What is the politics of Slovakia and the Euro as well as the eurozone/EU

Sovereign euro Risk of Slovakia according to the rating agencies

September 2011	Sovereign risk	Currency risk	Banking sector risk	Political risk	Economic structure risk	Country risk
	A	BB	A	AA	BBB	A

Sovereign risk

Stable: The commitment to fiscal consolidation will remain strong, and debt levels should remain well below EU thresholds. 

Currency risk

Stable: Growing concerns regarding the solvency and competitiveness of some euro area members are potentially negative for the single currency. However, interest rate differentials should favour the euro in the short term.

Banking sector risk

Stable: Slovakia's banking sector is very conservative and very profitable but also very conservative in its asset allocation. The banking sector has been resilient to the aftermath of the global crisis of 2008-09. However, some foreign banks with branches in Slovakia could face distress because of the euro area crisis.

The Slovak capital Bratislava, the economic hub of the country

Political risk

The centre-right government looks less stable than its predecessor, but it is more investor-friendly. None of the parties likely to make it into parliament in a general election threatens Slovakia's international creditworthiness.

Economic structure risk

The economy's dependence on exports of automotives, machinery and electronics weighs heavily on the outlook for the economy, and could make medium-term growth more volatile.

Slovakia is led by a four-party, right-wing coalition, in which the largest party is the Slovak Democratic and Christian Union-Democratic Party (SDKU-DS the political party that brought about the 19% flat tax). The government has delivered pro-business changes that dilute workers' rights in the hope that will reduce the disincentives to hire people. This has dismayed many given widespread reform fatigue. Fiscal consolidation will be the main economic policy issue in the coming years.

The chances of the current coalition surviving until the election scheduled for 2014 are fair given that the overcast global environment does not favour major changes. But personal and programmatic clashes could bring it down before then. Real GDP growth is slowing in 2011 as the government is performing fiscal consolidation with a view to put aside funds in case there is a global crisis. Growth until 2015 will be slower than in the boom years but fairly fast in the chastened environment but at least this is not over levaraged unstable growth. Inflation is settling around 2.5% in 2012-15. The current account is expected to register deficits averaging around 3.4% in 2011-15.

Political outlook The centre-right ruling coalition turned one year old in July. Coalition parties have shown resilience despite frequent disputes. Disagreements between ruling parties could spill over in late 2011 when parliament debates the government's recent decision to sanction Slovakia's financial contribution to the European Stability Mechanism (ESM) from 2013.

Economic policy outlook

Slovakia's fiscal consolidation effort has been progressing in line with plans in 2011. At end-July the state budget posted a deficit of €1.67bn (US$2.3bn), 30.4% smaller year on year.

Economic forecast

In June seasonally adjusted industrial output fell by 2.2% month on month. The economic sentiment indicator (ESI; 2005=100), which had moved lower in the second quarter, after climbing in the first quarter, edged down further in July, dropping by 1.6 points month on month, to 93.9. This reflected weaker confidence in the industrial sector, owing to weakening demand of trade partners in the EU.

Growth and debt, check out the performance of Slovakia particularly GDP for 2011

Volkswagen announces it will double its investments in Slovakia to a billion euros (1.36 billion dollars) in the next five years

Volkswagen’s Slovak unit has reported that the VW mother company plans to give it €1 billion over the next few years to boost car and car parts production in Slovakia.

"In the coming five years, the company will double its investment compared to the past five years," Andreas Tostmann, head of VW Slovakia, said in a press release.

He added that Volkswagen would "focus on new technologies, boost production at its car plant in Bratislava and components plant in Martin," northern Slovakia.

Volkswagen said earlier it expected to launch production of its new small family car line at its Bratislava plant this year.

The company's output in Slovakia fell in 2009 due to lower demand for expensive SUV models produced here amid the global economic slump.

But as the economy recovered in 2010, Volkswagen increased output over the first six months by 43 percent compared to the previous year.

The company has already invested more than €1.7 billion in the Euro zone countries over the last few years, according to Reuters.

The Slovak plant, which is situated near Bratislava, produces SUV models including the Volkswagen Touareg, Audi Q7, and parts of the Porsche Cayenne.

Volkswagen Slovakia, which began production in 1991, exports nearly all its output, mostly to Germany and China.

Why is Germany booming in a time of weak and state supported growth in the rest of the western world?

Something quite extraordinary is going on, the values of the ageing baby-boomer generation have hit the brick wall of debt (also known as leverage). 

The characteristic of most western societies from the 1980es onwards has been that  a rise in living standards for some has become increasingly reliant on borrowing from tomorrow's (fewer and poorer) taxpayers. This has been true particularly of countries like Greece, Britain, Ireland, Spain, Italy and of course the USA. Their formerly "dynamic economies" now seem to have been largely based on accumulating debts and boosting spending unsustainably. The recent world financial crisis simply brought forward the day of reckoning to affect some of the perpetrators.

Meanwhile Germany took a pragmatic view during the years of euphoria, it exported the consumer goods everyone else wanted now while keeping its own consumption moderate and its already high wages in check during this period. It didn't join the party, it just served the drinks for those that were demanding the high-tech machinery and automobiles and other manufactures that germans excel at.

