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IP/06/623

Brussels, 16 May 2006

Commission proposes Slovenia to adopt the euro in January 2007

The European Commission today concluded that Slovenia has achieved a high degree of sustainable economic convergence with the other Member States and that it fulfils the necessary conditions to adopt the euro. On the basis of its Convergence Report, the Commission is proposing to the Council that Slovenia adopts the euro on 1 January 2007. The final decision will be taken by EU finance ministers in July, after consultation of the European Parliament, and following a discussion by the Heads of State or Government at their summit in June.

“Slovenia meets all the convergence criteria, an achievement which results from a track record of stability-oriented policies and reforms and leads the Commission to propose that it adopts the euro in January 2007. As Slovenia is about to join the euro area, it is important to remember that the effort does not end with the adoption of the euro. The euro brings huge benefits but also important responsibilities in terms of preserving both the macroeconomic stability and a country’s competitiveness in a single monetary environment,” said Economic and Monetary Affairs Commissioner Joaquín Almunia. He added: Slovenia must also now speed up and finalise the crucial practical preparations to ensure a smooth changeover, including measures to avoid unjustified price increases.

Article 122(2) of the Treaty requires the Commission to assess the fulfilment of the conditions for full participation in the Economic and Monetary Union by Member States with a derogation[1] at least every two years or at the request of a Member State. The report adopted today responds to a request for an assessment submitted by the Slovene authorities on 2 March to the Commission and the ECB. Lithuania made a similar request on 16 March (see press release IP/06/622 published today).

In its so-called Convergence Report, the Commission assesses whether Slovenia has achieved a high degree of sustainable convergence, measured against the criteria set out in Article 121(1) regarding the government budgetary position, price stability, exchange rate stability and convergence of long-term interest rates. Compatibility of the legal framework with the Treaty is also examined. The ECB also issued a Convergence Report today as envisaged by the Treaty.

Results of the convergence examination

The Commission concludes that Slovenia has achieved a high degree of sustainable economic convergence as set out in the Treaty. The Commission is, therefore, proposing to the Council to abrogate the derogation of Slovenia as from 1 January 2007.

Inflation

The average inflation rate in Slovenia during the 12 months to March 2006 was 2.3 percent, below the reference value of 2.6 percent. Slovenia has respected the reference value since November 2005 and, based on the present outlook, is likely to continue to do so in the coming months. The improvement in price stability is based on sound foundations, but Slovenia will need to remain vigilant to protect its low inflationary environment and a favourable competitiveness position, including through a prudent fiscal stance and appropriate wage developments.

Government budgetary situation

Since EU accession, Slovenia has never been subject to an Excessive Deficit Procedure. Its general government deficit declined in 2004 and 2005 due to a combination of cyclical factors and policy measures, reaching 1.8 percent of GDP last year. General government debt remains well below the Treaty threshold at slightly below 30 percent of GDP. According to the Convergence Programme of December 2005, the budgetary strategy is to gradually reduce the government deficit to 1 percent of GDP in 2008. The Ecofin Council has regarded the budgetary targets as plausible and the underlying risks as balanced, but noted that some consolidation measures still had to be specified. In particular, it invited Slovenia to front-load its adjustment efforts and take measures to improve long-term sustainability.

Exchange rate

The Slovenian tolar has participated in ERM II since 28 June 2004 and will have participated for over two years in the mechanism by the time of the decision of the Council in July. During the two years before the convergence examination, the tolar has remained close to its ERM II central rate.

Long-term interest rates

Since ERM II entry in June 2004, the spread of long-term government bond yields vis-à-vis the euro area remained contained between 10 and 70 basis points, reflecting the credibility of Slovenia's convergence process. The 12-month average of long-term interest rates showed a steady decline over the whole assessment period. In the year to March 2006, the average long-term interest rate in Slovenia stood at 3.8 percent, well below the reference value of 5.9 percent.

Legal convergence

In its 2004 Convergence Report, the Commission had concluded that the legislation in Slovenia was not fully compatible with the EC Treaty and the ESCB/ECB Statute. All incompatibilities have now been removed and the legislation in Slovenia is compatible with the requirements of the Treaty and the ESCB/ECB Statute.


[1] The ten countries that became members of the EU in May 2004 were given a derogation from adopting the euro as they were not yet meeting the necessary conditions.


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