Process of Introduction in Seminar for the NBP

Elena Kohútiková, VUB bank

Date 10. July 2008 Agenda

„ Preparations for the Euro

„ Compliance with Maastricht Criteria

„ Euro Changeover Plan

„ Information gained from the process

2 Agenda

„ Preparations for the Euro - Political and Macro Backdrop - Common Interest in the Euro - Benefits of Early Euro Adoption

„ Compliance with Maastricht Criteria

„ Euro Changeover Plan

„ Information gained from the process

3 2003: Year of Grasped Reform Opportunity

„ Surprisingly to many observers, pro-reform political forces that over the years 1998-2002 successfully reintegrated Slovakia into the western structures (EU, OECD, NATO) had been confirmed in power in September 2002 parliamentary election

„ The re-election gave the second government of PM Dzurinda mandate for further reforms and yet closer integration into the EU institutions

„ The government grasped the opportunity in full and introduced comprehensive structural reforms (described on the following slides) that made Slovakia an economic front-runner in the newly acceding EU member countries

4 Tax Reform

Objectives: „Reduce work and entrepreneurship disincentives of taxation „Increase the transparency of the tax system „Reduce distortions from tax exemptions and double taxation

Means: „Introduction of a flat income tax rate of 19% for both personal and corporate income effective January 2004 (previous rates ranged from 10%-38% and 25%, respectively) „VAT rates were unified at 19% (from a two rate system of 14% and 20%) and excise taxes raised closer to the levels prevailing in the EU „All tax exemptions and special regimes were abolished, except for deductible allowances for low income earners, which were increased to improve work incentives „Gift and inheritance taxes were abolished, dividend tax rate was set to zero

5 Pension Reform

Objectives: „Enhance viability of the public pay-as-you-go (PAYG) pension scheme „Ensure long-term sustainability of the system by adding privately funded scheme

Means: „Parametric changes to PAYG, involving increasing the statutory retirement age for both men and women to 62 years from previous 60 and 55 years, respectively. „System changes to PAYG, introducing the “merit” principle with benefits made dependent on work and contribution history „Introduction of the second, privately funded pillar in 2005. Pension contributions, 18% of gross wages, were equally split between the first pillar, PAYG, and the second pillar, run by private asset management companies.

6 Social Security Reform

Objectives: „Reduce abuse of the welfare system, make it better targeted „Stimulate work

Means: „Benefits cut by half to able-bodied citizens who are voluntarily unemployed „Registration for unemployment benefit was made tighter to exclude employees working in the informal economy. Unemployed had to regularly visit labor offices to claim benefits or risk losing them „Child and family benefits distributed partly as tax bonuses to reward earned income „Incentives provided to unemployed who actively seek job, for example via accommodation payments for those willing to move

7 Labor Market Reform

Objectives: „Stimulate supply of labor „Stimulate demand for labor

Means: „Cut in social contributions rate by 3 percentage points „Targeted employment subsidies for job creation in high-unemployment regions „Simplified legal requirements for enterprise registration introduced to encourage self-employment and small scale businesses in job-intensive service activities „Labor Code approved in July 2003 provided more flexibility for employers by simplifying procedures for hiring and firing (however, modifications prepared by new government valid since September 2007 shifted the balance again towards labor unions and employees).

8 Other reforms – planned for 2004 but unfortunatelly not fully implemented

Healthcare reform Education reform ¾ Reforms involved mainly measures to ¾ Reform in the sector intended, for prevent further build-up of debt in the example, to motivate municipalities to heavily indebted Slovak healthcare. economize on basic school financing and introduce fees for university education. ¾ Such measures included, for example, introduction of a fixed payments for drug ¾ Consensus, however, formed very prescription, and stay in hospital hard, reform was eventually modified

Local Governance Law Enforcement ¾ Decentralization. Responsibility for the ¾ The main goal of the reform was to provision of the main public services was optimize the judiciary system and make transferred to sub-central governments as the judges’ work more effective of 2003. ¾ Funding set to motivate regions and municipalities to save and improve service

