The euro experiences in SlovakiaIvan Šramko, Senior Economic AdvisorIntesa Sanpaolo, PwC

www.pwc.com/sk

PwC

Originally expected effect of introduction of the Euro

Emphasis on elimination of transaction costs and additional growth of GDP

Slide 2May 2012

cons

pros

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4

transaction costs financial

transaction costs administra-tive

foreign exchange risk

currency exchange costs

loss of independent currency policy

(% GDP)

Long –term increase of GDP by 7-20%

* For the purpose of comparability with permanent effects, the one-off costs of currency exchange have been spread over five years

PwC

Actual effect and changes in assumptions

• The majority of direct benefits became reality: reduction of transaction costs, transaction costs dropped partially, the Euro foreign exchange risk ceased to exist

• The global economic crisis has significantly supported the role of the Euro in protection from the financial crisis

• Despite better rating, potential indirect benefits (DFI growth, foreign trade and GDP growth) will only occur later

Slide 3May 2012

PwC

Medium-term development of industrial production

Industrial production index

Slide 4May 2012

I.05

III.0

5V

.05

VII.

05

IX.0

5X

I.05

I.06

III.0

6V

.06

VII.

06

IX.0

6X

I.06

I.07

III.0

7V

.07

VII.

07

IX.0

7X

I.07

I.08

III.0

8V

.08

VII.

08

IX.0

8X

I.08

I.09

III.0

9V

.09

VII.

09

IX.0

9X

I.09

I.10

III.1

0V

.10

VII.

10

IX.1

0X

I.10

I.11

III.1

1V

.11

VII.

11

90

100

110

120

130

140

150

160

SK Average V4 CZ

ind

ex

20

05

=1

00

Source: Eurostat

PwC

The whole of Europe was concerned about the downfall of foreign trade

Slide 5May 2012Source: Eurostat * January to July 2011

FI LT MT SE EE BG IT LV AT CY CZ HU SI UK DE GR NL PT ES BE PL SK DK FR RO LU IE

-40-35-30-25-20-15-10

-505

101520253035404550

Aggregate export (2009) Aggregate export(2010) Aggregate export (2011*)

% (

y-o

-y)

PwC

Factors limiting industrial production

Slide 6May 2012

2008

-Q1

2008

-Q2

2008

-Q3

2008

-Q4

2009

-Q1

2009

-Q2

2009

-Q3

2009

-Q4

2010

-Q1

2010

-Q2

2010

-Q3

2010

-Q4

2011

-Q1

2011

-Q2

2011

-Q3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

demand work force facility financial other none

2008

-Q1

2008

-Q2

2008

-Q3

2008

-Q4

2009

-Q1

2009

-Q2

2009

-Q3

2009

-Q4

2010

-Q1

2010

-Q2

2010

-Q3

2010

-Q4

2011

-Q1

2011

-Q2

2011

-Q3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

demand work firce facility financial other none

Factors limiting production in SK

Source: European Commission

Factors limiting production in EU

PwC

Temporary deterioration in cost competitiveness of Slovakia

Slide 7May 2012

Exchange rate development

Source: Eurostat, NBS calculations

Industry labour cost development (in %)

I.08

II.0

8IV

.08

VI.

08V

III.

08X

.08

XII

.08

II.0

9IV

.09

VI.

09V

II.0

9IX

.09

XII

.09

II.1

0II

I.10

V.1

0V

II.1

0IX

.10

XI.

10X

II.1

0II

.11

IV.1

1V

I.11

VII

I.11

X.1

1

85

90

95

100

105

110

115

120

125

130

135

85

90

95

100

105

110

115

120

125

130

135

SKK CZK HUF PLN

Inde

x (I

.08=

100)

2008

-Q1

2008

-Q2

2008

-Q3

2008

-Q4

2009

-Q1

2009

-Q2

2009

-Q3

2009

-Q4

2010

-Q1

2010

-Q2

2010

-Q3

2010

-Q4

2011

-Q1

2011

-Q2

95

100

105

110

115

120

125

CZ SK

inde

x (Q

1.20

08=

100)

-20

-16

-12

-8

-4

0

4

8

CZ HU PL SK

% (

q-o-

q)

PwC

The Euro and competitiveness of SR

• The introduction of the Euro did not have a significant effect on the competitiveness of Slovakia

• The economic development is comparable with that in other EU countries and results from the global development of demand

• The price and cost competitiveness has deteriorated temporarily compared to our neighbours

• Adversely affected have been several service sectors

Slide 8May 2012

PwC

The Euro brings stability

Slide 9May 2012

A stable currency increases overall economic stability and creates favourable conditions for long-term business decisions

Source: ECB

I.08

I.08

II.0

8II

I.08

IV.0

8V

.08

VI.

