SLOVAKIA
FINANCIAL TIMES SPECIAL REPORT | Wednesday July 23 2008
A confident place at Europe’s top table
Euro membership
confirms the
country’s promise,
says Jan Cienski
A
decade ago, Slova-
kia was a country
on the margins of
Europe that looked
in danger of dropping off the
map altogether.
It was being overtaken by
ambitious reformist neigh-
bours such as Poland, Hun-
gary and the Czech Republic,
that were speeding towards
membership of Nato and the
EU, while the authoritarian
government in Bratislava
cuddled up to Moscow.
But by January 1 next
year, Slovakia will have left
its older and more estab-
lished neighbours behind as
it joins the eurozone, mark-
ing its final acceptance into
one of the most exclusive
clubs in the world and
cementing its place as one of
Europe’s most promising
economies.
Last year it joined the
Schengen zone, with its lib-
eralised internal border con-
trols, and the EU’s eastern
frontier now lies in the for-
ested hills of Slovakia,
where guards scan dozens of
television monitors linked to
cameras watching for illegal
migrants trying to sneak
into the EU from Ukraine.
That the final stages of
this process have been
achieved under the unlikely
leadership of Robert Fico,
the prime minister and a
fiery left-wing populist,
makes Slovakia’s success
even more surprising.
Mr Fico’s most singular
accomplishment was not to
implement his more radical
anti-reform ideas from the
2006 election campaign.
Even one of his economic
advisers, Peter Stanek,
admits that this has been a
government of “no change”.
Now Slovaks, whose econ-
omy grew last year at 10.4
per cent, are feeling flush
enough to start buying
houses just across the border
in neighbouring Austria,
while developers scan the
hills around the capital for
sites for new real-estate
projects.
The credit crunch that has
hit the US and parts of west-
ern Europe has had little
impact and banks continue
to lend.
Slovakia’s fast growth and
low wages have made it a
magnet for foreign investors,
with the government expect-
ing about $2.7bn in foreign
direct investment this year.
The country is the world’s
biggest per capita car pro-
ducer, with three state-of-
CZECH REPUBLIC
Kuty
Senica
Malacky
Trnava
Bratislava
AUSTRIA
SLOVAKIA
Official name:
Slovak Republic
Form of state:
Parliamentary republic
Head of state:
President of the republic, elected
directly; Ivan Gasparovic was
elected on April 17 2004
National legislature:
Slovak National Council of 150
members, elected in June 2006
Electoral system:
Universal direct suffrage for party
lists; proportional representation
subject to 5 per cent threshold
National elections:
April 17 2004 (presidential); June
Main cities and population
December 2004 (’000)
Bratislava (capital) 425,000
Kosice 235,000
Presov 92,000
Nitra 86,000
Zilina 85,000
Banska Bystrica 82,000
Sovereign credit rating
Moody A1 Fitch IBCA A+
Sources: EBRD; EIU; IMF
Old and new: Bratislava has its share of new construction but the country has avoided the property bubble that is painfully deflating in some neighbour states
the-art factories churning
out cars for export. Much of
the foreign money has gone
into productive investments
such as car and flatscreen-
television factories, pushing
up productivity and cutting
the current account deficit.
By contrast, the three Bal-
tic countries – which, com-
bined, are of a similar size to
Slovakia and which, for a
time, vied for the title of
Europe’s fastest-growing
economies – saw much of
their FDI used for real estate
and construction.
This helped cause the
property bubble that is now
painfully deflating, says
Christoph Rosenberg, the
IMF’s representative for cen-
Inside this issue
Economy Inflation remains
a concern, says Jan Cienski
Page 2
Banking The global credit
crunch has had a limited
impact so far, writes
Jan Cienski Page 2
Real Estate Strong
growth is leading to
tensions, finds Tom
Nicholson Page 5
Motor Industry
A growing labour
shortage threatens
one of the country’s
Cadca
Povazska
Bystrica
Zilina
Martin
Trencin
Prievidza
Piest'any
Zvolen
Nitra
Levice Sahy
Nové Zamky
Váh
Sturovo
Komarno
17 2006 (legislative); next
presidential election due in 2009;
next legislative election due in 2010
National government:
Coalition government headed by
Robert Fico was sworn in on July 4
2006
Main political parties:
Ruling parties: Direction-Social
Democracy (Smer-SD); Slovak
National Party (SNS); People’s
Party-Movement for the Democratic
Slovakia (LS-HZDS). Opposition
parties: Slovak Democratic and
Christian Union-Democratic Party
(SDKU-DS); Hungarian Coalition
Party (SMK); Christian Democratic
Movement (KDH)
Area: 49,035 sq km
Languages: Slovak, Hungarian
Population: 5.4m (end-2006)
Currency: Slovak Crown (Sk)
Exchange rate:
2007 average Sk24.679=US$1
Latest figure Sk19.001=US$1
Standard and Poor’s A
tral Europe and the Baltics.
