Greece, Portugual and other members of the troubled eurozone periphery could do worse than take a look at the experience of tiny Slovakia, which is showing that it is possible to undertake deep fiscal consolidation while still managing to eke out a reasonable rate of economic growth.

In what could be his final days as finance minister – his government faces defeat in Saturday’s parliamentary election – Ivan Miklos (pictured left with Evangélos Vénizélos, Greek finance minister) tells beyondbrics that Slovakia’s centre-right coalition reduced the budget deficit from more than 8 per cent of GDP in 2010 to about 4.3 or 4.4 per cent in 2011, all while having the economy grow by 3.3 per cent last year.

“Normally the effect of a reduction of the deficit is a recession, but in our case we had the second highest growth rate in the eurozone last year and could have the highest this year,” says Miklos.

Part of that is due to the fact that Slovakia, which spent four decades spinning its wheels as a communist Soviet satellite, is still in a catch-up phase of economic growth, which gives it more resilience than sluggish developed economies like that of Greece.

Another is that the small and open economy is closely tied to the Germany export juggernaut.

However, some of Slovakia’s other steps offer useful lessons – such as devoting enormous energy to attacking corruption and beefing up competitiveness by, for example, making the labour market more flexible.

“The answer is to conduct structural reforms, of the pension and tax systems and of the labour market,” says Miklos.

While joining the euro takes away the option of depreciation – one short-cut to competitiveness – it also provides for low inflation and economic stability, factors that recently helped Volkswagen to choose its Slovak factory as the site for producing the new electric version of its Up! subcompact car.

“Having no option of devaluation is good if you are responsible,” says Miklos. “The impossibility of depreciation pushes towards further fiscal and labour market reforms.”

Now that the centre-right coalition headed by premier Iveta Radicova faces defeat in Saturday’s poll, it is unclear whether the reforms mooted by Miklos – including changes to the pension and tax systems and administrative reforms – will go ahead.

The likely victor will be Robert Fico, who was prime minister from 2006-2010 and who has pledged to hike taxes on the rich as a way of meeting a target of bringing the deficit below 3 per cent of GDP by next year.

Fico is keen to junk the 19 per cent flat tax brought in by Miklos and return to progressive taxation. “Those who have high incomes and huge profits will have to pay more,” he has told Slovakia’s Sme daily.

Related reading:
Slovakia coalition heads for defeat, FT
Slovakia: tapping the Czechs, beyondbrics
Slovaks mark first year behind euro ‘shield’, FT

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