SLOVAKIA's entry to the European Union will bring a significant increase in prices and could push unemployment as high as 30 per cent, say Slovak government officials.
In spite of the dangers, economists and small business experts warn, neither firms nor the government are doing enough to cushion the impact of entry.
"Not even half of all Slovak companies have started to prepare for EU entry yet," states a report by the Eurochambers industrial and business association.
Slovakia is expected to join the EU in 2004 in an entry wave of as many as 10 countries, but has prices and productivity levels far below EU standards.
The warnings arise from a study on the impact of Slovakia's EU entry on the economy, which was prepared by the Slovak Academy of Sciences (SAV) at the request of the Government Office.
The analysis is focused on business sector preparation for Union membership because, as Deputy Prime Minister for EU Integration Mária Kadlečíková explained, "EU entry will most affect small- and medium-sized companies."
Kadlečíková added that "the biggest problems related to EU entry are growth in prices and increasing unemployment."
The main reason for the expected unemployment rise is more intense competition after EU entry, which, with the expected rise in inflation as regulated prices are brought to market levels, will force Slovak companies to cut workers to increase productivity, said Kadlečíková.
Richard Outrata from SAV said he expected price growth of 15 to 16 per cent after EU entry.
"Slovak GDP per capita is now only 49 per cent of the EU average, while productivity is at 50 per cent and wages at 30 per cent," said Outrata. "We lack sophisticated production."
Outrata added that the government should increase prices now, to make the post-EU entry shock less pronounced.
The central bank expects inflation at between 3.5 and 4.9 per cent in 2002, well below the 8 per cent seen in 2001, after the cabinet elected not to raise regulated prices before elections expected in September.
Small business experts reported that many firms were also in a wait-and-see mode as EU entry approached, able to see the dangers but often powerless to avert them.
"Slovak companies are most afraid of the competition that EU entry will create. They expect that the European market might demand more in terms of quality than the current domestic market," said Juraj Majtán, general director of Slovakia's NARMSP agency for the development of small- and medium-sized enterprises.
"Price increases will definitely reach at least the expected 16 per cent, and consequently the sale prices of goods produced by Slovak companies will be affected. The question remains whether they will still be competitive enough after this rise. They will have to improve labour productivity and the quality of production.
"Besides this, Slovak companies fear an inflow of goods and services onto the domestic market that might be sold at prices similar to Slovak ones due to the strong system of subsidies in EU member countries, thus endangering their market positions. This is a realistic fear, especially in the food production sector," said Majtán.
However, European Commission Director for Enlargement Eneko Landaburu has asked companies in candidate countries "not to be afraid of EU entry."
"Trade between transition countries and the EU has become more liberal since the beginning of 1990, and the impact of entry will be less visible and less influential than may be expected," he said.
While larger Slovak firms have either already built positions on EU markets or expect that EU enlargement will provide new business opportunities, smaller Slovak companies also expect better cooperation with European partners.
"According to a survey of Slovak companies, domestic entrepreneurs are generally optimistic about EU entry," said Majtán.
"Our companies have strong potential to supply big foreign companies at acceptable quality and price. A certain number of domestic companies will get new business contacts," said Majtán. "Domestic firms also expect that cooperation with foreign partners could improve their access to new technologies. Surprisingly, Slovak companies even expect improved access to capital."
An enduring cash crunch in Slovakia has bedeviled smaller firms, as banks remain reluctant to increase corporate lending after running up over Sk130 billion in bad loans during the 1990s.
ING senior analyst Ján Tóth said Slovak companies could best prepare for EU entry by focusing on sectors that are underdeveloped in the Slovak economy. "Services will not be affected so much by entry, as some of them cannot be attacked by competition, but in sectors like tourism, more needs to be done. As an example, demand for tourism in the High Tatras region is decreasing."
"Also, the corporate discipline of Slovak companies should improve. They should keep obligations arising from contracts and keep the deadlines. Big foreign companies are often interested in small local sub-suppliers because of their quality or speed, but these companies sometimes do not provide services according to their contracts and the foreign companies lose trust in domestic firms.
"In spite of lower domestic prices, such a company might next time turn away and decide to choose a foreign supplier, simply because of doubts over domestic companies' performance," explained Tóth.
The SAV analysis, which will form the basis of government decisions in the future, should be completed by the end of June.