Record Koruna Revaluation to Set the Final Conversion Rate

    At the request of Slovak authorities, the central parity between Slovak koruna and Euro within the ERM II system has been moved for the second time, this time by 15% from 35.4424 to 30.1260 SKK/EUR on May 28. The revaluation is the most significant movement of the central rate in the history of the European exchange rate mechanism. In case of Ireland and Greece before 2002, the changes were by three and three and a half percent respectively. The change is a reaction to the positive assessment of the Slovak euro bid by the European Commission from the beginning of May and a significant appreciation of the Koruna exchange rate due to healthy economic fundaments during the last two quarters.

    The new exchange rate center will most probably constitute the final exchange rate as Slovakia switches to Euro in January next year, since no country has yet joined the Eurozone with an exchange rate different from its central parity, and another revaluation is highly unlikely. 

    The Koruna revaluation appeased the bullish market that continued to trade Slovak currency at ever stronger positions in May. Verbal assertions of the Slovak PM Robert Fico as well as NBS governor Ivan Šramko stating that there is a room for koruna appreciation helped to move the exchange rate to new all-time highs. Another driving factor of appreciation was low risk aversion of global investors, which has fallen to ten-month lows according to standard proxies (VIX and global macro-risks indices). From SKK 32.25 for a Euro at the beginning of May, Koruna appreciated to record 30.616 SKK/EUR on May 28, 2008 – shortly before the revaluation, and up to 30.087 SKK/EUR on the following day. This makes Slovak Koruna the most appreciating currency vis-à-vis Euro in the world since 2005. The local currency’s year-on-year strengthening averaged at above six percent in the last three and a half years. Czech Koruna and Polish Zloty appreciated on average by slightly more than five percent each year. Against the dollar, Koruna strengthened to levels below 20 SKK/USD for the first time in history. The record now stands at 19.254 SKK/USD.

    In the future, no further significant movements of the exchange rate from the new parity are to be expected, however. We expect the new rate to be confirmed as the final conversion rate by the EcoFin on July 8, since it approximately constitutes already the 2009 equilibrium exchange rate. Worries springing from the record currency appreciation, 11.1% in year-on-year terms, have already spread among exporters, who produce in Korunas but earn in Euros. It is thus reasonable to anticipate that the trade surplus predicted for 2008 will be, as a result, a bit smaller than expected.

The Left and Right: Economic Worldviews Explained

I consider this such a great piece of text that I am attaching it here as a whole. It comes from Harvard professor Greg Mankiw, who's explaining the differences between the left- and right-leaning economists.

The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.

The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.

The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.

The right sees people as largely rational, doing the best they can given the constraints they face. The left sees people making systematic errors and believe that it is the government role to protect people from their own mistakes.

The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.

There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.

A Great Convergence in Europe

Source: Eurostat
(2009 values were calculated from predicted GDP growth)

Robert Aumann Coming to Slovakia!

Young and entusiasthic group of Slovak scholars under the heading of Virtual Scientific Laboratories has managed to organize an unique visit of a unique scholar.

Robert Aumann, father of modern game theory applied in economics, will address an initial lecture of Tatra banka lecture series at the University of Economics in Bratislava on 12th of May 2008.

Participation is possible by invitation. We sincerely believe that one of this blog's editors will attend the event and provide a short summary for our readers.

More info about Mr. Aumann here, short article by Tyler Cowen here, and by the Center for the Study of Rationality here.

So long.

EDIT1: ...for those of you who do not know, Mr. Aumann is a Nobel laureate.

Neighbors

Sources: Eurostat and ŠÚSR

Real and Price Convergence under a Fixed Exchange Rate Regime

Nadežda Stanová in the current issue of Biatec (monthly magazine of the National Bank of Slovakia).

Real and Nominal Convergence Go Hand in Hand

Hence, inflation in a fixed exchange rate regime in New Europe (e.g. in Slovakia after adopting euro) can be expected at levels up to real GDP per capita growth (5-7%).

Forecast

Recent OECD forecast expects a decline of economic growth in Slovakia to approximately 7 percent in 2009. Among other factors influencing this outlook, a slowdown of EU economies is to be blamed. More comments in Slovak Spectator's article.

More interesting is the economic performance under changed economic conditions after adopting euro. Although some expect the growth to decline as a result due to Maastricht fiscal ceiling, fiscal discipline is definitely not the only factor influencing the expected outcome. Taking into account that currency-switching is a very specific situation, one should not omit the long-term effects of euro on economic growth.

In my humble opinion, policy makers should have at hand a strategy for further development in form of an industrial policy vision. For this, measurements of the allocation efficiency of public funds for FDI stimuli should be considered. That is to say, that FDI in the automotive industry might have already exploited the existing economies of scale opportunities, which means that a further contribution of this sector to economic growth may not be so robust anymore. For a small country, in addition, a fast adjustment in competitiveness seems to be the key priority of economic policy. Without a scientific guidance in economic policy-making, it is hard to follow optimal solutions, unbiased by ideological disputes.

Slovak wages at 685 EUR when entering Eurozone

Nominal expectations can be as important as real ones for possible euro-related real price changes and resource misallocations. I thus bring numbers for the average monthly gross wage in Slovakia at the break of 2009, when the country expects to convert to euro. The average wage, seasonally adjusted, will be 680-690 eur. The figure is to be used in the context of the Slovak economy only, since comparing gross wages across Central-European economies is rather complicated, as I demonstrated before. The expected conversion rate between koruna and euro used in this calculation is 32.63 SKK/EUR (taken from the survey on assessments of Slovakia meeting the Maastricht criteria.

Historically Lowest Budget Deficit Confirms Slovak Euro Ambitions

The 2007 state budget ended up in a deficit of 23.5 bn SKK (712 mil EUR) at the end of December. Relative to the Gross Domestic Product (GDP), this constitutes 1.3%, which is a historical low (data available since 1995). The budget was originally planned with a shortfall of 38.4 bn SKK. The narrower-than-planned budget gap was caused by 2007 state revenues being almost four percent higher than those budgeted, thanks to record economic growth, while the actual state spending almost exactly matched the plan. Together with the negative balance of regional administration and social security, which is estimated at 1.1% of GDP in the latest update of the Finance Ministry, the figure means that the general government deficit will most probably lie at 2.4% of GDP. Public finance deficit of this size satisfies the 3.0% of GDP Maastricht convergence criterion necessary for adopting the common currency in January 2009.