9 Thanks to reforms and entry into the EU , economic growth was about to take off, boosting convergence to EU

Real GDP growth (%) Slovakia: convergence % EU15 11 EU entry 10 9 65 8 60 7 6 55 5 50 4 3 45 2 40 1 0 35

9 0 4 5 f 9 0 0 0 9 998 9 0 003 0 0 0 1 1 2 2001 2002 2 2 2 2006 2007 0 GDP per Capita (PPP) Price Level 2008e 2 1997 2000 2003 2006 2008e Slovakia EU15

10 Price distortions have largely been corrected, inflation was set to decline gradually

Development of inflation in 2000-08 (y/y %)

50

40

30

20

10

0 I-08 I-07 I-06 I-05 I-04 I-03 I-02 I-01 I-00 VII-07 VII-06 VII-05 VII-04 VII-03 VII-02 VII-01 VII-00

Headline inflation Regulated prices Core inflation

11 Fiscal performance was about to improve dramatically...

Fiscal deficit 2000-10 (% of GDP) Public debt 2000-2010 (% of GDP)

13.0 65

Public finance deficit inc. 60 11.0 pension reform costs Public debt / GDP (in %) Public finance deficit ex. 55 Maastricht fiscal criterium - Public debt 9.0 pension reform costs 50 Maastricht criterium 7.0 45

5.0 40

35 3.0 30 1.0 25

-1.0 20 2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005 2006F 2007F 2008F 2009F 2010F 2006F 2007F 2008F 2009F 2010F

12 ...all of which boosted interest rate convergence and value of the

Development of 10 year govt Development of EURSKK bond yield (2001-2008) (2000-2008) 9.0 44

8.0 42

7.0 40

38 6.0

36 5.0 34

4.0 32

3.0 30 I-01 IX-01 V-02 I-03 IX-03 V-04 I-05 IX-05 V-06 I-07 IX-07 V-08 I-00 IX-00 V-01 I-02 IX-02 V-03 I-04 IX-04 V-05 I-06 IX-06 V-07 I-08

13 Both the government and the central bank have had a common interest in the Euro... „ 2003: Strategy of Euro Adoption in the Slovak Republic - A joint conclusion of the government and the central bank that it is advantageous to adopt the euro as soon as possible after having met the Maastricht criteria in a sustainable way (2008, 2009)

„ 2004: A Detailed Strategy of Euro Adoption - Target date for euro adoption 1.1.2009 - Maastricht criteria compliance in 2007 - Approved in parliament by votes of both coalition and opposition

„ 2005: National Changeover Plan - Detailed plan of practical steps toward smooth introduction of the euro

14 ... and concluded that adopting the euro later than 2009 would needlessly deprive the country from the benefits of the single currency financial transaction costs

benefits administrative transaction costs

exchange rate risk Long-term increase of GDP by 7-20 % costs cost of currency changeover

loss of 0 0,1 0,2 0,3 0,4 independent (% GDP) monetary policy Source: NBS

15 Pros and Cons of Euro Adoption summarized

Advantages Disadvantages Economic advantages: Economic disadvantages: ƒ Elimination of transaction costs ƒ Technical costs of currency ƒ Elimination of exchange rate risks changeover ƒ Higher price transparency ƒ Loss of independent monetary policy ƒ Increase of foreign trade ƒ Some increase in inflation ƒ Higher attractiveness for FDI inflow ƒ Loss of fx revenues and temporarily ƒ Acceleration in economic growth higher expenses of the banking sector

Non-economic advantages: Economically unfounded fears: ƒ Higher credibility of Slovakia abroad ƒ Increase of prices because of ƒ Better cooperation on juridical and changeover / rounding police field, environmental and R&D ƒ General fears of the future of the projects

16 To be sure, there were some relevant arguments for delayed Euro adoption… „ Insufficient readiness of the economy for the common market, insufficient real convergence, insufficient competitiveness

„ Insufficient cycle synchronization of the economies of Slovakia and EMU

„ Insufficient flexibility of the labor market (constrained movement of Slovak employees to some countries of EMU)

