Economic Policies on Slovenia’s Road to the Euro Area

Since May 2004, Slovenia has been a member state of the European Union. Although trade barriers had been removed to a large extent with the progressing accession negotiations, participation in the EU is further fostering the European economic integration of the new member states. One important integration aspect concerns the monetary policy framework. This paper analyses whether the choice of participating in the ERM II in an early stage after EU accession was the best strategy in terms of the macroeconomic performance. It is shown that the best overall economic performance is achieved under a crawling peg regime allowing a depreciation of the Slovenian tolar (SIT) against the euro with a decreasing rate of depreciation. The worst policy results are obtained when the exchange rate is totally fixed at an early stage of EMU integration. The labour market performance can be significantly improved by cutting income taxes and social security contribution rates.