Introduction
In this paper we present some of the challenges relevant to macro-economic policies brought on by the developments of last couple of years. The contemporary period and accepted policy measures are strongly affected by the financial crisis and subsequent public finance problems. Here we will emphasize those main challenges that in this regard are more or less similar for all V4 countries. We will focus on current economic developments heavily influenced by external con-ditions and the process of population ageing, while analyzing actual policies applied in the process of fiscal consolidation. Particularly im-portant are activities focused on better competitiveness and hence economic growth prospects purportedly brought by the Euro, plus pact measures and sustainability of government finances supported by the Fiscal compact rules, which are also our objectives. Then we shift our focus to the federalization of the EU and the position of the Slovak Republic regarding fiscal union. Further, we analyze the po-tential for cooperation among the V4 countries.
Long term factors affecting the fiscal position The IMF Mission concluded that the Slovak Republic’s strong fiscal commitment is evident and that since 2009 the budget deficit has
1 Research fellow, Institute of Economic Research, Slovak Academy of Sciences, Bratislava
been reduced by about 5.0 percentage points to 2.8 percent of GDP in 2013, just below the threshold for exiting the EU´s Excessive Deficit Procedure.2The Slovak Republic’s debt of around 55 percent of GDP is manageable, this being reflected in relatively favourable market conditions and low interest rates for government debt.
A demographic trend whereby people will live and work longer is a common feature of all European economies, including V4 countries, and is directly related to future consumer behaviour or employment developments.3An immediate pursuit of sustainability of public fi-nances is in this regard a condition for the future sustainability of pen-sions, social security and health care systems. Therefore it is important to interconnect the whole social system with demographic evolution. For example, the Slovak Republic has in this regard intro-duced binding pension age tied to life expectancy, imposed restric-tions on early retirement and enacted labour market policy focused on the employability of persons 55 and older.4In these terms, to pre-vent the potential growth of public debt induced by an ageing pop-ulation, the Slovak Republic is implementing several structural reforms in its social, pension, or health care systems.
An alternative to the current regulation of retirement age will be pre-pared by the Ministry of Labour, Social Affairs and Family of the Slo-vak Republic by the year 2017. An integral part of this new regulation should be specification of the length of pension insurance participa-tion (in years) needed to apply for full pension benefits without any conditions pertaining to the actual age of the insured person. There is the option to radically increase the number of minimal pension in-surance participation years needed to apply for a full pension from the current 15 years up to 30 years.5
The Ministry of Labour, Social Affairs and Family will set the mini-mum pension to accord with the number of years worked and be in line with the presumption that the person who worked the prescribed
2 IMF (2014)
3 Not to neglect the influence on public finances.
4 In this regard it is important to mention that an older population will work longer, which could create obstacles for the employability of younger generation. Therefore it is important to pay attention to work opportunities for other age groups and to support intergenerational dialogue.
5 Ministry of Labour Social Affairs and Family (2013)
number of years should not find him/herself6financially dependent on the social aid system. The age of the person will therefore not be the key precondition for pension beneficiaries. According to the Min-istry plan, when dealing with pre-retirement age beneficiaries, par-ticipants in the third pillar of the pension system will be allowed to leave the labour market earlier and finance their living expenses with private funds held on personal accounts.
In the year 2012 the Slovak Republic adopted an amendment to the Act on Social Insurance to improve the long-term sustainability of the pension system, facilitate the consolidation of public finances in the short-term and also abolish certain exemptions and special regimes applicable to social security contributions. Adopted meas-ures have different repercussions in the short and medium term as they affect mainly the net income of insured persons (through an in-creased tax burden).In the long-term the amendment will mainly af-fect pensioners (higher retirement age, indexation of pensions solely to inflation, reinforced solidarity in the system). There are indications that most insured persons will not be able to accumulate enough pension savings on their private accounts, and thus there should be supplementary charges to their pensions from the government. When confronted with such weaker household demand influenced both by short term as well as long term factors, future growth prospects are dependent on competent reaction and strategy from the respective institutions and authorities.
