Panel intervention at the Euro conference hosted by Banka Slovenije
Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB
Ljubljana, 15 January 2007
Ladies and Gentlemen,
[Slide 2] It is a great pleasure to talk to you here, in Ljubljana at a conference celebrating the adoption of the euro. Slovenia has always been near to my heart, and not only because it is so close to my own country. I have always appreciated Slovenia’s deeply entrenched stability culture. On 1 January this year it took one of the biggest steps in its short history as an independent state. And it is a very good step in my view. Slovenia is entering a currency union that is in good shape. Inflation in the euro area has been under controlled since its inception, economic activity is now expanding robustly and employment is growing at a healthy pace. [Slides 3 and 4]
In my presentation I will discuss some of the changes that EU enlargement is bringing about, looking at the experience of the ten central and eastern European countries that joined the EU in May 2004 and the two countries that joined at the beginning of this year. My main message is that enlargement has been a remarkable success story, opening up important new opportunities for trade and investment for both the new and existing EU Member States. This process – together with the effects of globalisation that largely work in the same direction – is leading to profound and complex changes in the European economic landscape of which I can only scratch the surface in this presentation.
Let me discuss some of these changes in more detail. Thanks to the restructuring and upgrading of export baskets in the new Member States and the implementation of the Europe Agreements in the 1990s, EU enlargement already had a significant impact on trade integration within Europe well before the actual date of accession. Compared with 1995, most of the EU-10 countries have been able to raise their shares in euro area imports significantly. [Slides 5 and 6]
However, looking forward, enlargement is likely to lead to further increases in trade between the EU-10 and the other Member States, especially in the areas where trade liberalisation under the Europe Agreements was limited (e.g. agriculture) and as the EU-10 countries further upgrade their export structures. More generally, the expansion of the Single Market further intensifies the degree of competition as, with the accession of the new Member States, the number of suppliers increases within the enlarged Single Market. In addition, enlargement further enhances the scope for economies of scale as the available market widens.
A key factor behind the economic restructuring and the intensification of trade flows is foreign direct investment (FDI). FDI constitutes by far the largest share of total cumulative net private capital inflows to the new Member States. These inflows are not only associated with the privatisation process but also with the existence of attractive investment opportunities in new companies. It is interesting to note how important FDI inflows have become compared with previous enlargements [Slide 7]. In the largest central European countries, for example, FDI inflows reached peaks of around 10% of GDP during the years preceding their accession to the EU, whereas these inflows averaged only around 1% of GDP in Greece, Spain and Portugal before those countries joined the EU.
One of the sectors in the EU-10 that has been going through important changes is the financial sector. A key aspect of the development of the financial sector in the EU-10 has been a strong increase in the amount of bank credit to the private sector, particularly in those economies where the share of credit in per cent of GDP is still relatively low [Slide 8]. A notable feature of this phenomenon is that in a number of countries an important share of this credit is provided in foreign currency [Slide 9]. Although a rapid expansion of credit is a natural phenomenon associated with the transition and catching-up process, it may also pose some risks to both macroeconomic and financial stability.
Overall, enlargement leads to important structural changes that have the potential to benefit both the EU-10 and the other EU Member States. These benefits do not accrue automatically, however. The degree and speed with which these effects materialise depend largely on economic policies in both the new and existing Member States. In particular, macroeconomic policies should be aimed at stability and structural reforms should be implemented to enhance the flexibility of markets. To fully reap the benefits of enlargement, a fully operational Single Market must be implemented, allowing a free flow of goods, services, capital and labour. Removing the remaining barriers within the EU will be an important means to promote the efficient allocation of factors of production as well as deeper economic and financial integration.
Let me finish with a few words on Slovenia. Euro adoption implies for Slovenia that the benefits of the Single Market – of which I just discussed some elements – are further enhanced by the single currency. Euro adoption offers a credible framework for monetary policy and price stability in an environment characterised by the absence of exchange rate uncertainty within the euro area.
Tourist slogans often call Slovenia the “sunny side of the Alps” or a “green treasure of Europe”. In my view, Slovenia can be regarded as what in German is called a “Musterland”, or a model, among the EU Member States that joined in 2004. It is the first country of this group to introduce the euro. This reflects its successful and rapid transformation to a fully-fledged market economy. In addition, in January next year, Slovenia will be the first country of the “new members of 2004” to take up the EU’s rotating Presidency. With these two important milestones, Slovenia leads the way for the countries that joined the EU in 2004 and 2007.
But also when I look at Slovenia’s economy, some impressive achievements come to the fore. Key features of Slovenia’s economic strategy have been a focus on a stable macro economy and a gradualist approach to the transition process. As President Trichet already stated in his keynote speech, real GDP has been growing strongly, at around 4 to 5% per year, thanks to robust domestic demand as well as exports. Slovenia’s GDP per capita is the highest in the EU-10 countries at 76% of the euro area average. Inflation has fallen in recent years to 2.5% in 2006. The unemployment rate, at 6.5% in 2006, is also low by European standards. Moreover, progress has been made in structural reform – including cutting the top rate of income tax from 50% to 41%, while keeping the general government deficit within limits. Over the past few years, Slovenian interest rates gradually converged to those in the euro area and this process was smoothly completed at the end of 2006. [Slides 10 and 11]
Despite all these important successes, Slovenia also faces some challenges. Now that it has adopted the euro, Slovenia needs to adapt to the absence of an independent monetary and exchange rate policy. Future adjustments in competitiveness will therefore have to derive entirely from flexibility in wages and prices. Structural reforms aimed at increasing the flexibility of the economy are thus of the essence. Moreover, Slovenia will be among the European economies worst hit by population ageing. The country has a low fertility rate, and age-related spending is rising rapidly as a share of GDP. The sustainability of public finances therefore remains a key challenge, despite the improvements we have observed in recent years.
Slovenia’s entry into the euro area is also notable from a euro area perspective. The country forms an important link between the euro area and the economies in south-eastern Europe. The EU enlargement process is already affecting the countries in this region in a very positive way. Trade integration between Slovenia and the other countries in south-eastern Europe has been on the rise in recent years. And it is important that the economic integration process with this region continues, not only for economic but also for political reasons.
[Slide 12] Let me conclude. EU enlargement is bringing about profound structural changes to the European economy, which benefit both the euro area and the Member States that have not yet adopted the euro. Euro adoption implies for Slovenia that the benefits of the Single Market are further enhanced by the single currency, which offers a credible framework for monetary policy and price stability in an environment characterised by the absence of exchange rate uncertainty within the euro area. I congratulate Slovenia on this tremendous achievement!
Thank you for your attention.
 The Europe Agreements were bilateral agreements between the EU and countries in central and eastern Europe that were concluded in the early and mid-1990s and established a free trade area for most industrial products.