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PRICE GROWTH WILL OUTPACE WAGE GROWTH AS SLOVAKIA WORKS TO JOIN EUROPEAN UNION

Analysts warn of EU accession pains in business sphere

FOUR months before a nationwide referendum on EU membership, some analysts are warning that Slovaks have not been told enough about some of the economic dangers related with accession.
"The overall readiness of the business sector to enter the joint EU market is insufficient," states a recent report by the Institute of World and Slovak Economy (IWSE) titled The Economic and Social Contexts of Slovakia's Accession to the EU - Benefits and Risks.
"From the perspective of their financial position, approximately one fourth of large industrial companies [in Slovakia] are not competitive," the report continues.

FOUR months before a nationwide referendum on EU membership, some analysts are warning that Slovaks have not been told enough about some of the economic dangers related with accession.

"The overall readiness of the business sector to enter the joint EU market is insufficient," states a recent report by the Institute of World and Slovak Economy (IWSE) titled The Economic and Social Contexts of Slovakia's Accession to the EU - Benefits and Risks.

"From the perspective of their financial position, approximately one fourth of large industrial companies [in Slovakia] are not competitive," the report continues.

In particular, the IWSE says Slovakia "lags significantly" behind EU countries in the areas of education, scientific research, and innovation, risking the future competitiveness of Slovak firms.

According to the report, EU countries spend, relative to GDP, six times more than Slovakia on research and development, and three times more on education.

While 24 per cent of economically active EU citizens currently have a university degree, the figure is only 8.7 per cent in Slovakia, the report says.

However, not all experts share this pessimistic view of the state of Slovakia's business sector.

Ján Oravec, president of the F.A. Hayek Foundation think tank in Bratislava, says that while EU integration may bring some economic threats, Slovakia's businesses have been catching up with their western counterparts in recent years.

"It is not accurate to say that Slovakia's entry into the EU will represent a shock for companies. During the 1990s our companies were able to redirect their exports to highly competitive Western markets, and from this perspective, EU entry will be a mere formality," said Oravec.

Oravec did warn, however, that tax issues pose a potential threat to the Slovak economy after EU accession.

"Some countries may fear that if we create a tax system [beneficial to the Slovak economy and investors], it may lure away their businesses. Their national budgets will then lose sources of income," said Oravec.

"It is in their interests to complicate our reforms as much as possible, and they may use the formal mechanisms of the EU to achieve that," he added.

Oravec specified that countries that have problems with taxation and public finances currently include Germany, France, and Italy.

If the current approach towards unifying value-added tax (VAT) and excise tax rates within the EU is preserved, tax rates in Slovakia will have to rise, say analysts.

"VAT rates are expected to go up by around 5 per cent. Excise taxes should increase by around 20 per cent. These are significant increases, which will lead to the growth of price levels," the ISWE reports.

Higher taxes, say analysts, could worsen Slovakia's problematic unemployment rate, which has been gradually falling but still stood at 18.6 per cent at the end of 2002.

"As soon as you increase the tax burden, you reduce the volume of disposable finances available to businesses and you therefore decrease their ability to employ. The higher the taxes, the more problems there are with employment and economic growth," said Oravec.

Another danger cited by the ISWE is the amount of investment required for the country to comply with EU standards in various areas.

According to the report, total investments into environmental protection can be estimated at Sk120 billion to Sk140 billion (3 billion to 3.5 billion euro) until 2007, out of which at least 10 per cent will have to be paid before Slovakia's expected 2004 EU entry.

"The environmental field is one area in which Slovak businesses will have to invest significantly in the years to come. That will represent a burden for them, and this issue deserves broader debate," admitted Oravec.

Farmers will be among those most affected by EU demands for improved production and raised environmental standards.

"Meeting all veterinary and agricultural measures connected with the implementation of EU regulations is one of the greatest threats to [Slovak] agriculture," said Ivan Jung, director of the European-integration section of the Slovak Agricultural and Industrial Chamber.

"I'm certain many enterprises will have serious problems, as the requirements are not cheap. We are trying to make sure that these measures can be introduced with the help of funding from the [EU's] SAPARD [agricultural aid] programme. So far, we have not been successful," Jung said.

Further complicating these problems, say analysts, is Slovakia's push to join the European Economic and Monetary Union (EMU).

Although the country is at least three years away from implementing the single European currency, the drive towards the euro will push prices higher still, they say.

"If we aim to join the euro in 2006 or 2007, we will face a very serious problem trying to balance our price levels with those in EMU countries," said Oravec.

"The pace of price-level growth will be faster than the growth of wages. It is inevitable, because if it was the other way around, all companies would collapse," he added.

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