The booming economy has
allowed Mr Fico to keep his
popularity high by making
small changes, such as elimi-
nating a much-disliked fee
for accessing the healthcare
system, while not reversing
the reforms of his centre-
right predecessors.
The prime minister makes
no bones about his dislike
for large retail chains and
financial groups, as well as
his preference for a good
dose of state control of the
economy. “This government
hasn’t privatised anything,”
he says proudly.
Much of the local media
dislikes him, an antipathy
that is heartily returned,
biggest successes (below),
warns Jan Cienski Page 5
Guest Column Slovakia’s
pioneer role means it will
be closely watched when it
joins the eurozone, writes
Martin Barto Page 6
POLAND
Dolny
Kubin
Poprad
Ruzomberok Presov
SLOVAKIA
Kosice
Banská Roznava
Bystrica
Rimavská
Sobota
Lucenec
HUNGARY
100 km
Danube
Economic summary
Total GDP (Sk bn)
Total GDP ($bn)
Real GDP growth (annual % change)
GDP per head ($ at ppp)
Inflation (annual % change in CPI)
Agricultural output (annual % change) -20.2
Industrial production (annual % change) 17.2
Money supply, M2 (annual % change)
Foreign exchange reserves ($bn)
Unemployment rate (% of labour force)
Government expenditure (% of GDP)
Budget balance (% of GDP)
Current Account Balance ($bn)
Exports of Goods ($bn)
Imports of Goods ($bn)
Trade Balance ($bn)
Main trading partners
Share of total trade to world 2007 (%)
Germany
Czech Rep
Italy
Poland
0 5 10
with the prime minister
labelling a couple of the
country’s leading papers
“prostitutes”.
Mr Fico pushed through a
controversial media bill this
year that caused worries
about press freedom. “I
think Fico hates the media,”
says Matus Kostolny, editor-
in-chief of the SME daily.
But, as in most countries,
taking a swipe at the media
and questioning the pricing
policies of large energy com-
panies tends to be popular
with voters, and those ges-
tures have helped make Mr
Fico Slovakia’s most popular
politician, with many ana-
lysts expecting him to win
the next parliamentary elec-
tions scheduled for 2010.
Mr Fico’s politics of small
gestures may have helped
get his country into the
eurozone. However, he may
be called on to be more
active to deal with chal-
lenges in future, as Slovakia,
with only 70 per cent of the
EU’s average GDP per cap-
ita, tries to make up the dis-
tance separating it from the
rest of the continent, while
the world economy enters a
turbulent period.
There are severe regional
disparities between the fast-
growing west of the country
and the more depressed east,
where unemployment is
stubbornly high, and where
the large Roma minority
lives in poverty.
Bardejov
Snina
Michalovce
Trebisov
UKRAINE
2007 2008*
1,852 2,028
75.0 100.4
10.4 7.5
19,894 21,897
3.4 3.3
8.0
8.0
11.1 10.5
19.0 23.6
8.4 7.3
48.0 48.6
-2.2 -2.1
-4.0 -4.2
57.5 84.9
58.4 84.5
-0.9 0.4
Exports Imports
15 20
www.ft.com/slovakia2008
greeted his victory have
subsided.
Mr Fico made an obvious
break with the pro-US stance
of his predecessor, dropping
by the Cuban embassy in
Bratislava and making trips
to Libya and Venezuela, as
well as withdrawing Slova-
kia’s small contingent from
Iraq. Although he is now
less provocative, the prime
minister is still unafraid to
buck regional trends.
While neighbours such as
Poland and the Czech
Republic look fearfully at
Russia’s growing strength,
Slovakia is relatively uncon-
cerned about being reliant
on Russia for oil and gas.
“We consider them a very
reliable partner,” says Mr
The prime minister
makes no bones
about his preference
for a good dose of
state control
Kubis. “We don’t have any
Russophobia.” Slovakia is
also opposed to the planned
US missile defence shield,
Alamy Images which would see a radar sys-
tem built in the Czech
“We need improved road Local companies, as opposed the euro in May. Mr Pociatek Republic and, possibly, an
and rail links to the east,” to foreign companies with denies wrongdoing. anti-missile base in Poland.
