Economic Policy Mix in Slovenia and the Road to the European Monetary Union

As one of the few new EU member countries to enter the Exchange Rate Mechanism II in June 2004, Slovenia decided to implement the fast-track approach for joining the European Monetary Union. Although it limits a number of exchange rate and macroeconomic risks, the strategy of quick euro adoption simultaneously requires a highly orchestrated domestic economic policy intervention. The weakest part of this integration agenda is a sustainable disinflation policy. Results of various economic policy scenarios imply that when domestic monetary policy is oriented toward precluding exchange rate variability, the existing dynamics of inflation have to be managed by an adequate mix of wage deindexation, sustainable fiscal adjustment, and rigorous price policy in segments of the Slovenian economy in which insufficient competition creates lasting price pressures, through higher costs or wage increases not based on productivity gains. Lowering inflation in Slovenia to comparable euro area levels will be evidence that the gradual approach to economic transformation after the 1990s, as it has been practiced in the Slovenian economy, is compatible with swift monetary integration and ultimate adoption of the euro.