Fiscal Compact measures and consequences The above mentioned measures will be implemented in line with the procedure called the Fiscal Compact, which entered into force in January of 2013. The Slovak Republic established this policy frame-work with the institution of the Council for Budget Responsibility (CBR). Slovakia established the CBR to deal with overall fiscal health and conduct policies. It was formed as an independent body equipped with competences to monitor and evaluate the fiscal
per-6 When obliged to receive the pension.
formance of the government.7This is a transparent step towards pre-cise targeting and more sound and better quality measures imple-mented in the field of fiscal management. It provides comprehensive, independent and politically unbiased information on the development of public finances, hence it is an important new element in the fiscal policy framework and a reaction to the sharp growth of the budget deficit and public debt in the aftermath of financial crisis and reces-sion. It also serves as a signal to financial markets, indicating that public finances are now much better monitored than before: this should lead to more sustainable public finances and better conditions for fiscal financing under pressure.
One of the key elements of this new framework is the adoption of the Fiscal Compact rule of debt brake, limiting the general govern-ment debt, which corresponds with binding governgovern-ment expenditure ceilings to ensure better fiscal discipline in the medium term.8 An-other important feature is an approved tightening of rules for munic-ipalities and self-governing bodies (which are independent in their decision making but constitute a part of the public finance sector).
This new fiscal framework should improve the overall understanding of fiscal policies pursued by the government, particularly in the con-text of long-term sustainability of public finances, hereby creating a better overview for private as well as public institutions and investors to make better decisions.
According to the report entitled “Long-Term Sustainability of Public Finances”,9the purpose of which is to evaluate the situation in public finances within the context of long-term sustainability while taking into account positive and negative impacts of adopted legislative meas-ures and policies, the most important and challenging areas are:
1. Pension system and health care (population ageing)
2. Major expenditure programs which have consequences over a longer term horizon (e.g., PPP projects)
7 Council for Budget Responsibility (2012)
8 Council for Budget Responsibility (2012)
9 Council for Budget Responsibility (2012)
3. Contingent liabilities that constitute potential risks for public fi-nances (e.g., lost court cases)
4. Macroeconomic shocks which may change the fiscal position (e.g., narrowly defined tax base)
One of the main tasks of CBR is to inform Parliament on compli-ance with fiscal responsibility and fiscal transparency rules – it serves to evaluate whether all the rules laid down in the Fiscal Responsibility Act have been met. This institutional framework should be relevant for other members of V4 as well, since the basic idea is to incorporate Fiscal Compact rules into existing EU treaties as soon as possible.
This is a new development and could cause problems in the future, because European institutions (neither the European Parliament, nor the European Commission) are not playing a significant role in the process of the negotiation or application of Fiscal Compact rules.
This political stance with EU institutions as “bystanders” has created more space for the activity of individual states and their representa-tives, which is particularly visible in the success of Germany’s agenda in this regard. The marginalization of European institutions rises once again in terms of the question about their legitimacy (i.e., democratic deficit) and the structure and competences they should represent in the future. On the other hand, in the absence of adherence to com-mon principles, fiscal imbalances in the EU could persist and estab-lished negative externalities could possibly spread to all member states of the EU.
The basic idea behind this stricter version of the Stability and Growth Pact is to obstruct the repetition of mass bailouts that oc-curred in Europe after the onset of the financial and debt crisis. The Fiscal Compact will have especially severe consequences for those countries that are highly indebted, because they will have to carry out radical austerity reforms to boost their competitiveness and bring budgets back into balance. Balanced budget requirements could lead to a much smaller need for fiscal transfers in Europe (compared to current levels) and potentially hinder the growth of V4 countries.
It is uncertain whether the reforms needed to comply with Fiscal Compact would enable the depressed economies of Europe to regain their competitiveness, when their membership in the EMU has to this
point brought higher disparities and deficits.10 It is questionable whether prescribed reforms and proposals could be effectively im-plemented in every member state of eurozone at the same time, and that is why we will probably witness the persistence of imbalances between countries in the years to come.