08V

II.0

8V

III.

08IX

.08

X.0

8X

I.08

XII

.08

I.09

II.0

9II

I.09

IV.0

9V

.09

VI.

09V

I.09

VII

.09

VII

I.09

IX.0

9X

.09

XI.

09X

II.0

9I.

10II

.10

III.

10IV

.10

V.1

0V

I.10

VII

.10

VII

I.10

VII

I.10

IX.1

0X

.10

XI.

10X

II.1

0I.

11II

.11

III.

11IV

.11

V.1

1V

I.11

VII

.11

VII

I.11

VII

I.11

IX.1

1

0

1

2

3

4

5

SKK CZK HUF PLN

%

Monthly exchange rates volatility (in %)

PwC

The Euro has improved trust

Slide 10May 2012

However, in the context of the current debt crisis, Slovakia is seen as a more risky country!

Source: Bloomberg

CDS* premium development in the V4 countries

0

100

200

300

400

500

600

700

I-07

III-07

V-07

VII-07

VIII-07

X-07

XII-07

II-08

IV-08

VI-08

VIII-08

X-08

XII-08

II-09

IV-09

VI-09

VIII-09

X-09

XII-09

II-10

IV-10

VI-10

VIII-10

X-10

XII-10

II-11

IV-11

VI-11

VIII-11

X-11

0

100

200

300

400

500

600

700

SK HU PL CZ

PwC

The debt crisis changes the viewpoint

• Slovakia did not participate in the original loan to Greece

• However, the amount of Slovak guarantee commitment in the European Financial Stability Facility (temporary fund) is € 7.73 billion (after the increase)

• The amount of guarantees in the European Stability Mechanism (permanent fund) is € 5.77 billion

• Total loan commitment of Slovakia arising from approved assistance to Ireland and Portugal is more than € 500 million

• In the extreme case, the exposure of Slovakia may achieve more than € 13 billion (ie. approximately 20 % of GDP in 2010) – however, the practical limit is € 8.6 billion in order that the firewall sustains the AAA rating

Slide 11May 2012

PwC

The debt crisis was not caused by the introduction of the Euro but by the failure to meet the criteria for the Euro introduction!

• Low inflation

• Consolidated public sector finance

• Stable exchange rate

• Harmonised long-term interest rates

Slide 12May 2012

PwC

Public debt in the Eurozone

Slide 13May 2012Source: Eurostat

BE DE EE IE GR ES FR IT CY LU MT NL AT PT SI SK FI0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% o

