1. Slovenian Approach to EMU Boštjan Jazbec Member of the Governing Board The views expressed herein are those of the author and not necessarily those of the Bank of Slovenia.

2. Contents Macroeconomic Stabilization and Transition Macroeconomic Perfomance Maastricht Criteria Entry to ERM2 and Adoption of Euro Conclusions

3. Macroeconomic Stabilization and Transition Better initial conditions than in other transition economies Money-based stabilization program Rehabilitation of the banking sector Sound macroeconomic performance Inflation

4. GDP per capita

5. Openness (exports and imports in % GDP)

6. Foreign Trade with EU (in % of export and import, 2001)

7. Government Deficit

9. Public Debt (% GDP; ESA95)

10. Price Level

11. Relative Price Convergence

12. Y-on-Y Final Quarter Inflation

13. Maastricht Criteria

14. Synchronization of Business Cycles

15. GDP Composition by Activity

16. Financial Sector

17. Banking Sector by Total Assets

18. Slovenia vs. Greece vs. Portugal

19. Disinflation Trend in Slovenia The disinflation trend displays a breaks due to a combination of shocks in 1999: introduction of the VAT, demand boom, oil shock.

20. Exchange Rate Pass-Through

21. ERM2 - Why as Early as Possible? Are there any reasons to wait? Can small open economy run independent monetary policy? Sound macroeconomic performance

22. ERM2 Risks Capital inflows entail risks of volatility and exchange rate pressures Credit demand and booms: –low interest rates, demand boom and falling saving ratios can produce overheating, CA deficit and asset price bubbles. Balassa-Samuelson effect may generate inconsistencies between the inflation and exchange rate criteria. –Estimates for Slovenia range between 1 and 1.5%.

23. ERM2 Policy Mix Joint program between BoS and the Slovenian Government from Nov. 2003. Monetary policy : ER management in line with the ERM2 criterion. BoS has acquired experience and designed its instruments to stabilize the ER movements. Fiscal measures : low fiscal deficits, counter-cyclical spending, reduced rigidities and formula- driven social transfers, buffer stock relative to the Stability and Growth Pact (SGP). Wage and price flexibility needed to absorb asymmetric shocks (progressive deindexation). Synchronization of activity with euro area implies a consistency with the ECB stance. Financial market supervision Appropriate central parity

24. Conclusions Wish us all the best. www.bsi.si