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Minister's threat to resign taken in stride

Repeating a threat she made only eight days earlier, Finance Minister Brigita Schmögnerová said on April 10 she might resign if deep tax cuts were approved over her opposition. But her dramatic words were quickly dismissed as a bluff by coalition party leader Ľudovít Kaník, who had backed the cuts.
Schmögnerová, who is one of the most highly-regarded members of the Slovak cabinet abroad, and who was chosen by Euromoney magazine as Finance Minister of the Year for 2000, had first said on April 2 that she would leave her post if the tax cuts proposed by the rightist Democratic Party (DS), led by Kaník, gained parliamentary approval.
But when the threat was repeated at an April 10 press conference on the abolition of Slovakia's inheritance tax, Kaník dismissed Schmögnerová's words as "not based on anything rational", and said her resignation was no more than an empty threat.

Repeating a threat she made only eight days earlier, Finance Minister Brigita Schmögnerová said on April 10 she might resign if deep tax cuts were approved over her opposition. But her dramatic words were quickly dismissed as a bluff by coalition party leader Ľudovít Kaník, who had backed the cuts.

Schmögnerová, who is one of the most highly-regarded members of the Slovak cabinet abroad, and who was chosen by Euromoney magazine as Finance Minister of the Year for 2000, had first said on April 2 that she would leave her post if the tax cuts proposed by the rightist Democratic Party (DS), led by Kaník, gained parliamentary approval.

But when the threat was repeated at an April 10 press conference on the abolition of Slovakia's inheritance tax, Kaník dismissed Schmögnerová's words as "not based on anything rational", and said her resignation was no more than an empty threat.

However, the Finance Minister said that the DS proposal, which would see the corporate income tax rate cut from the current 29% to 19%, after falling from 40% in 2000, would put enormous pressure on the country's budget. It would also, she added, destroy what fiscal stability her office and she personally had worked hard to put in place over the last two and half years.

"Their [DS] proposal, which looks very nice on the surface, would increase the state's fiscal deficit. This would consequently raise interest rates, and Slovakia could wave goodbye to its good credit rating," she said.

Slovakia is currently rated just below investment grade by international agencies, having had a full investment grade rating until spring 1998.

An idle threat?

Schmögnerová's threat, although also dismissed by analysts as hollow, took on added weight when her party, the former communist Democratic Left Party (SDĽ), distanced itself from the minister's comments on cooperation among ruling coalition members made at the same conference.

The minister said during the April 10 meeting that the SDĽ "doesn't feel bound by common agreements" within the coalition, referring to a deal hammered out between the government's four ruling parties following September 1998 elections, which governs governmental co-operation.

Schmögnerová's opinions came after a large number of coalition members of parliament went against the SDĽ and united to pass a legal amendment abolishing inheritance tax on April 7. Schmögnerová said that she wanted the ministers whose parties had voted to abolish the tax to pay the subsequent budget shortfall from their own ministries' purses.

In an immediate reaction, the SDĽ issued an official statement that Schmögnerová had misinterpreted the conclusions of the party's regular session, held only a day before the press conference, saying the new law had merely been criticised by party members, and that there had been no resolution to stop co-operating with other parties in the government, including on matters such as tax law.

International institutions and banks view Schmögnerová and Deputy Prime Minister for Economy Ivan Mikloš as key guarantors of economic reform within the government. The duo's importance for Slovakia is underlined by the fact that the economic reforms they are pushing forward are considered among the most important for the country's NATO and EU membership bids.

Analysts have said that the loss of the minister would be a serious blow for foreign confidence in Slovakia. Jeff Gable, economist with Deutsche Bank's bureau in London, said Schmögnerová was one of the few Slovak government members who had been vocal on the need for reform. "Any suggestions that she might have to leave would be viewed with a certain amount of concern. We listen to what she says closely," he said.

Schmögnerová's continued presence in cabinet came under threat last summer when her own party held a vote on keeping her on as minister. She had threatened to resign then as support for her hard-line fiscal policies dwindled among socialist party colleagues.

According to Gable, the situation since then has changed little. "At that time there was a tendency to push Schmögnerová out of her own party. It then quietened down, but now it looks as if the reformers and anti-reformers are at loggerheads once again," Gable said.

He also warned that with elections approaching next year, the minister would have to measure her words more carefully, as support within her own party could drop. "At some point, people are going to be much more willing to test her on what she says, and she will have to resign," Gable said.

Market reaction

Macro-economic analysts and money market dealers were surprised that the market reactions following the threatened resignation and the distancing by her own party had not been more acute. The exchange rate between the crown and euro fell from 43.400 to 43.530 crowns to the euro, but later strengthened to a record 43.250.

"I am surprised that market reaction wasn't more negative. After Schmögnerová's announcement, there was a currency sell-off which lasted a few hours, and then bang, right back to where we were, and the crown is at its strongest this year," said Deutsche Bank's Gable.

When the SDĽ voted on the Finance Minister's recall last year, the crown fell .4 crowns against the euro. Since then, improving market liquidity and a growing resistance to external factors, such as the minister's announcement, have helped insulate the market against such resignation threats.

"There would have been a stronger market reaction then, but people are starting to take Schmögnerová's announcements with a pinch of salt," said Juraj Zabadal, a dealer with SLSP bank.

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