„ Insufficient consolidation of public finance

„ Incomplete liberalization of some markets

17 ...yet, in retrospect, the Euro process and associated reforms put them aside „ Accelerated real convergence (p. 10)

„ Improved competitiveness (CGI ranking in 2007: 41 vs 2003: 49)

„ Improved flexibility of the local labor market

„ Improved consolidation of public finance (p. 12)

„ Accelerated liberalization of remaining markets

18 Economic Policies Supporting Euro Adoption

„ Short-Term Target: meeting Maastricht criteria - continue to decrease inflation - decrease public finance deficit - assure stability of the koruna exchange rate (joint task of the central bank and the government)

„ Long-Term Target: increasing the flexibility of the economy - structural policies, involving mainly the labor market, plus support of the growth potential of the economy - Benefits of the euro are not automatic, they will materialize only if they are accompanied by right policies

19 Concluding remarks on € preparation stage

„ The EURO project has been an integral part of and the driver of reforms

„ NBS took the initiative of EURO implementation

„ Consensus in the project was demonstrated by common submission of materials for the approval by the government

„ Government then submitted materials to the parliament

20 Agenda

„ Preparations for the Euro

„ Compliance with Maastricht Criteria - Criteria and their pitfalls - Slovakia’s experience with ERMII

„ Euro Changeover Plan

„ Information gained from the process

21 Maastricht Criteria defined

„ Public finance: - Fiscal deficit below 3% of GDP - Fiscal debt below 60% of GDP

„ Inflation: not higher than 1.5ppt above the average of three lowest member states (EU not EMU)

„ Interest rates: long term interest rates not higher than 2.0ppt above the average of three inflation-lowest member states

„ Exchange rate stability: stay in ERM II, fluctuation range ±15%, without devaluation of the parity, without significant strains

22 Slovakia’s Compliance with Maastricht Criteria

Criteria 2003 2004 2005 2006 2007 2008e

Public deficit including pension 2,7 2,4 2,8 3,6 2,2 2,0 reform costs (max. 3%)* Public deficit excluding pension 2,7 2,4 2,2 2,6 0,9 0,8 Fiscal criterium reform costs (max. 3%)* (% GDP) 42,4 41,4 34,1 30,4 29,4 31,0 Public debt (max. 60%)

8,5 7,5 2,8 4,3 1,9 3,2 Inflation (HICP, %)

4,99 5,03 3,52 4,41 4,49 Long term interest rates (%)

In ERM II since November 28, 2005 Nominal exchange rate

Sources: NBS, Ministry of Finance SR, EUROSTAT, NBS and VÚB calculations *Public deficit for 2005 and 2006 is evaluated without pension reform costs as allowed by transition period set by Eurostat * Public deficit for 2005 and 2006 includes also pension reform costs

23 Pitfalls of the Fiscal Criterion

„ Counting in the Pension Reform cost

„ Temporary allowance to treat privately funded pension pillar within public finance

24 Pitfalls of the Inflation Criterion

„ Moving target, we do not know the reference level in advance

„ Benchmark countries EU not EMU (Poland was Slovakia’s reference country in the period 4/06-4/07; Sweden, another non- euro country almost all our two-and-a-half year ERMII stay)

„ Potential conflict with the exchange rate criterion

„ Potential conflict with catching up - price impact of fast economic growth (Balassa-Samuelson effect)

25 Pitfalls of the Exchange Rate Criterion

„ Small open converging economy with floating exchange rate regime!

„ Currency vulnerable to speculative attacks

„ Liberalization of capital and financial flows vs. exchange rate stability

„ Definition of the stability „without significant strains“

„ Potential conflict with the inflation criterion (impact of the exchange rate pass-through on inflation)

26 Pitfalls of the Interest Rate Criterion

„ Critically dependent on the belief of financial markets in the success of the euro process

„ If all the other Maastricht criteria are met, interest rate criterion will very likely be met as well

27 Pitfalls of Sustainability

„ How do you define fulfillment of the criteria in a sustainable way? One year prior to the euro entry, two years, or ?