In the environment of restrained economic growth, along with the pursuit of spending cuts already contained in the Fiscal Compact rules, we can see the ambition to carry out deeper income reforms through unifying tax rates or tax bases, from which tax rates are cal-culated. This (along with the impossibility to weaken their currency) could further undermine the former competitive advantages of na-tional states that joined the EMU and hence possibly force individual countries to make vital structural reforms.11 How the process of budget balancing will look will depend very much on the particular country and its political representatives. On the other hand, one force behind potential implementation of fiscal reforms could be pressure from financial markets, which will probably penalize those countries that are unable to undertake needed reforms and lower their public debts or fiscal deficits with higher interest rates.
In the absence of democratic institutions on the federal level, this new concept could lead to budget cuts in social services, even though the ongoing crisis and recession around Europe has very negative im-plications reflected in record high unemployment, high long term un-employment, rising income polarization and growing poverty rates.
This is in sharp contrast to the proclaimed objectives set out in the Europe 2020 strategy, for example, which has clear targets for poverty reduction and social inclusion, as well as targets for developing the smart economy and better education, the financing of which is now under threat. These targets are jeopardized by possible expenditure cuts and continuous fiscal consolidation imposed by markets.
A well-prepared fiscal concept of balanced budgets is a vital part of greater economic governance reform gradually leading eurozone
10In the states which are deprived of the ability to weaken their respective currencies, imports are growing much faster than exports (low competitiveness) and during the crisis this fact cont-ributed to rapid growth of foreign debt.
11For example, reforms leading to a more flexible labor market.
member states to a more unified fiscal system – likely fiscal and po-litical union. After the onset of the financial crisis eurozone member countries began implementing coordinated policy measures. It is very likely that the process of closer integration and deeper cooperation will continue not only on the level of eurozone, but also on the level of the whole EU.
This system is moving Europe closer to the existing arrangements of macroeconomic policy and institutions as we know them in the USA, where member states of the Union are obliged to have bal-anced budgets. This means that every country posting a deficit in the case of a cyclical downturn, while recording a combination of lower revenues and higher expenditures, must take steps to rebalance the budget, which in practice means cutting (social) spending, and/or in-creasing taxes. This fact, without appropriately strong federal expen-diture support in Europe – contrary to the USA12– will reinforce the risk that even a relatively small recession could be transformed into a major one.
In the light of the experiences from the financial crisis we can mean-ingfully expect higher savings rates in the eurozone member states.
Extended public spending cuts, labour cost reduction and persisting high unemployment could harm the growth models of V4 countries.
Developments in many European countries during the period 2009-2012 have clearly shown that austerity measures adopted in the ma-jority of EU member states under the patronage of European Commission and IMF have had a much more pronounced impact on economic growth than was previously expected, hence creating self-defeating fiscal consolidation. Therefore we assume that V4 countries should cooperate more closely on the theoretical and institutional challenges imposed by the process of EU federalization, which if properly conducted, could counterbalance the rules imposed on member states’ non-deficit budgetary planning.
12Fiscal union in USA has a very different nature and functioning institutional framework, where the Federal government collects revenue equalling around 24% of the GDP – which is much more than approximately 1,5% equivalent in Europe. This means that the Federal government in the USA has a bigger social impact and better ability to influence the cyclical behavior of the economy. The Federal government can in this way compensate for demand losses resulting from balanced budget requirements passed by individual states during the economic cycle.
