IFP: Slovakia’s convergence with EU economy slower than before crisis

It was significantly affected by a massive increase in Ireland’s real GDP.

(Source: Sme)

Slovakia continues to converge with the EU economy, albeit at a slower pace than before the economic crisis that erupted almost a decade ago, the Finance Policy Institute (IFP) think tank running under the Finance Ministry wrote in its analysis.

The IFP highlighted the difference between the real GDP growth in Slovakia and in the EU and the eurozone.

“The convergence stagnation at 77 percent of the EU-28 level is only the result of the statistical imperfection in measuring the price level via the purchasing power parity,” writes the IFP. “Medium-term, the dynamics of the purchasing power parity should become harmonised with the GDP deflator.”

It added that the deceleration in convergence trends is due to different methodologies used in measuring the price level in Slovakia.

Based on the GDP deflator, the price level in Slovakia vis-a-vis the eurozone fell by almost 4 percent in the past three years. Meanwhile, according to the purchasing power parity, the prices in Slovakia and the eurozone grew roughly at an equal pace in the same period.

The IFP also pointed out that Slovakia’s convergence model involving the growth of nominal incomes at the same pace as elsewhere in Europe, but with slower inflation, isn’t sustainable long-term. Instead, it’s expected that inflation in Slovakia will accelerate along with the economy’s nominal performance and the re-emergence of the Balassa-Samuelson effect.

It should be noted that Slovakia’s convergence on the EU was significantly affected by a massive increase in Ireland’s real GDP for 2014-2015 – by 34 percent. If it hadn’t been for that, Slovakia’s economic performance compared to the EU would be at 78 percent, the IFP pointed out.

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