28 Benefits and Challenges of ERMII

Benefits Challenges

ƒ Disciplining tool for government and ƒ ties hands of local monetary policy monetary policies (inflation targeting within ERMII)

ƒ Signifies clear commitment of both the ƒ fiscal policy must support disinflation in government and the central bank to the economy adopt the euro ƒ need to continue with structural reforms, increase flexibility of the economy

ƒ more flexible labor market = wage discipline

29 Slovakia’s entry into the ERMII

„ November 28, 2005, 08:00 a.m. „ The central parity of the koruna set at 38,4550 vs the euro (the spot rate cob Friday Nov 25) „ The fluctuation range ±15 % around the central parity „ No unilateral commitments of the government and the NBS in the area of exchange rate regime

Koruna exchange rate 1-month ahead of ERMI entry

39,2 spot 30-day average 38,8

38,4 ERM II 38,0 entry

37,6

37,2 27.10.2005 4.11.2005 11.11.2005 21.11.2005 28.11.2005 5.12.2005

30 Experience with the stay in the ERMII (1/2)

„ 1st revaluation of the central parity in March 2007 - Shift of the parity by 8,5%, realigning with the growth outperformance of the Slovak economy vis-a-vis EMU since the entry into the ERMI - Parity set weaker than current market spot, in line with the perceived equilibrium level - Market reacted dramatically, but in the direction of further appreciation, rather than depreciating toward the new parity - That is, market participants did not view the new parity as credible to sustain

31 Experience with the stay in the ERMII (2/2)

„ 2nd revaluation of the central parity in May 2008 - Shift of the parity by 15,0% (the strongest bound of the previous fluctuation band) to allow for the future growth outperformance - Parity was set stronger than current market spot, actually stronger than market ever reached - Market reacted with move toward and stabilization around the new parity - That is, market participants accepted the new parity as the future level of the fixed conversion rate

32 Koruna exchange rate during ERMII stay

39.0

1st revaluation 37.0 & parity

35.0 2nd revaluation 33.0 & parity

31.0

29.0 ERM II entry: Nov 25, 2005 EUR/SKK Parity set on ERM II entry - 38.455 EUR/SKK 1st revaluation of parity - 35.442 EUR/SKK 2nd revaluation of parity - 30.126 EUR/SKK 27.0 Range ± 2.25% from actual parity Range ± 15% from actual parity

25.0 I-05 V-05 IX-05 I-06 V-06 IX-06 I-07 V-07 IX-07 I-08 V-08

33 Concluding remarks on ERMII stage

„ Slovakia has been a pioneer in number of dimensions: - small open converging economy - floating exchange rate regime - two revaluations of the central parity

„ ERMII proved a great disciplining tool on politicians, guarantor of continuity of sound economic policies

„ Maastricht criteria are ill-defined for converging economies, would be beneficial for the next euro adopters if at least some of the most open pitfalls are corrected, especially the inflation criterium

34 Conclusion – What Have We Learned

„ Start early - Strategic thinking and decisions 6 years in advance - Operational and organizational preparations 3 years in advance

„ Cooperation of the government and the central bank at all managerial levels during all stages of the process

„ Importance of communication - Government - Central bank - Businesses - Public

35 Agenda

„ Preparations for the Euro

„ Compliance with Maastricht Criteria

„ Euro Changeover Plan

„ Information gained from the process

36 Euro Changeover Plan: A. Basic principles B. Main Factors C. Slovak notes and coins

37 Euro Changeover Plan

38 Euro Changeover Plan

„ July 2005 – Euro Changeover Plan Adoption

„ November 2005 – entry into the ERM II

„ December 2005 – an anonymous public tender for the design of national sides of Slovak

„ January 2006 – Euro Plenipotentiary of the Government (initially I. Štefanec – since February 2007 I. Barát)

„ January 2008 – passing of the Euro Introduction Act in the Slovak Republic (so-called Umbrella law)

39 Euro Changeover Plan

„ April 2006 – March 2008 Sustainable fulfilment of the Maastricht criteria

„ May 2008 – Convergence reports by the ECB and the EC and proposals concerning Slovakia´s ability to adopt €

