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Mikloš to tackle unemployment, deficit ahead of EMU entry

The incoming Finance Minister, the Slovak Democratic and Christian Union's Ivan Mikloš, says he is planning to continue the country's fiscal reforms in preparation for a quick adoption of the euro.
In a recent interview with the Pravda daily, the outgoing Deputy Prime Minister for Economy said he wanted to continue the privatisation of strategic state companies as well as address Slovakia's continuing unemployment problem.
"Unemployment is, of course, one of the key issues," said Mikloš in the interview, stressing Slovakia's need to reform the country's health care and social security system.

The incoming Finance Minister, the Slovak Democratic and Christian Union's Ivan Mikloš, says he is planning to continue the country's fiscal reforms in preparation for a quick adoption of the euro.

In a recent interview with the Pravda daily, the outgoing Deputy Prime Minister for Economy said he wanted to continue the privatisation of strategic state companies as well as address Slovakia's continuing unemployment problem.

"Unemployment is, of course, one of the key issues," said Mikloš in the interview, stressing Slovakia's need to reform the country's health care and social security system.

"Once we have reformed those sectors, a reduction in unemployment will follow," he said.

Figures from Slovakia's Statistics Office show a gradual 18-month decline in unemployment, with an 18.6 per cent jobless rate reported in the second quarter of this year. Nevertheless, Slovakia still has one of the most problematic employment situations in Europe, characterized by sharp regional discrepancies and a thriving illegal labour market.

Applauding the proposed reforms, analysts noted that the slimming down of public sector institutions will offset any fall in the jobless rate in the short term.

"I don't expect a significant decrease in unemployment soon, but in 2005 and 2006 the positive effects [of the new government's reforms] should be seen," said Ján Tóth, senior analyst for ING Bank.

While backing the country's bid to join the European Union (EU), analysts warn that Slovakia's entry may pose a further threat to the labour market.

The country's accession is likely to be followed by an increase in foreign investment, leading to some short-term employment opportunities, but experts say those benefits will be outweighed by continued trimming in over-employed and under-performing industries.

"For companies that are not able to keep pace, rationalisation of employment policies will be inevitable. We still have many companies with over-employment," said Ján Kotian, an analyst with Slovenská sporiteľňa bank.

Nevertheless, Mikloš remains optimistic that social reforms can deliver a reduction in unemployment of 2 to 3 per cent over the next four year. "This society can do no more yet," he said.

Acknowledging that the necessary reforms will require financing, Mikloš said the funds would most likely come from the sale of state-owned stakes in strategic companies, such as Slovak Telecom, the SPP gas utility, and the SE electricity producer.

"We are still discussing this, but I see no reason why the state should hold on to any shares in these companies," said Mikloš, an opinion echoed by finance and investment insiders.

"It will be best if the state keeps no shares at all, or just very small stakes," said Tóth.

"Considering the amount of money it needs, it will probably keep none," he added.

While agreeing with Mikloš's position on privatisation and EU reforms, some analysts disagree with his ideas on European monetary union and the speed at which Slovakia should adopt the single currency.

Mikloš said he favours a relatively speedy entry into the eurozone, possibly by 2008, stating: "The advantages of fast membership outweigh the disadvantages."

However, Tóth thinks a slower approach is more realistic.

"In the short term, the EMU is not an optimal solution," he said.

"If the country is well managed, and the results of the elections show this is possible, the exchange rate of the Slovak crown in relation to the euro will improve.

"We can expect an annual strengthening of between 2 and 3 per cent. This means that people's savings will increase relatively. This will not be the case once we accept the euro," Tóth added.

While pointing out that the tough fiscal discipline required by EMU entry would help rein in public spending, both Kotian and Tóth feel that the incoming coalition government has already set itself realistic deficit goals, limiting the benefits of immediate monetary integration.

"If we had an unwise government, bringing in increased fiscal discipline would have beneficial effects. With a wise government, importing fiscal discipline is unnecessary," said Tóth.

Estimated to hit Sk34.9 billion ($776 million) for 2002, Slovakia's fiscal deficit remains a key problem. However, the Finance Ministry has recently reduced its deficit prediction from a feared shortfall of 4.5 per cent of GDP to 3.3 per cent of GDP, within the limits of the original budget law.

Mikloš sees the trend towards fiscal discipline continuing.

"The positive effects of unpopular steps, provided they are done well, on time and to the necessary extent, should be seen over the next four years," said Mikloš.

However, he added: "I don't think we can achieve a balanced budget by the end of this election term."

Instead, he said the government would aim for "a deficit amount that doesn't damage economic stability but one that also allows us to fulfill the criteria for entry into EMU," which should be less than 3 percent of GDP by European methods of calculation.

"This is a very demanding goal," Mikloš said, noting that Slovakia's public deficit currently stands at between 6 and 7 percent of GDP according to European calculations. Nearly Sk14.4 billion ($343 million) spent on restructuring the banking sector is not included in the government's fiscal deficit targets.

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