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THE IMPACT of the EURO ADOPTION on SLOVAKIA Thesis THE IMPACT OF THE EURO ADOPTION ON SLOVAKIA Thesis by Anna Gajdošová Submitted in Partial Fulfillment of the Requirements for the Degree of Bachelor of Science in Business Administration State University of New York Empire State College 2019 Reader: Tanweer Ali Statutory Declaration / Čestné prohlášení I, Anna Gajdošová, declare that the paper entitled: The Impact of the Euro Adoption on Slovakia was written by myself independently, using the sources and information listed in the list of references. I am aware that my work will be published in accordance with § 47b of Act No. 111/1998 Coll., On Higher Education Institutions, as amended, and in accordance with the valid publication guidelines for university graduate theses. Prohlašuji, že jsem tuto práci vypracovala samostatně s použitím uvedené literatury a zdrojů informací. Jsem vědoma, že moje práce bude zveřejněna v souladu s § 47b zákona č. 111/1998 Sb., o vysokých školách ve znění pozdějších předpisů, a v souladu s platnou Směrnicí o zveřejňování vysokoškolských závěrečných prací. In Prague, 06.08.2019 Anna Gajdošová Acknowledgement I would like to express my special thanks to my mentor, Prof. Tanweer Ali, for his useful advice, constructive feedback, and patience through the whole process of writing my senior project. I would also like to thank my family for supporting me during this whole journey of my studies. Table of Contents Methodology .......................................................................................................................... 8 1. Historical Overview ...................................................................................................... 10 1.1. Economic and Monetary Union ............................................................................. 10 1.2. History of the Economic and Monetary Union ...................................................... 10 1.3. The European currency snake ................................................................................ 11 1.4. The European Monetary System ............................................................................ 12 1.5. The Delors report ................................................................................................... 13 1.6. The three stages of Monetary Union ...................................................................... 13 1.7. Benefits of monetary integration ............................................................................ 17 1.8. Meeting the Maastricht criteria .............................................................................. 17 1.9. Slovakia and the EMU ........................................................................................... 20 2. Expected benefits of Euro ............................................................................................. 21 2.1. Direct benefits ........................................................................................................ 22 Transaction costs eliminated ......................................................................................... 22 Exchange risk ................................................................................................................ 23 Price transparency ......................................................................................................... 23 Capital costs and interest rates ...................................................................................... 24 2.2. Indirect Benefits ..................................................................................................... 24 Foreign trade ................................................................................................................. 24 Foreign direct investments (FDI) .................................................................................. 26 3. Disadvantages and Costs .............................................................................................. 28 3.1. Monetary policy ..................................................................................................... 28 3.2. Rounding the prices ................................................................................................ 29 3.3. Exchange rates ....................................................................................................... 29 3.4. Inflation .................................................................................................................. 30 4. Slovakia after the Euro adoption .................................................................................. 32 4.1. The Effect on Inflation ........................................................................................... 32 4.2. Banking Sector and Interest Rates ......................................................................... 34 4.3. Competitiveness ..................................................................................................... 36 4.4. Foreign Trade ......................................................................................................... 37 4.5. Foreign Direct Investment (FDI) ........................................................................... 39 4.6. GDP growth ........................................................................................................... 41 4.7. Tourism .................................................................................................................. 44 5. Conclusion .................................................................................................................... 46 Works Cited .......................................................................................................................... 49 Bibliography ......................................................................................................................... 55 Abstract 10 years have passed since Slovakia adopted the euro and joined the Eurozone. Prior to adopting the euro, the National Bank of Slovakia made predictions about the effects of adopting the common currency on various aspects of Slovak economy. Some of them were supposed to manifest immediately, but some of them would be visible rather in the long run. The thesis provides brief insight into Slovakia’s journey towards the euro, and the theory of optimal currency areas. The euro adoption affected all Slovak citizens along with institutions, businesses and organizations. The primary purpose of this thesis is to compare the predictions versus reality and explore if the optimistic scenarios became reality. Methodology Slovakia joined the euro area on the 1st of January 2009. It became the 16th member of the euro area. The government of Prime Minister Mikulas Dzurinda has paved the way towards the euro in Slovakia. In November 2005, the Slovak koruna was involved in the ERM II exchange rate mechanism. In addition to technical preparations and efforts to meet the Maastricht criteria, the government has also implemented a number of reforms that are necessary to draw the benefits of introducing the euro. The topic of my bachelor thesis is the impact of the euro adoption on Slovakia. I divided my work into several parts. The first part is the introduction and historical overview that led to the euro adoption. In that part, I tried to characterize the process of monetary integration, namely the European Economic and Monetary Union (EMU). This part also explains, Slovakia’s attitude towards the EMU, and how the country fulfilled the criteria to become a member of the euro area. The next part is going to be about predictions versus what happened in reality. In 2006, The National Bank of Slovakia issued a document about the effects of the euro adoption on the Slovak economy. It was a certain prediction of what it might look like after joining the euro area. I will compare the aspects from these predictions with actually happened over the 10 years since the euro adoption. In my work, I am drawing conclusions from secondary research, that is, mostly data and information from 8 the documents, publications, journals, websites and books concerned with this topic. The main goal is to briefly analyze the steps leading to Slovakia’s entrance to the euro area, and also to find out how Slovak people view the advantages and disadvantages connected to the new currency. I will look into several aspects in the Slovak economy. After the comparison between the predictions and reality, I will decide if the impact on several sectors of economy was positive or negative, and will discuss the current situation. I am expecting that the advantages will outweigh the costs after my comparisons. The euro adoption affected all Slovak citizens along with institutions, businesses and organizations. The change of currency has effects that are visible immediately, but some of them have to be evaluated after longer period of time, which is why I think this topic could be interesting for readers from the countries that adopted the euro, and also those who did not do so yet. 9 1. Historical Overview 1.1. Economic and Monetary Union The Economic and Monetary Union (EMU) is a result of gradual economic integration of European Union. The Treaty of Amsterdam considers the EMU as one of the goals of the European Union. The Economic and Monetary Union consists of European countries that have agreed to use a common currency – the euro, and common economic and fiscal policies. There are currently 28 EU Member States participating in the economic union, while only 19 of them have adopted
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