„ 28th of May 2008 - new central parity 30,1260 SKK/ EUR (SR the 1st country, where the central parity was set twice)

„ 17th of June 2008 – Consultation with the European Parliament „ 19th of July 2008- Leaders of the recomended the entry of Slovakia to the eurozone „ 8th of July 2008 – The Council of the EU cancelled the exception and set a conversion rate at the level of: 30,1260 SKK/ EUR 1st of January 2009 – Introduction of the euro - day €

40 Euro Changeover Plan

„ Principle of not harming the citizen– the introduction of euro must not negatively harm citizens and consumers

„ Principle of price neutrality - € must not be abused for increasing prices without any reason, every merchant, who will abuse the introduction of euro for increasing the prices will be penalized

„ Principle of the continuity of contracts – the introduction of euro will have no consequences for existing contracts, these will be valid as they were signed. If a component of the contract is in Slovak koruna, this will be converted on the 1st of January 2009 to euro by the conversion rate and contract conditions will stay the same, but executions will be in euro.

41 A. Basic principles „ Principle of not harming the citizen

- The euro introduction must not harm citizens or consumers - Fees and taxes, if not precisely converted according to rounding rules, should be rounded down, - payments to citizens should be rounded up - more precise rounding off some prices– for example unit prices- at least by 1 decimal number more than other prices, minimum 3 - prices of water, energy, electric services- rounding off at least on 4 decimal numbers- these are small sums- more precise rounding off protects consumers - preclusion of increasing prices– Ethical code– enterprises committed themselves that they will not abuse the introduction of € for increasing prices

42 A. Basic principles „ Principle of price neutrality

- Prices converted from SKK to € will be calculated only by conversion rate in an unshortened form :

1€ = 30,1260 SKK

- Rounding off the prices by determined rules- on two decimal numbers- up to 5 towards down and 5 and over 5 towards up - Rounded off will be the final value, not partials items, so for instance value of the whole purchase, not individual goods

43 A. Basic principles „ Principle of the continuity of contracts

- The euro introduction can not influence the continuity of contracts and other legal instruments. - All contracts containing references to the Slovak koruna will remain valid after the euro changeover - It will not be possible to terminate any contract due to the euro changeover - The euro changeover will not influence the nominal interest rate payable by the debtor in the case of instruments with a fixed interest rate - At the same time, however, the principle of the freedom of contract will be preserved; contracting parties may, by bilateral agreement, change their agreement following the euro changeover in any way

44 B. Main factors 1. Big-bang or Madrid scenario BIG BANG!

WHY? a) € is a well-known and the most used currency in foreign trade b) Slovakia is a small economy c) Lower costs d) Lower risk

„ The only one official currency will be from the first minute of 2009 EURO – (Euro will be introduced at the same time in both cash and non-cash form) „ In the countries of Eurozone, coins with Slovak national symbols will be valid and in Slovakia will be valid coins with national symbols of the 15 Euorzone countries

45 B. Main factors

2. Conversion rate „ Set by the Council of the European Union on the 8th of July 2008 „ Is determined as a number with 6 digits, 2 before decimal point and 4 after the decimal point

1 € = 30,1260 SKK

„ Conversion rate must not be rounded off!!! „ This rate will be used until the end of 2008 only for the purposes of dual displaying of prices, preparation and testing of the conversion, preparation of recalculation of property and securities, in practise the rate will be used for the first time on the 1st of January 2009

46 B. Main factors

3. Rouding off

„ Only a sum already converted by the conversion rate can be rounded off „ Rounding off should be done on the nearest cent, unless not specified by the law „ Rounding off will be executed according to mathematical principles

47 B. Main factors

4. Dual pricing – main principles are included in the Umbrella law

- From the 8th of August 2008 (one month after the setting of the conversion rate) until the 31st of December 2009 - Displaying of sums in SKK and simultaneously in € ( until the 31st of December 2008 is the main currency SKK and € serves only for information purposes, from the 1st of January 2009 is the main currency €) together with conversion rate - Valid in relation to citizen - not compulsory between business subjects - On price tags must be a sum in SKK, € and conversion rate - exceptions are determinated by the regulation of the Slovak Ministry of Economy- for example for entrepreneurs with 5 and less than 5 employees, for sales of unstable foodstuffs, for price tags directly on goods, specifications also for internet sales...

