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BUSINESS FOCUS - EUROPEAN UNION - ACCESSION MIGHT NOT BRING EXPECTED INCREASES IN INVESTMENTS, ALTHOUGH SLOVAKIA COULD BE AN EXCEPTION

New members could spark EU reforms

MEMBERSHIP in the European Union is, without a doubt, a significant milestone for Slovakia, as the country now has the right to express its opinion on affairs of international consequence with more weight than ever before.
However, analysts say immediate improvements in the Slovak economy and everyday life will barely be noticeable. On the contrary, inhabitants might feel negative reactions, such as price hikes, at first.

MEMBERSHIP in the European Union is, without a doubt, a significant milestone for Slovakia, as the country now has the right to express its opinion on affairs of international consequence with more weight than ever before.

However, analysts say immediate improvements in the Slovak economy and everyday life will barely be noticeable. On the contrary, inhabitants might feel negative reactions, such as price hikes, at first. As for the economy, the slower pace of the EU might even check Slovakia's domestic reformist mood.

"The enlargement of the EU from 15 to 25 is a great moment. It means finishing our efforts of economic integration. Entrance to the EU brings opportunities, of course, but also risks. It is up to us to be able to face them - to take advantage of them and solve them," Marek Gábriš, an analyst with ČSOB, told The Slovak Spectator.

Pavol Ondriska, an analyst with Slávia Capital, added: "There is a risk of possible disillusionment among people, as a substantial majority of the population expects that simply entering the EU will solve their problems. The discontent that might follow could influence the political and economic development of the country."

Analysts agree that membership should attract more investments to Slovakia, support employment and sustainable economic growth, and gradually increase salaries and the living standard.

The Slovak economy should become even more intertwined with that of the EU than it already is. The majority of the country's exports currently head towards the EU countries but economists expect their share to grow to more than 90 percent.

Cooperation with other member countries will thus create even stronger pressure to improve the nation's institutional and legislative environment. But, the analyst pointed out, the will to carry out further needed structural reforms will still depend more on the domestic political scene than on EU executives.

Opportunities to spend euro-funds will give lagging Slovak regions a chance to buoy their economies, especially those in eastern Slovakia, which suffer higher unemployment and a lower living standard than Bratislava and the western parts of the country.

According to Gábriš, in forthcoming years investments will be directed to new members. They provide lower salary costs, investment incentives, and labour productivity comparable with the old European 15.

However, analysts think that May 2004, the month Slovakia and another 9 countries entered the EU, will not bring many visible positive changes. Inhabitants of the "new EU" will have more reason to be optimistic about the union later on.

"Accession to the EU provides many economic advantages, such as the liberalisation of trade in goods and services and the free movement of capital and labour, that will enable Slovak income to catch up with that of the [old] EU over time," said Zdenko Štefanides, an analyst with VÚB bank.

"True, the majority of these advantages were already open to the Slovak economy, while some remain limited even after the formal accession to the EU [e.g. employment barriers] - from May 1, 2004, little will change in the short term. We believe, however, that Slovakia will have the opportunity for accelerated growth and convergence towards other members in the medium- to long-term," he continued.

Analyst Róbert Prega from Tatra banka, said that the most significant and noticeable changes directly connected to the EU would probably be caused by entry to the European Monetary Union, which means "a really long-term horizon".

"Slovakia already has an open economy focused on exports to the EU anyway; almost all the needed economic changes were carried out because of the European Union during the last 10 or more years. Trade barriers were removed. We do expect a stronger economic growth but that is more a result of a long-term trend," Prega said.

"Awaited increased investments might also be more related to our reforms and cheap labour than to the fact that we entered the union. Although the truth is that the EU shows us to be reliable and improves our image among investors," he added.

The Economist Intelligence Unit (EIU) has the same opinion. An EIU study suggests that the latest enlargement will not lead to significant increases of FDI in countries of central and eastern Europe. The new target for foreign investors is already Asia, according to the study, the TASR news wire wrote.

The EIU says that eastern Europe enjoyed the most investment advantages before accession. Further positive effects upon EU en try will be limited. However, the unit expects some positive effects for Slovakia thanks to its low labour costs.

So far, people have been most afraid of price hikes following convergence to EU price levels, especially more expensive food due to the common agricultural policy. The current Slovak prices are only 40 percent of the EU15 average (in purchasing power parity).

However, analysts believe that price convergence to current EU15 levels will be a long-term and gradual process and will match the growing purchasing power of inhabitants.

"Bigger differences will mostly be in prices for services that are not really exposed to international competition, thus causing them to grow only gradually. Common agricultural policy will, however, have an immediate impact on food prices, clearly seen in one to three months after accession," said Gábriš.

Economists see most of the big EU risks in the current state of the union. The push for reforms in the old EU is not as strong as it is among new members, though the attitudes of the latter might change as a result of accession.

They also added that some EU tools, like the common agricultural policy, could be more of an economic brake than an engine of reform. According to Prega from Tatra banka, if there were no common agricultural policy, Slovak agriculture subsidies would probably be much lower and there would be a greater effort to reform the sector than there is today. "We should learn how to use these tools and at the same time keep our priorities," he said.

"Many main countries, like Germany and France, have a lower economic growth and need domestic structural reforms. Thus we also hear protests from those countries against new member states [and their economic reforms, such as decreasing tax burdens, etc]," Prega added.

Some analysts see the protests as an effort to make new member states, many of which have gone through painful reforms in order to liberalise their markets, adopt a model of stronger state administration, similar to those of the western EU countries.

"However, such voices are still not strong. This is also a positive moment in which discussions about the need to carry out reforms in the old EU countries have opened," said Prega.

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