First 'new' EU member to adopt euro

Broad social and political consensus on economic policy, including wage restraints, have enabled Slovenia to be the first EU accession country to adopt the Euro - on January 1, 2007 - the Slovenian Finance Minister, Dr Andrej Bajuk, told The Sunday Times.

In an exclusive interview here Dr Bajuk said that "this consensus on broad national goals is a surprising contrast to our endless arguments about smaller issues".

"Moreover, after gaining independence in 1991 we escaped the civil wars engulfing other former republics of the Yugoslav federation, while being forced to turn away from our neighbours and towards Europe."

At 70 per cent of the EU-15 average, Slovenia - with a population of two million and an area of 20,000 km2 - has the highest per capita income of the EU accession states.

"Switching from the 15-year-old tolar to the euro as soon as possible has been the logical outcome of our economic success - and highly popular. Slovenia joined ERM II on June 28, 2004 (along with Estonia and Lithuania) at the then existing tolar/euro parity. Tolar fluctuations from ERM's central parity rate have since been a fraction of 1 per cent, compared to the permitted plus or minus 15 per cent", Dr Bajuk continued.

The first European Commission Convergence Report (October 2004) indicated shortfalls in relation to some of the Maastricht convergence criteria. The May 2006 Convergence Report however proposed Slovenia's Euro entry next year while the European Central Bank recommended leaving the ERM II tolar/Euro conversion rate unchanged. Slovenia's Eurozone entry was formally endorsed by the EU's Council of Finance Ministers (Ecofin) of July 11.

"The most difficult problem was fulfilling the Maastricht inflation criterion," Dr Bajuk stated. "We continued the anti-inflationary policies of the previous government, including an agreement with the trade unions to limit annual wage increases to 1 per cent less than productivity gains. We were able to reach the March 2006 inflation target by November 2005."

"By the time we entered ERM II, the tolar was also at a competitive level. After several years of frequent devaluations - which admittedly helped our exports (62 per cent of GDP, mainly machinery and transport equipment, chemicals, pharmaceuticals, household goods) - our enterprises had to realise that currency stabilisation was here to stay. They were forced to make necessary adjustments: they did."

Inflation however re-emerges as a threat which could follow the rapid 'big bang' Euro changeover ending January 15, 2007.

Abusive 'rounding up' as happened in neighbouring Italy and some other Euroland countries is not an option for Dr Bajuk. "The central thrust of our master plan for the introduction of the euro is to warn consumers to 'watch out'. To help them do so and cope with the difficult conversion rate (239.640 tolar to the euro) the Central Bank has distributed pocket calculators to every household. Dual pricing has been enforced as from March 1. Fair rounding up will be forced by consumers voting with their feet against retailers who overcharge."

In its July 11 decision, Ecofin urged Slovenia to pursue budgetary rigour, structural reform and maintain competitiveness. "The draft 2007-2009 budget now before parliament is fully consistent with the Stability Pact, and includes sweeping tax reforms," the minister confirmed. "In fact our low structural deficit (now 1 per cent of GDP) will be eliminated by 2011. Our indebtedness level is also low - since independence borrowing has not been heavy."

"Maintaining competitiveness involves sticking to our inflation goals, and thus a prudent fiscal policy. Privatisation has been slow - not necessarily a bad thing - and we are being extremely careful about further foreign participation in our banking system, since 35 per cent of deposits are already held in foreign-controlled banks. The reason is the EC Capital Requirements Directive adopted this June, providing that while the state is responsible for financial stability, crisis management is the responsibility of the supervisor, i.e., the central bank of the country of origin of the majority shareholder."

Developing the domestic capital market and attracting more foreign direct investment remain major challenges. "We have a huge tourism potential, but need more quality hotels, big improvements in our ageing public transport system and more investors in ski resort development."

'Age-related expenditures' are seen as 'a threat to future financial stability' by the 2006 EC Convergence Report. "Unless we act now, we will have major problems in 2020 and must find a consensus on how to proceed," Dr Bajuk warned. "Apart from pursuing economic growth we must adjust pensions downwards and find ways of financing home care and retirement homes. Since a law passed in 1999, the retirement age has since been annually raised by three months, from the initial retirement ages of 55 for women and 60 for men".

Dr Bajuk admits to an unusual arrival into high-level politics, while his residency in Slovenia only started the day he became 'transition' prime minister in 2000.

His late parents left Yugoslavia at the end of the war, just after he was born, to settle in Mendoza, Argentina. After graduation he joined the Economics Faculty at Mendoza University but during an academic assignment in California was fired from his job.

Like so many reform-minded young Argentinians, he was declared 'undesirable' by the then Argentinian government - and remained in forced and homesick exile for 20 years.

Working in Washington, first at the World Bank and then at the Inter-American Development Bank, he moved to Paris in 1994 to head IDB's European Office. "With my Slovenian-born wife I then began to rediscover my European roots - and visit Slovenia where my daughter had married."

"I became an adviser to the Opposition party, took early retirement in 1999, and during a short trip to Slovenia in 2000 found myself nominated as the consensus candidate for 'transition' Prime Minister. My Slovenian was less than perfect, and I lived in a hotel for my first three months in office, while builders finished a flat we had bought a few months earlier".

"Then a new government took office, I founded a new party, became an MP, we won the elections in 2004... and here I am".