PM courts Brussels with anti-inflation plan (The Slovak Spectator)

Z dlhodobého hľadiska má politická manipulácia
cien a miezd na hospodárstvo krajiny negatívny účinok, povedal
v súvislosti so zavedením eura na Slovensku v roku 2009 Juraj Karpiš
z INESS pre The Slovak Spectator dňa 10.12.2007.

With the coalition crisis still smouldering at home, Prime Minister Robert
Fico went to Brussels to convince the European Commission that Slovakia is
serious about joining the eurozone in January 2009.

Fico met EC officials at a time when the European Parliament is calling for
more powers to evaluate the readiness of countries that want to adopt the EU
currency. Meanwhile, back home, his team was about to push through parliament a
state budget described as euro-friendly.

The prime minister brought a package of anti-inflationary measures to
Brussels on December 3 and 4 to court the EC and calm EU worries about the
country’s ability to contain inflation within the Maastricht limits. He also
promised to cut public spending.

The package includes a code of ethics for businesses, an agreement with
employers and unions on not letting wage growth exceed the level of labour
productivity, and penalties for monopolies that abuse their position on the
market.

“The measures that Mr. Prime Minister was speaking about are basic rules of
economic theory,” Finance Ministry spokesman Miroslav Šmál told The Slovak
Spectator. “For example, there is a basic economic rule that the growth of
wages should not exceed the growth of labour productivity.

“Of course, we cannot say that following all these rules will eliminate the
chance that the fate of Slovenia will reach us,” he continued. “We cannot
control the development of oil and food prices. But if these rules are kept,
we’re heading in a good direction.”

Inflation in Slovenia has recently shot past five percent, which is more
than double its inflation rate from the same period in 2006. Inflation in
Slovenia was 2.3 percent shortly before it entered the European Monetary Union.

But it seems that Slovakia has the European Commission’s confidence that it
will walk the euro walk.

European Commission President José Manuel Barroso said that the efforts that
Slovakia has so far made to join the eurozone send a good signal to Europe.

“I believe that Slovakia will enter the eurozone in 2009,” Barroso said, as
reported by the SITA newswire.

Internal politics disregarded?

There has been much guessing in the local media about what impact the
turbulence on the local political scene could have on Slovakia’s eurozone
prospects. Fico has several times rejected these speculations, saying political
criteria cannot be used to judge Slovakia.

Fico has also assured Barroso that things are stable in Slovakia’s ruling
coalition.

“Local democratic institutions solved the problem of the illegal land
deals,” the prime minister said, as quoted by SITA.

Fico’s ruling coalition was shaken by a scandal around illegal land
transfers involving a nominee from the Movement for a Democratic Slovakia party
(HZDS) and millions of crowns. Fico sacked HZDS nominee Miroslav Jureňa from
the post of agriculture minister in response to the scandal, which sparked a
blame game between the HZDS and Fico’s Smer party and threats to dissolve the
coalition.

According to Barroso, the objective fulfillment of Maastricht criteria will
be a decisive factor in evaluating the country’s preparedness.

“I therefore believe that Slovakia will manage to keep up the pressure on
fulfilling the criteria in the future, as well,” Barroso said.

Fico stressed that economic conditions have been favourable in Slovakia, and
suggested that the country is undergoing an ambitious fiscal consolidation
under a socially-oriented government.

There have been comments from Brussels that the consolidation of public finances
should be going faster. But Fico told the EU Commissioner for Economic and
Monetary Affairs, Joaquim Almunia, that the reduction of the country’s public
finance deficit and its fiscal consolidation is enough to get it to the
eurozone.

Brussels also assured the Slovak government that the European Commission and
the Council are going to decide on the country’s eurozone entry. According to
the draft European Treaty, the European Parliament is to receive more
significant powers in these issues as of January 1, 2009. But by then, Slovakia
will already be a eurozone member if it fulfills the Maastricht criteria, SITA
wrote.

Fico met with members of the European Parliament, including David Casa, the
EP rapporteur for Slovakia’s euro changeover.

“Fico is determined to make a success story out of Slovakia’s application to
join the eurozone,” Casa told The Slovak Spectator. “Taking into consideration
the timetable we have, once the Maastricht criteria are met there will be no
problem for Slovakia to join in January 2009.”

Casa praised Slovakia as an “ex-communist country that has made huge steps
since democracy was re-installed.”

“It is an example to all the Eastern European countries,” Casa said. “The
economy is flourishing and there is a set path which the government wants to
follow. There is also a general consensus about euro adoption. There will
obviously be obstacles on the way, but I am sure the determination of Slovaks
will overcome them.”

Slovakia meeting targets

The general government budget has a projected deficit of 2.3 percent of the
GDP in 2008. Fico said that his government plans to cut the public finance
deficit to 0.8 percent of the GDP in 2010.

Slovakia started meeting the most feared criterion for adopting the euro in
August, when the country’s inflation dipped thanks to cheaper clothing and
food. EU-harmonised inflation reached 1.2 percent year-on-year in August, which
was enough to push the 12-month average inflation under the limit required for
entering the eurozone.

Slovakia has to keep its inflation within 1.5 percentage points above the
average for the three European Union countries with the lowest inflation rates.

Slovakia’s inflation rate was one of the lowest in the EU-27 in August, said
Tatra Banka analyst Juraj Valachy.

However, market watchers and the business community are not that
enthusiastic about Fico’s anti-inflation steps.

“Efforts to politically manipulate
price indexes through a forced agreement between employers and trade unions on
a temporary halt to the growth of wages, or state pressures on the price
creation policies of private companies, might temporarily stop inflation; but
the effect of such measures is necessarily only a short-term one,” said Juraj
Karpiš, an analyst with the INESS economic think-tank.

In the long-term, the political
manipulation of market processes will lead to negative effects, Karpiš told The
Slovak Spectator.

Market watchers and experts have been speculating on whether the inflation
developments in Slovenia could make it harder for Slovakia to persuade Brussels
that it can control inflation after it joins the European Monetary Union.

“It is possible that the Slovenian
experience will increase Brussels’ caution,” Karpiš told The Slovak Spectator.
“However, it is not certain what weight the inherently subjective evaluation of
inflation sustainability will have in evaluating Slovakia’s entry to the EMU,
if Slovakia manages to meet all the specifically-defined Maastricht criteria.”

Slovenia, however, has undergone
political manipulation of its prices to meet the inflation criterion, in the
form of limits to the growth of regulated prices and pressures on slowing down
wage growth, Karpiš added.

As for Slovakia’s ability to sustain
its inflation within the Maastricht levels even after entering the eurozone,
Karpiš said it depends on many factors, including local monetary policy, prices
on the world commodity markets, economic cycles, and the way price indexes
develop in other eurozone countries.

The Slovak Spectator, 10 Dec 2007, Beata Balogová