Treaty on Stability,
Coordination and Governance
The Treaty on Stability, Coordination and Governance (TSCG) in the Economic and Monetary Union was signed by all leaders with the ex-ception of the Czech Republic and the United Kingdom, but it has an inclusive character, meaning that it can be joined in later phases of its implementation. On the other hand, it is impossible to withdraw from it. TSCG is intended to strengthen fiscal discipline by (a) estab-lishing a ‘balanced budget rule’ and automatic correction mecha-nism, and (b) introducing stricter surveillance mechanisms. The Slovak Republic ratified TSCG on January 11thof 2013.Incorporated into the national legal system were the balanced budget rule with a structural deficit not higher than 0,5 % of the GDP and the institute of a correction mechanism in the case of a breach of this rule. This mechanism is an integral part of economic partnership programmes, which contain detailed structural reforms member states are intended to put in place for improving competitiveness and boosting economic growth. In 2013 the Slovak Republic proceeded to its medium-term budgetary objective and avoided significant variation in terms of the Fiscal Compact, while the consolidation effort was significantly higher then those stated in Fiscal Compact requirements.13
The Slovak Republic has to comply with the agreed rules three years after the excessive deficit procedure has ended. According to the Stability and Growth Pact, the Slovak Republic was put under the excessive deficit procedure in the year 200914, because general government deficit was 8% of the GDP at that time. Nevertheless, after four years SR had completed the process of budget consolida-tion, moving the deficit under the threshold of 3% of the GDP.15 In June of 2014 SR was taken out of the excessive deficit procedure.
The objective of the budgetary strategy is to ensure the sustain-ability of the correction of the excessive deficit and to reach the medium-term objective of a structural deficit around 0.5% of the GDP by 2017, as mentioned in Recommendation (8) of the European Council (EC, 2014). The structural deficit stood at the level of 3.0%
13Ministry of Finance of SR (2014b)
14Ministry of Finance of SR (2009)
15European Commission (2014a)
of the GDP in 2013, and we can expect that the largest part of the consolidation effort to reach the medium-term objective will take place in the years 2016 and 2017.
Table 1. Fiscal indicators, 2008-2013 (% of GDP)
Source: Eurostat (2014)
The effort of the SR government is systematically concentrated on the continuation of successful fiscal consolidation, the fight against tax evasion and effective VAT collection. The European Commission advises these efforts be complemented by the broadening of the tax base and by the use of taxes less harmful for economic growth – e.g., taxation of property and environmental taxes.
The Euro plus pact corresponds with Fiscal Compact rules and es-tablishes an important policy framework representing strategy for higher competitiveness as well as more sustainable growth brought by lower macroeconomic and structural imbalances between EMU member states.16The Euro-Plus Pact focuses primary on five impor-tant objectives: competitiveness; employment; sustainability of public finances; strengthening of financial stability; and coordination of tax policies. In this regard there are several challenges particularly im-portant for the Slovak Republic.
The Euro-Plus Pact upgrades the cooperation within the planned macroeconomic policies on the national level. It is clearly inspired by macroeconomic policy conducted by Germany, which is based on a balanced budget (constitutional law), export-led GDP growth and competitiveness based on wage deflation. Obviously, these objectives can´t be reached by all EU countries at once and are going to have different impacts on particular member economies through con-ducted policies and their cyclical behaviour. There are some doubts
16Beyond EMU member states Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania also joined the Pact.
2008 2009 2010 2011 2012 2013
Public debt 27.9 35.6 41.0 43.6 52.7 55.4
Deficit -2.1 -8.0 -7.5 -4.8 -4.5 -2.8
that suggests the limited ability of the Euro-Plus Pact to impact unit labour costs, hence restraining expected influence on the accumula-tion of current account imbalances.17 Common economic interests could therefore be reached only by a respective macroeconomic pol-icy mix realized by individual countries, which should be obliged to discuss with partner countries the repercussion effects of principal reforms they are going to implement and hence create better
that suggests the limited ability of the Euro-Plus Pact to impact unit labour costs, hence restraining expected influence on the accumula-tion of current account imbalances.17 Common economic interests could therefore be reached only by a respective macroeconomic pol-icy mix realized by individual countries, which should be obliged to discuss with partner countries the repercussion effects of principal reforms they are going to implement and hence create better