SLOVAKIA TO JOIN THE EURO ZONE: IT'S OFFICIAL

UNCLAS BRATISLAVA 000315 SENSITIVE SIPDIS TREASURY FOR LNORTON USDOC FOR 4232/ITA/MAC/EUR/MROGERS E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD LO SUBJECT: SLOVAKIA TO JOIN THE EURO ZONE: IT'S OFFICIAL REF: A. BRATISLAVA 249 ¶B. BRATISLAVA 216 ¶1. (SBU) On July 8, European Commissioner for Economic and Monetary Affairs, Joaquin Almunia, officially welcomed Slovakia as the 16th member of the Euro zone as of January 1, ¶2009. As widely expected, the final conversion rate between the Slovak Koruna and the Euro was fixed at the current central parity rate of 30.126 SKK/EUR by European Ministers of Finance. Beginning in August, the prices of all goods and services in Slovakia will be recalculated and displayed in both Euro and Koruna. Against the backdrop of this signal achievement, and in anticipation of a potential backlash among voters, PM Fico continues to threaten "irresponsible businesses" against price speculation. The Ministry of Finance announced the establishment of a new government body, a so-called "price council" led by PM Fico, whose mandate is to monitor the price growth of basic foodstuffs and services in comparison with neighboring countries. This proposal has been met with criticism from the opposition and members of the business community, but it is clear that even the MoF still does not know how the council, in actual practice, will carry out the PM's mandate. In the meantime, the price council proposal likely resonates with the public. ¶2. (U) Following the recent excitement and turmoil stemming from accusations by the opposition that the GOS, in particular Finance Minister Pociatek, leaked information to Slovak financial groups and banks in connection with the May 2008 revaluation of the central parity rate to 30.126 SKK/Euro, the official announcement today of the final rate was almost anti-climactic. The final conversion rate of 30.126 follows an unprecedented course of growth for the Koruna, which led the EU to break precedent by revaluating twice (first in May 2007, then in May 2008) the central parity rate (reftel A). Fluctuations in the exchange rate could occur until the end of the year due to differences in market interest rates and changes in investment patterns, but any such fluctuations are expected to be slight. ¶3. (SBU) With today's announcement, Slovakia becomes the first Central European EU member and only the second post-Communist country to secure a place in the Euro zone. That it superseded Hungary and the Czech Republic is no small source of satisfaction here. Another feather was added to Slovakia's cap today with the Fitch Agency's decision to upgrade Slovakia's foreign currency rating from "A" to "A plus." While Finance Minister Pociatek and Central Bank Governor Sramko are celebrating in Brussels, PM Fico has adopted a sober, and at times, stern rhetoric in his public remarks about what Euro adoption will mean for the citizens of Slovakia. Fico has made it clear that he intends to do everything within the government's power to minimize any negative effects of Euro adoption on average citizens (reftel B). At the same time, his rhetoric suggests that he is not overly concerned about the potential effects of such measures on the business environment or community. Although it is not yet clear how the new "price council" will work in practice -- and Ministry of Finance officials have acknowledged the inherent challenges ahead -- Embassy contacts suggest that if prices in Slovakia did appear to be out of line with prices in neighboring countries, the GOS would probably respond with a revision to the law on prices, which would enable price regulation. FinMin Pociatek told Pol/Econ Chief at a July 7 event that this response would be a "last resort" and that the government hoped that the signals of vigilance it was conveying would have a chastening effect on potential speculators. Comment: Slovakia's entry into the Euro zone is an impressive achievement, particularly in light of the lack of credibility the Fico government initially had with financial experts in Brussels. Post will monitor developments with respect to the "price council" and will follow up with in-depth reporting on the impact of this, and other GOS initiatives, on the business climate. OBSITNIK