Wednesday, July 09, 2008

Slovakia Euro Entry Might Make ECB More Hawkish

Slovakia was recently formally invited to become the 16th member of the euro area in 2009. Slovakia is thus the fourth of the countries that joined the EU in 2004 to join the euro area (Slovenia joined in 2007, Malta and Cyprus in 2008).

One effect of this might be to make the ECB more hawkish. This is for two reasons. One is that if Slovakia is included then average growth and and therefore also inflation (because of the Balassa-Samuelsson effect) will increase, which means that the ECB will have to push interest rates higher to reach the inflation target, while feeling less pressure to ignore it for short-term growth considerations. The second reason is highlighted today by the Wall Street Journal, namely that the Slovakian central bank governor Ivan Sramko, who will join the ECB governing council, is considered to have relatively hawkish views on monetary policy.


Blogger Flavian said...

The fact that he is considered a hawk might have helped Slovakia into the euro, since it might have convinced the Germans to agree to Slovakian entry.

However; the ECB is a political football kicked around by inflationist politicians.

12:59 AM  

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