Clustered around germany are a number of economies that in varying degrees followed the policies of Germany. Chiefly countries like Slovakia (more than the Czechs), Poland, Sweden, Denmark etc. They are also closely linked to germany through trade. Slovakia has and is benefiting from German and Austrian investment, and in turn it has become a good customer, in the crisis the Slovak economy almost mirrored the sharp german slowdown and swift recovery

Reading now old articles carrying scathing criticism of europe in magazines such as the economist, or the Financial Times during most of the decade from 2000 up to 2008 makes illuminating reading. With hindsight teutonic/continental economies seem to shine through now as sustainable, socially responsible, and intergenerationally fair systems, and are not suffering the long-term consequences the debts have brought about and anglo economies will feel for decades. Back then the anglosaxon press at best would characterise europe slow or ageing or not as fast growing as the USA. I see no grovelling apologies for these misguided opinions of the past. It seems that Germany's policies but also its admirable investment in the east is in the best tradition of building up the future not only for its own citizens but also for its neighbours. 

To back up my ideas about the lack of debt see the article below by one of the top US economists.

(Why is Germany doing well?) It's the lack of leverage

This contribution was authored by Carmen Reinhart and Vincent Reinhart.

Germany’s relatively robust comeback obviously requires a multi-part explanation. The very important dimension of its resilience in the current environment, where recoveries from the crisis, notably in the advanced economies, on the whole, have been disappointing.

Carmen M. Reinhart is Professor of Economics and Director of the Center for International Economics at the University of Maryland. She received her Ph.D. from Columbia University. Professor Reinhart held positions as Chief Economist and Vice President at the investment bank Bear Stearns in the 1980s, where she became interested in financial crises, international contagion and commodity price cycles.

We explored the experience of economies surrounding severe financial crises in a paper, After the Fall, presented at the Federal Reserve Bank of Kansas City’s Jackson Hole Symposium. As we pointed out, Germany was a notable outlier in the now-notorious credit and debt boom of the decade prior to the onset of the subprime crisis. Credit relative to nominal GDP fell about 11 percentage points during 1997-2007; during the same period, credit/GDP rose 80 percentage points for most of the advanced economies. Germany’s gross external debt/GDP fell about 5 percentage points during 2003-2007, while that ratio climbed by about 50% for other advanced economies. Germany’s property market cannot even be loosely characterised as part of the global bubble. In fact, real house prices fell 11% from 1997 to 2007. Unlike Japan, which was the other notable outlier during the credit boom, it did not have the burden of a high public debt. As a consequence, despite rapid increases in government debt since the crisis, Germany does not have a private or public debt overhang of the historic proportions confronting most other advanced economies. It follows that a long and painful deleveraging is not on the horizon. 

In this regard, Germany is the advanced economy counterpart to emerging markets in Asia and Latin America. Those economies also deleveraged during the tranquil booming years (as discussed in Reinhart and Rogoff, 2010). These emerging markets are not only recovering robustly—some are showing signs of overheating.

5% GDP - 2nd quarter of 2010 - Slovakia’s economy has best GDP growth among all countries in the European Union

In the second quarter of 2010 Slovakia’s economy is posted the best GDP growth among all countries in the European Union.


The growth is spiking but it is not yet the stellar numbers achieved in the past given the international situation. Still Slovak growth looks set to remain strong for the rest of the year. Germany energising economy is a very big trade partner for Slovak business, and it certainly helped to generate the nearly 5-percent pro rata jump in Slovakia’s GDP.


In the second quarter, the country’s GDP grew by 4.6 percent year-on-year, following just slightly stronger growth of 4.8 percent in the first quarter, according to a flash estimate released by Slovakia’s Statistics Office on August 13. Total GDP in the second quarter reached €16.340 billion.


“The ongoing strength of the growth in the second quarter real GDP in Slovakia was, overall, more of a positive surprise,” Vladimír Vaňo, chief analyst with Volksbank.

In the first half of 2010, Slovak exports increased on average by 20.7 percent year-on-year, accounting for a similarly stellar recovery in Slovakia’s annual industrial production by an average of 22 percent in the first six months, Vaňo noted.

“Compared with expectations of other market watchers of around 4 percent year-on-year and our estimate of 4.3 percent, the year-on-year growth of GDP was faster than expected,” Martin Lenko, senior analyst with VÚB Banka, said.


Though the detailed structure of the growth in Slovakia’s GDP is not fully known yet, Lenko said that household consumption in Slovakia probably recorded only a moderate increase in the second quarter, similar to its performance in the first quarter, due to the country’s still high unemployment rate (mostly in the east of the country) which is falling only very slowly.

“Slovak quarterly expansion of 1.2 percent quarter-on-quarter runs ahead of results of similarly open economies of the Czech Republic or Hungary,” Vaňo said. “However, the overall eurozone economy, a destination for roughly half of Slovak exports, recorded a quarterly real growth of 1.0 percent in the second quarter. In other words, recovery of the export markets alone does not suffice in explaining the resilience of the Slovak economy.”


According to Vaňo, gauging from these comparisons as well as from the strength of the recovery in industrial production in the first half-year together point to Slovakia continuing to reap the benefits of euro introduction via a more resilient economic recovery. He believes this is explained by a competitive edge brought to Slovak exporters by the euro through lower interest rates but more importantly because of exchange rate stability and significant savings in the administrative costs of foreign trade.


“The faster than expected growth of GDP in Slovakia, and also in Germany, in the first half of the year is forcing us to revise the estimate of annual growth of GDP in 2010,” Lenko said. “We estimate that growth in real GDP will reach an average of 4.2 percent year-on-year in 2010 as opposed to our original estimate of 3 percent.”

The rosier growth numbers for Slovakia’s GDP have not yet been reflected in significant job growth in the country’s labour market.

Central bank of Slovakia forecast: Slovak economy will grow by 3.7 percent in 2010

and likely to accelerate further to 4.3% in 2011
positively steaming away in these days of no growth or negative growth for others...