48 B. Main factors

5. Dual circulation

„ Will last only until the 16th of January 2009 for citizens and until the 19th for entrepreneurs „ During the time of dual circulation citizens can also pay by Slovak koruna, but entrepreneurs can only give them back euro with the exception, when a customer agrees with taking back the overpayment in other form than euro „ After the termination of the dual circulation it will be possible to pay only in euro „ Merchants have to prepare themselves for the dual circulation at both the organisational and technical level (two )

49 B. Main factors

Withdrawal of Slovak notes and coins from the circulation „ Notes – after the termination of the dual circulation without any charge until the 31st of December 2009 in commercial banks and NBS- conversion to euro will be always executed in line with the conversion rate „ From the 1st of January 2010 for an unlimited period of time in NBS for free of charge, always will be used the same conversion rate as on the 1st of January 2009 and this conversion will be always without any charge „ Coins – until the 30th of June 2009 in commercial banks and NBS under the same conditions as with notes „ From the 1st of July 2009 to 31st of December 2013 in the NBS „ Commemorative Slovak coins-without a time limit (same as notes)

50 B. Main factors - Communication Target groups:

„ entrepreneurs – government does not have a special communication strategy, information from banks, association and suppliers of softwers „ employees – information from employers „ Other citizens – especially children, retired persons, endangered groups, disabled, ethnic minorities Communication is conducted on 3 levels: • Government, NBS and other central institutions • Associations – including Slovak banking association • On the level of individual entrepreneurial subjects- VUB has been implementing during the whole process its communication activities- what is also a part of a competition in the field

51 B. Main factors - Communication Euro Plan:

„ Plan of the conversion consisting of three milestones– dual displaying – an estimation of the date of implementation August 2008, a plan of conversion – the 1st of January 2009 and a plan of accounts– the 31st of January 2009 „ Communication plan – in the framework of euro project, inside the company, in relation to public (suppliers, customers, bank), in relation to media and owner of the company „ Educational plan for employees – about the euro conversion in general, about the conversion in the company, about changing practices in the day-to-day work in accountancy and in the area dealing with cash „ Plan of frontloading and sub-frontloading „ BCP – so-called risk scenarios– currently underestimated area not only in the business sector „ Commercial Plan

52 B. Main factors - Communication Euro committee:

„ A sponsor of the Euro committee should be a member of the company leadership (management board), responsible for practical managing of project- not an IT manager- those business „ Members of the Euro committee should be the leading managers responsible for individual sectors, which deal with euro- for example area of accountancy, financial activities, information systems, HR director etc. „ At least once per month should report the management board about the preparations for euro „ Regularly report the supervisory board

53 B. Main factors - Communication

„ Curbing fears from inflation growth

„ Consumer protection principles

„ Dual display of prices

„ Conversion rate, rounding rules

„ Banknote and coins designs, security features

„ Cash exchange modalities

„ Other sources of information

54 B. Main factors- Institutional provision for the euro changeover „ National Coordination Committee - the supreme managing and coordination body - chairman – the Minister of Finance, also as the National Coordinator for Euro Changeover in the SR, deputy chairman – NBS Governor, Deputy Prime Minister for a Knowledge-Based Society, European Affairs, Human Rights and Minorities, Minister of Justice, Minister of Interior ...

„ Plenipotentiary of the Government of the Slovak Republic for the introduction of € „ Working committees - for Banks and the Financial Sector, for General Government , Non-financial Sector and Consumer Protection, for Legislation, for Communication

„ Working groups in every organization - The National Coordinator recommends that self-governing regions, towns, municipalities, all businesses and organizations establish working groups for euro changeover

55 B. Main Factors- Legislation 1.Umbrella law – directs the process of € introduction: edits: dual pricing sanctions institutions of supervision conversion Control and supervision over dual displaying and prices – it was necessary to amend 25 legal norms (commercial code, labour code...)

