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EU STATISTICS SHOW GAPS BETWEEN SLOVAK PURCHASING POWER AND THAT OF EU

Are we half as rich?

SLOVAKIA is half as rich as European Union countries on average. While analysts say it might take the nation decades to catch up with the wealthiest European countries, some are positive that it will happen.
Eurostat, the European Union's statistical office, released data on purchasing power parity (PPP) among European countries. According to the December 3 findings, Slovakia took 24th place among 32 nations. Hungary and the Czech Republic took 22nd and 23rd place, respectively.
Eurostat reported Slovakia's gross domestic product (GDP) per capita at 52 percent of the European Union average.

SLOVAKIA is half as rich as European Union countries on average. While analysts say it might take the nation decades to catch up with the wealthiest European countries, some are positive that it will happen.

Eurostat, the European Union's statistical office, released data on purchasing power parity (PPP) among European countries. According to the December 3 findings, Slovakia took 24th place among 32 nations. Hungary and the Czech Republic took 22nd and 23rd place, respectively.

Eurostat reported Slovakia's gross domestic product (GDP) per capita at 52 percent of the European Union average.

GDP and GDP per capita are indicators of a country's total production and expenditure, and are ways of measuring and comparing degrees of economic development. The process has limitations. For example, purchasing power is an artificial measurement that reflects differences in national price levels but does not take into account exchange rates.

Silvia Čechovičová, analyst with ČSOB bank, considers the ranking a realistic reflection of Slovakia's economic power. She thinks that Slovakia's economy has not grown enough since 1997 to significantly raise the standard of living.

Analyst Zdenko Štefanides from the VÚB bank blames Slovakia's poor placement behind Hungary and the Czech Republic on Slovakia's inferior starting position after the division of Czechoslovakia in 1993.

He says the paucity of meaningful foreign direct investments for so many years did not help, and points out that privatization and nationwide restructuring initiatives did not come into play until the late 1990s.

However, Štefanides says that Slovakia's game of catch-up matters more. "The ranking itself is poor, but look at the dynamics in the income catch-up process. Here one can see real convergence, that Slovakia has been closing the income gap to meet European Union standards at a comparatively fast pace: nearly one percentage point per year," he said. Slovakia went from 45 percent of GDP per capita in purchasing power parity in 1995, to 52 percent in 2003.

"From our regional neighbours, only Hungary has made a more significant convergence progress, having moved 11 points over the past eight years, compared to Slovakia's seven and Poland's five.

Note that the Czech Republic actually lost one point, albeit from a much higher level," said Štefanides.

Analysts explain that purchasing power parity adjusts for different prices and living costs across countries.

For example, to rent an average flat in London costs more than in Bratislava when you compare the corresponding sums at the market Sterling/Crown exchange rate.

"PPP figures try to stay away from exchange rates; they compare how many 'identical' or average flats you rent in London and Bratislava using GDP per capita.

Or how many medical treatments or pints of beer can you afford," explains the VÚB analyst.

Štefanides mentions the most simplistic concept of purchasing price parity, the so-called BigMac index, which compares prices of an identical McDonalds hamburger across various countries.

He continues. "Aggregating across all goods and services produced in the economy and across all 25 countries in the EU, Eurostat arrives at a 'GDP per capita in PPP'.

This comparative measure of income is more meaningful for individuals than enterprises or investors. The latter are more interested in the tradable part of the economy."

When Slovakia will catch up with better-positioned countries depends on numerous multinational factors.

Financial analyst Čechovičová estimated that Slovakia has 20 to 30 years to go before the playing field levels.

"Whether Slovakia enjoys a faster rate of growth than the EU economy at large will be the main factor. But the growth must be sustainable.

"The foreign direct investment influx must continue and the deficit must continue to decrease".

According to Štefanides, the VÚB bank sees Slovakia accelerating its real convergence process in the years ahead, possibly to 1.5 percentage points per year, or even more, especially in the run up to country's adoption of the euro in 2009. He says three main arguments support this view.

Historically, countries with initial income levels significantly below the EU average catch up quickly after their accession to the EU.

Portugal, Spain and Ireland are examples, having demonstrated substantial gap closures after accession.

Only one country - Greece - witnessed a decline in relative income in the first decade after accession, mostly due to poor fiscal discipline and weak structural reforms.

Štefanides says accelerated foreign direct investment should encourage Slovakia's convergence.

For comparison, the FDI inflow into Spain, Portugal, Greece and Ireland increased from an average of 1.1 percent of their GDP to 2 percent on average over the five years following their EU entry date.

FDI inflows then stabilized at about 1.5 percent of GDP over the subsequent five years.

He thinks an inexpensive yet well-educated labour force, geographical proximity to core western European markets, and a business-friendly flat tax of 19 percent should make Slovakia's FDI much higher than that.

The economic reforms pursued by the current Slovak government, such as those in the tax, labour, and pension systems, create a strong environment for domestically driven growth.

According to Štefanides, Slovakia has a chance to become one of the structurally healthiest economies of the EU and, as a result, will catch up fast to Western Europe's standards of living.

Eurostat's data indicates that Luxembourg is the wealthiest European country. GDP per capita in Luxembourg, expressed in terms of purchasing power standards, was more than twice the EU-25 average in 2003.

Ireland was one-third above average, and Denmark, Austria, the Netherlands, the United Kingdom and Belgium were 20 percent above average.

Sweden and Finland recorded figures about 15 percent above the EU-25 average. France, Germany and Italy were 10 percent above average. Spain was just below the EU-25 average, and Cyprus, Greece and Slovenia measured at 20 percent below.

Malta and Portugal were around 25 percent below average, the Czech Republic about 30 percent below, and Hungary about 40 percent below.

Slovakia and Estonia were about 50 percent below average, while Lithuania, Poland and Latvia recorded figures between 40 and 50 percent of the EU-25 average.

The GDP per capita in Luxembourg tends to be overestimated, since a large share of its labour force crosses the border to work.

While such a workforce contributes to GDP, they are not counted as part of the resident population, which is used to calculate GDP per capita.

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