Slovenia lends a hand to Bulgaria to gain experience in adopting the euro

Slovenia is ready to share with Bulgaria its experience in the adoption of the euro and the transition period between the national and the European currency. This was said in an interview with BTA by the Deputy Governor of the Slovenian Central Bank (Banka Slovenija - Banke Slovenije) Primož Dolenc.

Slovenia became part of the EU in 2004 and that same year entered the so-called waiting room of the Eurozone (the European Monetary Mechanism - ERM II). In 2006, the country set the final exchange rate of its national currency, the tolar, to the euro, and in 2007, it became the 13th member of the eurozone.

Commenting on the issue of the adoption of the euro and the transition process from the national to the pan-European currency, Dolenc noted that in this regard, Slovenia served as an example of best practices for Croatia, which will join the currency union on January 1, 2023.

"In this process, we were able to significantly help Croatia with advice based on our experience, we can also help Bulgaria," said Primozh Dolenc.

According to him, in this period of adaptation to the pan-European currency, it was very important that Slovenians were largely already used to the euro, as their neighbors Italy and Austria already used the single European currency, and Slovenia has strong commercial and tourism relations with these countries. The information campaign, carried out in coordination between various Slovenian institutions, also played an important role.

"Now that the euro has been in use for more than 20 years, I think that the countries that will join the eurozone in the coming years will have no problems preparing, adopting or using the euro. The situation is similar in Croatia. They have significant income from tourism, many people come to the country with euro, so Croatians know euro. I don't think that the situation in Bulgaria is much different in this regard," said Dolenc.

The Slovenian vice-governor commented on the fears of a sharp jump in prices after the introduction of the euro, distinguishing between statistical inflation and the so-called perceived inflation.

Statistics show that annual inflation (HICP) in Slovenia was 2.5 percent in 2006 and accelerated to 3.8 percent in 2007, when the country introduced the euro, and in 2008 it reached 5 .5 percent.

In Slovenia, the effect of the euro was actually quite weak. According to estimates, only a quarter of a percentage point of inflation in 2007 is due to the euro, notes Primozh Dolenc.

Although the effect on inflation growth from the introduction of the single European currency was negligibly small, according to the banker, it was mainly about goods and services of lower value, whose prices people knew well and therefore noticed any increase in them. He notes that in such a situation, statistically, inflation remains low because these products and services do not represent a significant share in the consumer basket, but people perceive it as high.

This led to a negative psychological effect on people. Everyone knew how much coffee cost before and after the euro, but statistically the effect was almost negligible, it was small, Dolenz said.

Another reason for the acceleration of inflation after the introduction of the euro, according to Dolenc, is the overheating of the Slovenian economy during this period.

Slovenia reported economic growth of 5.7 percent in 2006, which accelerated to 7 percent in 2007.

In 2007, and even before that, we had strong economic growth thanks mainly to domestic demand. Gross domestic product (GDP) growth at that time was around 7 percent, and this caused inflation to rise. We had the simultaneous introduction of the euro and overheating of the economy, and people would think that inflation was due to the euro, but this is not the case, stressed Dolenc.

Commenting on the benefits for Slovenia of adopting the euro, the Slovenian vice-governor highlighted Slovenia's connectivity to European markets, European production and supply chains. He also highlighted the country's significant income from tourism.

The share of tourism revenue in Slovenia's total GDP was 6.5 percent in 2020, according to data from the World Travel and Tourism Council.

In this context, according to Dolenc, an extremely important factor is that the adoption of the euro avoids the risks associated with exchange rates. Thanks to the euro, "uncertainty in business has significantly decreased", he recalls.

The euro, in our estimations, has contributed significantly to Slovenia's competitiveness through more competitive prices, and has also contributed to a more stable economic environment, Dolenc said.

He also noted that with full membership in the Eurozone for export-oriented companies, the market has grown significantly as it is "much easier to do business with the same currency".

Thanks to the euro, corporate investment has also increased, the country's sovereign ratings have been raised, and this has had a correspondingly favorable effect on its borrowing costs.

"At the end of the day, the euro brought low interest rates to Slovenia, it brought financial stability, price stability, and this stability has a huge indirect effect on businesses and people," summarized Dolenc.

According to him, joining the Eurozone has only one drawback, at least in theory: the country's loss of sovereignty in conducting monetary policy with which to balance its own business cycle. However, according to him, this can be done through other measures.

We have fiscal policy, we have structural policies, macroprudential policy. So we have other tools through which we can smooth out the business cycle, explains Dolenc.

He identifies a rapid transition to the euro as a natural solution for Slovenia and outlines three factors for this.

The first is the purely political decision of the country. The second is that Slovenians had high confidence in the euro as their future currency, as they were historically used to the German mark, which was replaced by the euro. And the third factor is that they managed to fulfill the Maastricht criteria for entering the Eurozone in a short time.

"The main challenge was inflation, as we had high inflation levels before we joined [the eurozone] and there was a strong commitment and joint coordinated action by the Slovenian government and the Slovenian central bank to lower inflation," Dolenc said. He recalled that when Slovenia was part of the former Yugoslavia, the country historically had huge problems with inflation and even hyperinflation, and therefore the commitment and motivation for its normalization was even greater.

One of the criteria for membership in the Eurozone is price stability, with the requirement that the average rate of inflation in the candidate country does not exceed by more than 1.5 percentage points the rate of inflation in the three EU member states with the best indicators.

According to Dolenc, the euro has proved to be a natural way to deal with the problem of high inflation.

All our efforts to tackle inflation were complemented by fiscal policy measures and structural reforms, the Slovenian vice-governor added.