Regulations of individual ministries– specifying details of rounding off the sums and dual displaying of prices in individual sectors

56 B. Main Factors- Legislation

2. set of laws - laws, which must enter into force by the 1st of January 2009 such as Commercial code or Labour code 2009 3. set of laws – laws, which will be gradually amended after the 1st of January 2009

„ A list of legal norms, which will be influenced by the introduction of euro and their amendment was approved by the government on the 21st of December 2005 – 3 years before €

57 B. Main Factors- Legislation

Late enacting of legislative norms

„ 1.1.2008 the so-called Umbrella law went into force „ 1.3.2008 Regulation of the Ministry of Finance of the SR „ 27.3.2008 Regulation of the Ministry of Economy of the SR „ 1.7.2008 Regulation of the National Bank of Slovakia (should have been valid from 1.3.2008) „ 1.7.2008 Regulation of the National Bank of Slovakia (shares) „ 4.7.2008 Regulation of the Ministry of Labour, social affairs and Family „ Other regulations are still not approved– particularly entrepreneurs do not have adequate amount of information, crucial for the firms’ preparation for the introduction of euro

„ It is necessary to bear mind that the process could be longer due to the consultation with the ECB!

58 B. Factors- Frontloading and sub- frontloading

„ frontloading – from NBS to commercial banks

„ sub-frontloading – from commercial banks to commercial subjects such as post, wholesale, retail, providers of services, providers of organizations working with cash „ sub-frontloading will be offered by banks to clients free of charge and with conversion rate „ sub-frontloaded euro cash: euro notes and Slovak euro coins- cannot be released into the circulation before the 1st of January „ the whole process of frontloading is free of charge!

59 B. Main Factors- Sub - frontloading

„ real process of sub-frontloading takes at least 4 months

„ Approaching banks´ clients at least 1,5 year before the euro introduction

„ multiple approaching of clients- in the past, the clients´ reactions were very unenthusiastic- approximately only 10 – 15% of potential clients responded in the first round

„ press conferences, direct mails, briefings, calls, personal meetings with large clients „ Irreplaceable function of commercial banks

60 C. Slovak euro coins

„ July 2004 - NBS announced a public tender for art proposals for Slovak sides of euro coins

„ In total there were 658 proposals in the first round „ 10 proposals were shorlisted and 3 out of these shorltlisted proposals were chosen by the citizens of the SR (140 000 persons participated in the public inquiry)

„ winning proposals – Slovak motives: double cross, Bratislava castle and a peak Kriváň

„ Every coin has different size and weight, only 1,2 and 5 cents coins have the same thickness

61 C. Slovak euro coins

2€ 1€

50, 20, 10 c 5, 2, 1c

62 Agenda

„ Preparations for the Euro

„ Compliance with Maastricht Criteria

„ Euro Changeover Plan

„ Information gained from the process

63 Information gained from the process

„ preparation of business sector „ population

64 Preparation for € in business sphere

„ 69 % of businesses assume that their costs spent on the introduction of euro will not exceed 16 597 € „ 15 % of companies assume that these processes will not cost more than 33 194 € „ 16 % of companies is expecting the costs to be over 33 194 €

Zdroj: Prieskum TNS 2007

65 Preparation for € in business sphere

„ Majority of businesses does not expect problems with the introduction of euro „ Conversion of accountancy and adjustment of information systems are considered by big businesses as the most challenging tasks „ For small and medium sized business the most difficult task is the conversion of prices and dual displaying of prices Experience from has shown that for companies with 50 and up to 500 employees is in average desirable to devote for the euro adoption between 6 and 9 months

Source: TNS 2007

66 Problematic areas for big businesses

Expected problematic areas- big businesses

cash circulation determination of prices dual displaying

information systems conversion of accountancy

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % respondents

yes rather yes rather no no do not know

Source: NBS 2007

67 Problematic areas for small and medium sized businesses

Expected problematic areas- Small and medium sized business

information systems

cash circulation conversion of accountancy

dual displaying

determination of prices

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % respondents

yes rather yes rather no no do not know Source: NBS 2007

68 Costs of Euro Adoption

All must pay for the costs of introducing € by themselves

„ banking sector – large banks 20 – 30 mil. EUR „ business sector – in general costs are 0,1 – 0,3 % of GDP „ In the case of small businesses and sole traders the costs are estimated approximately from 40 000 to 50 000 Sk

Indirect costs: „ Banking sector – decreased profit (particularly from the view of sales, trading, system of payments...)

