
macroeconomic criteria, there nevertheless is still a 
possibility, though widely seen as relatively low, that the 
EU will delay Slovakia's entry to the Euro-zone.  By meeting 
the Maastricht criteria and leading the drive for adoption in 
2009, Fico has positioned himself well for either outcome. 
He will either be known as the father of Euro adoption, or 
the victim of a wider conspiracy to keep Slovakia out - both 
of which could help him in the 2010 elections.  A 
postponement beyond 2009 likely would lead to higher 
government spending by Fico to more rapidly institute his 
policy objectives in advance of expected 2010 elections, 
which would mean that Euro-zone adoption could slip by 
several years.  End Comment. 
 
VALLEE