THE EUROPEAN Union is facing an unprecedented metamorphosis and is heading towards stricter monitoring of the budgetary policies of its member states, say observers reflecting upon efforts in Brussels to prevent default by the eurozone’s weakest member, Greece, and avert a similar fate among other heavily indebted European countries. Brussels could even acquire a new authority to review the budgets of eurozone member states before they are passed by national parliaments.
After providing Greece with a generous €80-billion loan facility, EU finance ministers have also agreed to establish an emergency fund worth €750 billion to prevent the debt crisis spreading across the union. While critics say the move represents moral hazard, and risks exacerbating national tensions, EU leaders say they acted in defence of the euro.
“I consider this proceeding unavoidable,” said Slovak Prime Minister Robert Fico in response to the move, which will require Slovakia to contribute to the rescue fund to the tune of several billion euros. “God save us, if we had done nothing,” he added.
If Europe fails to take action it would have catastrophic consequences for Slovakia too, said Fico.
An analyst with the Institute of Economic and Social Studies INESS, Juraj Karpiš, said the creation of the €750-billion lifeline for stricken EU members is a significant move, but not necessarily in the direction he would prefer. He also suggested that a logical move by the EU now would be to introduce rules to prevent irresponsible debt policies.
“I consider the decision on this package to be a significant breakthrough in European integration and a decisive step towards a centrally directed Europe,” Karpiš told The Slovak Spectator.
According to Karpiš, politicians have decided that citizens of the whole eurozone will now pay for the debts and irresponsible fiscal policies of a specific European country.
“This solution brings huge moral hazard and most probably will also create large national tensions within Europe in the future,” Karpiš said. “The logical second step would be the introduction of rules which would prevent irresponsible indebtedness and address how to effectively recover debt. However, these have not been introduced yet.”
For Karpiš, default and subsequent restructuring of the debt of countries that creditors consider unable to meet repayments would be an alternative solution, along with the subsequent recapitalisation of banks of key importance to the European financial system.
The announcement of the rescue fund somewhat calmed edgy markets earlier this week. However, market watchers say that the huge package might only have a temporary effect.
Taming the deficit?
As for stricter rules, Fico said that he does not object to a situation in which a country that does not meet fiscal rules could, for example, be cut off from receiving EU funds.
Fico also said that Slovakia would have no problem with stricter budgetary rules.
“We can, without any difficulty, agree with the proposals to establish very strict fiscal discipline within the eurozone and the EU,” Fico said, as quoted by the Sme daily on May 11, adding that Slovakia’s deficit would shrink.
Government plans anticipate a Slovak public finance deficit of 5.5 percent in 2010. But bank analysts’ predictions suggest this figure is somewhat optimistic.
Mária Valachyová, an analyst with Slovakia’s largest bank, Slovenská Sporiteľňa, predicted that this year’s public finance deficit might climb even higher than last year’s, which stood at 6.8 percent of GDP.
Data published so far for the first four months of the year indicate tax revenues below what the budget had assumed, Valachyová told The Slovak Spectator.
“At the same time, the expenditure side is not being adjusted to lower revenues before the elections,” said Valachyová. “It is possible that this year too, as happened last year, it will be necessary to help the municipalities. This is why we expect that the public finance deficit could this year reach around 7.5 percent of GDP.”
According to Valachyová, the final result could be still influenced by the next government, if it promptly implements savings measures after the elections.
Martin Lenko, senior analyst with VÚB Banka, expects the public finance deficit in 2010 to reach 7.4 percent, considerably above the official 5.5 percent estimate.
As for the factors that will have the strongest impact on the development of the deficit, Lenko told The Slovak Spectator that these included economic development and its impact on tax revenues, along with government’s willingness to cut spending.
Počiatek confident his predecessor talks about 'Greek path'
Finance Minister Ján Počiatek has said that the Finance Ministry is ready to make cuts if the situation calls for such a move.
“If more cuts are necessary, we are ready for this in the second half of the year – if, of course, we are in government,” Počiatek said, as quoted by the SITA newswire.
Meanwhile, former finance minister and deputy chairman of the opposition Slovak Democratic and Christian Union (SDKÚ) Ivan Mikloš said that Slovakia has been following the Greek path for some time already.
He suggested that neither Greece nor Slovakia used their period of economic prosperity to cut their deficits. According to Mikloš, Slovakia, just like Greece, has ignored the ageing of its population; he also argued that the Fico government has been ruining the second, private pillar of the country’s pension system.
17. May 2010 at 0:00 | Beata Balogová