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Can Slovakia, Eurozone's Former Black Sheep, Maintain Its Miracle Growth?

In less than a decade, Slovakia has gone from bottom of the class to best in show, with a 2.5% growth in 2012. Will it be able to keep up the miracle, or will it turn out to be just a mirage?

Tren?ín, Slovakia (EU Social)
Tren?ín, Slovakia (EU Social)
Florence Beugé

The past ten years have been a success story for Slovakia. The country was the last to arrive in the Eurozone (in 2009), and here it is, taunting Europe. Industrial production is still growing: +2% in May, +10.8% yearly, according to figures published on July 10. In 2012, the growth rate was approximately 2.5%, far from the other, considerably feebler European economies.

Who remembers that in October last year, Bratislava rejected the European Financial Stability Facility before forcing itself to approve it, at the cost of a political crisis? In June, Slovakian parliament ratified the European Stability Mechanism, to which it will contribute 659 million euros over five years. “We’ve often been considered the black sheep of Europe! And now we are the good guys!” says Juraj Karpis, an analyst at the Institute for Economic and Social studies in Bratislava.

As if to catch up on lost time, this country of 5.4 million inhabitants is doing everything at an accelerated pace. “I’ve been here since 2002 and I feel like I’ve been through ten professional lives, everything changes so fast!” says Vincent Barbier, CEO of energy services company Dalkia.

Fast paced reform

In less than a decade, Slovakia has integrated the OECD, NATO, the European Union and the Eurozone. Living standards have already reached 70% of the European average.

Its automobile construction know-how, a legacy of the Soviet era, is highly praised. Even though it is trying to diversify, the Slovakian economy still rests mainly on its car and flat screen television exports to the EU -- something which is both its strength and its weakness.

Overall, the Euro is seen “as a guarantee of stability, in particular for investors,” says Jan Cienski, the Financial Times’ regional correspondent.

Bratislava still has to reduce its public deficit. Robert Fico, the new Social-Democrat prime minister, came to power in March after early legislative elections: he promised to rein in the deficit back to less than 3% of the Gross Domestic Product (GDP) in 2013, down from 4.8% today.

Fico also wants to fill the State’s coffers by taxing the rich. The flat 19% tax rate will soon be a thing of the past. Starting in 2013, the wealthiest private individuals will be taxed at 25%, and companies at 22% to 25%, depending on how flourishing they are.

“This measure is going to kill our competitiveness,” believes Juraj Karpis, even though he acknowledges that Slovakia is still “very attractive, with an average industry salary that is only a quarter of Germany’s.”

Grigorij Meseznikov, an analyst at the Bratislava Institute of Public Affairs, is also worried about the new prime minister’s economic policies. “Many foreign investors came to Slovakia these past few years because of our attractive low tax rate policies. We risk losing them,” he says.

Regional discrepancies

“This whole low salary story is bogus! It’s the quality of Slovakian products and their added value that should be taken into account,” counters Vladimir Vano, a financial analyst at the Volksbank. In Romania, he says, “salaries are as low as they are in Slovakia, and yet the economic performance is not as good!”

Reducing public deficit even though household consumption is atonic is a headache for the new government. “If the debt crisis doesn’t get any better, we won’t be able to kick-start our economy. We aren’t economically linked to Greece, but what’s happening there has a psychological effect on us. There is no more confidence. Uncertainty about the external environment is too strong and unemployment is very high,” explains Renata Konecna, the director of the monetary policy department at the central bank.

The unemployment rate is one of Slovakia’s biggest problems -- in addition to regional discrepancies and the Roma. Bratislava is in great health, but other regions are deep in Middle-Ages poverty. The nationwide unemployment rate is only 14%, but the rate reaches 30% to 35% in the disadvantaged Eastern provinces.

“In 2001, our unemployment rate was 20%. We then lowered it to 10%, and it increased again with the crisis,” says Vladimir Vano as he mentions “structural unemployment,” in other words: the Roma (they represent 8% to 10% of the population, including 150,000 who live in very precarious conditions).

Without this ticking time bomb -- successive governments refuse to take care of what they see as an insoluble problem -- the job-seeker rate wouldn’t exceed the Czech Republic’s (10%) or Hungary’s (12%), says the Volksbank analyst.

Read more from Le Monde in French.

Photo - EU Social

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