THE MESSAGE from the European Commission to Slovakia, which hopes to adopt the euro on January 1, 2009, was straightforward: contain possible inflationary pressures and adopt a tighter fiscal stance. Slovakia's response: pressures are under control, fiscal consolidation is sufficient.
"Slovakia is advised to stand ready to adopt a tighter fiscal stance, in particular in view of possible inflationary pressures after the disinflationary effect of past exchange rate appreciation fades out," said the European Commission in its assessment of Slovakia's euro convergence programme on January 30.
Regarding the long-term sustainability of public finances, Slovakia appears to be at medium risk, the European Commission said based on an update that Slovakia submitted in November 2007 for the 2007-2010 period.
The commission also advised Slovakia to use the growth its economy is experiencing to speed up structural reforms and improve labour market performance.
Fiscal consolidation in Slovakia is sufficient, said Slovak Finance Minister Ján Počiatek on January 30. Last year's economic results prove that Slovakia has been consolidating more quickly than expected, he added.
According to Počiatek, the report clearly states that Slovakia will most likely be excluded from excessive deficit procedure, a tool used by the European Commission's Stability and Growth Pact to press countries to contain their high public deficit.
Originally, the Finance Ministry had expected a public finance deficit of 2.94 percent of GDP in 2007.
"At the moment, we know the deficit will definitely be below 2.5 percent of GDP, probably around 2.3 percent," Počiatek told the SITA newswire. "Last year's consolidation was massive and a similar scenario is expected in 2008."
The public finance deficit for 2008 is planned at 2.3 percent, while the ambition is to have the deficit pushed down to 0.8 percent of GDP by 2010. The National Bank of Slovakia (NBS) said that the European Commission assessment is consistent with previous evaluations and does not contain any new or unexpected facts.
The central bank's medium-term inflation prediction (3.1 percent), which was published on January 29, is comparable to the European Commission prediction (3 percent) for 2009, including the risks that are similar in the material of European Commission and the medium-term prediction of the NBS, Jana Kováčová, spokeswoman for the NBS told The Slovak Spectator.
These are mainly the risk of rising food, energy and fuel prices that follow the development of world commodities market prices and which in fact fall beyond the influence of monetary and fiscal policies, she added.
"Currently the growing inflation in Slovakia is a phenomenon shared by the whole eurozone, which is linked to the world-wide development of commodity prices," Kováčová said.
The European Commission is calling for stricter structural consolidation in 2008, while the central bank has also said it is important that the government use the current favourable situation to the greatest possible extent.
The Finance Ministry, which also published its latest economic projection on January 29, said that harmonised inflation should reach 3.1 percent, which is 1.3 percentage points more than the ministry predicted in September 2007.
Even with the modified inflation rate, Slovakia's inflation would still fulfil the Maastricht criterion, which requires it to be below 1.5 percent of the inflation posted by the three best performers in the European Union.
Moreover, Slovakia would still have enough reserve to meet the criterion, said František Palko, state secretary of the Finance Ministry, in an official comment on the ministry's prognosis.
But market watchers have said that EC inflation concerns will be justified if the lack of labour in the upcoming years pushes wages above the current estimates.
"It is obvious that a more radical reduction of the public finance deficit would be the only possible response," Viliam Pätoprstý, analyst with UniCredit bank told The Slovak Spectator.
For now, Pätoprstý thinks the government's efforts to gradually reduce the deficit are sufficient.
"However, the EC criticism pertaining to the lack of structural reforms is entirely justified," Pätoprstý said. "The public finance priorities are not sufficiently directed towards building long-term competitiveness, mainly due to a lack of support for education and research."
In short, the structure of public finance spending seems to be a far bigger problem than the public finance deficit itself, Pätoprstý concluded.
Igor Barát, Slovakia's proxy for euro adoption, said he would not call the EC assessment an expression of concern.
"These are warnings about the possible risks," Barát told The Slovak Spectator. "Such warnings are understandable and in no way surprising. It is the natural role of the European Commission to warn member countries about eventual risks, while governments' role is to perceive such warnings and prevent these risks."
Barát said he is confident that the steps included in the updated convergence programme, along with responsible policies from the government, will be sufficient to face any eventual inflationary pressures.