A New EU Member Country on the Road to the Euro Area: Monetary and Fiscal Policies for Slovenia Klaus Weyerstrass & Reinhard Neck Published online: 10 October 2007 # International Atlantic Economic Society 2007 Abstract Slovenia was the first of the ten new EU member states to enter the Euro Area on January 1, 2007. It was an explicit objective of Slovenian policy-makers to introduce the euro as early as possible. Slovenia was participating in the exchange rate mechanism ERM-II since June 2004. This paper analyses whether the choice of participating in the ERM-II soon after EU accession was the best strategy in terms of the macroeconomic performance. It is shown that a better overall economic performance could have been achieved under a crawling peg regime allowing a depreciation of the Slovenian tolar (SIT) before introducing the euro in 2007. The worst policy results are obtained when the exchange rate is totally fixed at an early stage of EMU integration. The labor market performance can be significantly improved by cutting income taxes and social security contribution rates. Keywords Fiscal policy . Monetary policy . Macroeconometric model . Slovenia JEL E40 . E62 Introduction May 1, 2004, Slovenia joined the European Union together with nine other countries, seven of which are Central and Eastern European. Although trade barriers were removed to a large extent already during the accession negotiations, participation in the EU is further fostering economic integration of the new member states with each others Atl Econ J (2007) 35:431–449 DOI 10.1007/s11293-007-9083-9 K. Weyerstrass Institute for Advanced Studies (IHS), Vienna, Austria R. Neck (*) Department of Economics, Klagenfurt University, Universitaetsstr. 65–67, A-9020 Klagenfurt, Austria e-mail: reinhard.neck@uni-klu.ac.at