69 Preparations for € - citizens

„ Experience from different countries influenced stance of the citizens to €: - Expecting increased rise of prices - € was perceived more skeptical - Depression from low wages - Illusion from low prices (only tenths of original sums)

70 Do you consider the adoption of euro to be beneficial?

11,3% Alli 15 + 15,3%

39,1% 34,3% Definitely beneficial

Rather beneficial

Rather disadvantageous

Definitely disadvantageous Source: research GfK agency SR 2008

71 Will you miss the Slovak crowns?

All 15 + 3,3% 16,8%

39,7%

15,6% definitely yes rather yes rather not 24,7% definitely no

Source: research GfK agency 2008 Do not know

72 Benefits of adopting euro no need to exchange money 35,8

uniform currency for Europe 23,8

simpler travelling 23,2

simpler payments abroad 7,2 advantages for economy, commerce 6,7

stability of currency, inflation 6,3

no need to count rates 2,8

simpler labour abroad 2,5

no specific benefits 2,5

time will show 2,4

benefits for young people 1,2

different benefits 12,1 Source: research GfK agency 2008 do not know 11,4

0% 10% 20% 30% 40%

Base: respondents, who consider adoption of euro as beneficial (252) 73 Disadvantages of adopting euro

higher prices, inflation 35,4

low wages and pensions 23,1

too many coins, carrying a money bag 9,0

difficult orientation 8,2

problems with conversion of crowds to euro 6,1

inequality between Slovakia and Western states 4,9

low prices in comparison with crowd 4,1

unpreparedness of Slovak economy 3,2

too early 2,4

loss of Slovak crowd, Slovak identity 2,4 bad experience from countries, which already adopted euro 2,1 worsening of life standard- more expensive daily bread 2,1 different disadvantages 10,7 Source: research GfK agency 2008 do not know 8,0

0% 10% 20% 30% 40%

Base: respondents, who consider adoption of euro as beneficial (248) 74 Contact with Euro currency

1,8% All 15 + 20,0%

58,6% 19,6%

I have already paid by euro I have already held euro notes/coins I have already seen euro notes/coins I have never seen euro Source: research GfK agency 2008

Base: respondents, who consider adoption of euro as beneficial 500 in age 18 and more 75 The Euro in Austria

With 2,1% more than twice as high as last year Fuel heats up inflation (Kronen Zeitung)

Discussion about price increases tarnishes Euro‘s birthday (Kurier)

Austrians bemoan loss of Schilling (Kurier,) Euro = Teuro? Many goods up to 30% more expensive (Die Presse)

Often applied trick: Less content, same price (Kronen Zeitung)

Euro makes even hair-cuts more expensive (Kronen Zeitung)

Source: GfK agency 4. 2008 76 The Euro in Austria

I am spendin g as much as before I am spending 38% more 48%

I am spendin g rather less 14%

prices have clearly 71 salaries seem to be low 39 increased

living conditions have prices seem to be lower 57 changed 35 living conditions have 20 salaries have decreased 21 changed

salaries have decreased12 salaries have increased4

salaries have increased5 prices have fallen1

Source: GfK Austria Eurobarometer (in %) 77 Conclusion

Experience:

„ The base is soon preparation of legislation- it must be borne in mind that it is also considered by the EC and the ECB

„ Communication in relation also towards business sphere

„ Active work with citizens, active communication towards citizens will start later

„ Despite long-term and quite expensive preparation it is possible that the process of the euro adoption will be not finished with a positive outcome from the EC and the ECB. The first information about the expected result of the process can be available at the end of April from the Convergention reports. Final approval half a year before expected euro day. If negative – wasted costs

78 Thank you for your attention !

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