f G

DP

PwC

Public deficit in the Eurozone

Slide 14May 2012

Source: Eurostat

BE DE EE IE GR ES FR IT CY LU MT NL AT PT SI SK FI-15

-12

-9

-6

-3

0

3

6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% o

f G

DP

PwC

Effect of the reduction of market signalisation and fiscal irresponsibility

Slide 15May 2012

PwC

Debt increase in the Eurozone countries

Slide 16May 2012

Source: Eurostat

BE DE ES FR GR IE IT PT-30

-10

10

30

50

70

90

110

130

150

170

2010-2012

2007-2010

1999-2007

1999

Ref. value

% G

DP

Public debt

PwC

Simulation of the Maastricht criteria

Slide 17May 2012

Source: Eurostat, European Commission, NBS calculations

Inflation Deficit Debt Interest Exchange rate

2011 2012 2011 2012 2011 2012 2011 2011

BE 3.5 2.7 -3.7 -4.2 97 98 4.4 €

FI 3.3 3.0 -1.0 -0.7 51 52 2.5 €

FR 2.3 2.2 -5.8 -5.3 85 87 3.2 €

GR 3.1 -0.5 -9.5 -9.3 158 166 21.1 €

NL 2.5 2.0 -3.7 -2.3 64 64 4.4 €

IE 1.2 1.6 -10.5 -8.8 112 118 8.7 €

LU 3.7 2.7 -1.0 -1.1 17 19 2.2 €

DE 2.5 1.9 -2.0 -1.2 82 81 1.9 €

PT 3.9 3.3 -5.9 -4.5 102 107 13.1 €

AT 3.6 2.4 -3.7 -3.3 74 75 3.1 €

ES 3.1 1.3 -6.3 -5.3 68 71 5.5 €

IT 2.9 2.9 -4.0 -3.2 120 120 6.8 €

CY 3.5 2.8 -5.1 -4.9 62 64 7 €

EE 5.1 3.1 -0.6 -2.4 6 7 - €

MT 2.4 2.1 -3.0 -3.0 68 68 4.4 €

SK 4.1 1.9 -5.1 -4.6 45 47 5.2 €

SI 2.1 1.6 -5.8 -5.0 43 46 6.9 €

PwC

Non-sustainable interest expenses in some countries

Slide 18May 2012

Source: Eurostat

Long-term interest rate

I-0

5III

-05

V-0

5V

II-0

5IX

-05

XI-

05

I-0

6III

-06

V-0

6V

II-0

6IX

-06

XI-

06

I-0

7III

-07

V-0

7V

II-0

7IX

-07

XI-

07

I-0

8III

-08

V-0

8V

II-0

8IX

-08

XI-

08

I-0

9III

-09

V-0

9V

II-0

9IX

-09

XI-

09

I-1

0III

-10

V-1

0V

II-1

0IX

-10

XI-

10

I-1

1III

-11

V-1

1V

II-1

1IX

-11

1

3

5

7

9

11

13

15

17

19

DE IE GR ES IT PT

%

17,8

PwC

Loss of competitiveness by the Eurozone peripheral countries

Slide 19May 2012

Unit labour costs (index 100=2000)

Source: Eurostat, EC

Current account (% of GDP)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-20

-15

-10

-5

0

5

10

Germany Greece Portugal Spain Italy

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

90

100

110

120

130

140

Germany Greece Portugal Spain Italy

PwC

Prospects for development in Slovakia

Slide 20May 2012Source: NBS, Slovak Statistics Authority, MF SR

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-13.0

-8.0

-3.0

2.0

7.0

12.0

-13.0

-8.0

-3.0

2.0

7.0

12.0

GDP growth Current account PB Public finance deficit HICP inflation

% G

DP

%

PwC

Comparison of EU countries’ growth prospects

Slide 21May 2012Source: Consensus Economics

Slovakia should still belong among the fastest growing countries

GR PT IT ES FR NL IE DE BE AT FI SI SK EE HU DK CZ RO CY BG LV PL LT-6

-4

-2

0

2

4

6

8

-6

-4

-2

0

2

4

6

8

Real growth of GDP (2011) Real growth of GDP (2012)

% %

Eurozone countries EU countries outside the Eurozone

PwC

New fiscal rules

The Euro firewall 1 + 2(EFSF / ESM)• Explicit confession that

Eurozone states are directly exposed to issues in other member states

• Explicit confession that the no-bail-out rule was only a bluff

Slide 22May 2012

Improved rules: 6-pack and a new Fiscal

Treaty• Reinforcement of Stability

and Growth Pact• Stronger preventive

arm (attempt to achieve deficit from 0.5%, instead of 3% of GDP)

• Automatic penalties within the procedure of excessive deficit

• Stronger national rules – such as debt brakes

• New macroeconomic imbalance procedure

PwC

New fiscal rules (2)

Short-term effect

• Effect of assurance from Euro firewalls is prevailing

• Stronger protection of the Eurozone countries from speculative attacks

o Protection only from problems arising from the lack of liquidity, not from insolvency

Slide 23May 2012

PwC

New fiscal rules (3)

Long-term effect

• The Eurozone firewall (permanent), in addition to insurance risk, also creates a risk of moral hazard – governments might also feel confident when the deficit is higher

• Better rules (6-pack, Fiscal Treaty) imposes strong pressure on governments to address their deficits and other imbalances

• The resulting effect should be greater motivation to consolidate the budgets

Slide 24May 2012

PwC

Economic policies and introduction of the Euro

Long-term benefits from the introduction of the Euro will occur only if supported by proper policies:

• Structural policies aimed at increasing flexibility of the economy – particularly creating conditions for a flexible labour market:

o Flexibility of real (as well as nominal) wages

o Geographic, sectoral, and professional mobility of jobs

o Flexible employment and legal relationship

• Fiscal policy (balanced/ surplus budget, long-term sustainability)

Slide 25May 2012

PwC

Summary

• The introduction of the Euro resulted in several direct benefits

• The price and cost competitiveness of Slovakia deteriorated temporarily (in selected services)

• The financial and debt crisis caused a reduction of direct benefits of the Euro; long –term benefits will occur later

• Failure by some countries to meet fiscal criteria caused the debt crisis

• Despite downward review, the Slovak economy should maintain a relatively fast pace of growth

Slide 26May 2012

Thank you for your attention

© 2012 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Slovensko, s.r.o. and PricewaterhouseCoopers Tax, k.s., which are member firms of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.