Sunday, July 01, 2007

Slovenia Gets Euro Boost?

6 months ago, Slovenia became the 13th country to officially adopt the euro as currency.

Now we can see that first quarter growth rose to 7.2%. That is the highest number since
Slovenia gained independence from Yugoslavia, and the highest number of all EU countries except the flat tax havens of Slovakia and the Baltic countries.

Note also the increase in year over year growth from 5.5% in the fourth quarter to 7.2% in the first quarter. This implies that growth expressed in the American way (compared to the previous quarter in annualized terms) was likely 12% or more.

Was there a causal connection between
Slovenia's adoption of the euro and the sharp acceleration in growth? Probably to a certain extent as monetary unification tends to increase trade. Moreover, the pick-up in inflation also indicates that lower interest rates and the following higher monetary expansion could have provided some boost.

One argument against this is that the increase in growth was much bigger than the one experienced by other countries adopting the euro. That does indeed mean that some other factor could have been involved, although it should be said that the expected theoretical boost to Slovenia is higher than for most other countries given Slovenia's small size ( With its mere 2 million people, only Luxembourg is smaller among current euro zone members) and its not particularly stable monetary history. So, the euro probably explains most of the increase.


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