says Andreas Tostmann, Slovak factories, still have In foreign policy, Mr Fico’s “We are not happy with
chairman of Volkswagen Slo- not made headway in becom- coalition with Jan Slota’s rockets and radars in
vakia. ing suppliers to the car xenophobic, anti-Hungarian Europe,” says Mr Fico, who
The labour market in the industry. The most success- nationalist party strained also has opposed the major-
west of the country is tight, ful local businesses are relations with Hungary, ity of fellow EU countries by
but the education system is financial groups, Penta and whose politicians have in not recognising Kosovo’s
lacklustre at best, dangerous J&T, both of which have turn fanned anti-Slovak independence.
for a country which will not grown large enough to look sentiments. “Our view is that interna-
be able to rely on cheap beyond Slovakia. “Relations are basically tional law has not been
wages for much longer. The local business and normal, but they should be respected in this case,” says
Tourism has not yet been political elite is small and better,” says Jan Kubis, for- Mr Fico.
able to develop as a money tightly interlinked, as shown eign minister. Slovakia’s self-confidence
spinner, which would benefit by the scandal surrounding After he formed his coali- is a reflection of the growing
the northern Tatra moun- finance minister Jan Poci- tion government, Mr Fico’s sense that, only 15 years
tain region. atek’s trip aboard a Mediter- Smer party was initially sus- after arriving on the interna-
The economy is dominated ranean yacht organised by a pended by the Socialist tional scene, the small coun-
by foreigners, who control private equity group accused grouping in the European try of 5.4m is about to join
the bulk of the banking sec- of profiting from currency parliament. However, it was the eurozone and is now con-
tor as well as the country’s speculation before the reinstated earlier this year, a fidently taking a seat at
most important industries. koruna was revalued against sign that the shudders which Europe’s top table.
2009*
2,182
109.4
5.2
23,499
5.0
3.5
6.0
8.0
25.5
7.1
49.1
-2.0
-3.8
99.8
99.1
0.7
* Forecast
25
2 ★ † FINANCIAL TIMES WEDNESDAY JULY 23 2008

Slovakia

It can pay to
be small when
a crisis comes
BANKING
The credit crunch has
had a limited impact,
writes Jan Cienski
In business it sometimes pays to
be small, out of the way and a bit
behind the times. Or so Slova-
kia’s banks are finding, when
they survey the damage the
credit crunch has wrought in the
US and parts of western Europe.
“The impact of the credit
crunch here has been fairly lim-
ited,” says Marcel Kascak, a
board member at Tatra Banka,
the Slovak subsidiary of Aus-
tria’s Raiffeisen.
Tatra, together with VUB
Banka, owned by Italy’s Intesa
Sanpaulo, and Slovenska
Sporitelna, part of Austria’s
Erste Bank, form the big three of
Slovak banking, controlling 55
per cent of the market.
The main reason for Slovakia’s
banking buoyancy is that, while
growth is anaemic or even nega-
tive in many developed econo-
mies, Slovakia’s economy
expanded by 10.4 per cent in 2007
and is expected to grow by 7.7
per cent this year.
While the mortgage market has
developed rapidly, lending is still
mainly to urban middle class and
upper middle class professionals,
people whose salaries are rising
rapidly and who are unlikely to
have trouble repaying their
loans. Non-performing loans are
More than face value: Slovakia has beaten most of its former Soviet neighbours to the eurozone François Lenoir/Reuters below 1 per cent at Tatra, says
Mr Kascak.
workers from other regions,”
says Dusan Dvorak, spokesman
for South Korea’s Kia, which
recently opened a car factory
near the north-western city.
With a loan-to-GDP ratio of
about 40 per cent, much lower
than in western Europe, Slovak
banks can continue to expand
their lending. Despite tougher
scrutiny, mortgage loans last
year grew 17 per cent at Sloven-
ska Sporitelna, the country’s
largest bank, with about a third
of the lending market. At Tatra,
mortgage loans more than dou-
bled last year; at VUB they went
up by more than 40 per cent.
Despite the increase in loans,
Slovak banks are awash with
liquidity, with loan-to-deposit
ratios close to 70 per cent. That
means they do not have to tap
into international markets.
Adding stability to the system
is the negligible amount of loans
denominated in euros and Swiss
francs, which make up a majority
of the mortgages in Hungary and
Poland. Banks have been reluc-
tant to take on that kind of cur-
rency risk, due in large part to
the country’s commitment to join
the euro by next year.
“Interest rates in the Slovak
koruna have been stable and
acceptable, so there has been no
‘Interest rates in the
koruna have been
stable and acceptable,
so there has been no
interest in exotic

The tiger that beat the odds

ECONOMY Slovakia’s admission was
grudging, with the European
The eurozone may Central Bank worried about its
beckon, but inflation fitness for the euro, stressing
that it had “considerable con-
remains a concern, cern” over the country’s ability
writes Jan Cienski to restrain inflation.
For Mr Fico, in many ways,
getting into the euro was the
Despite his occasionally popu-
list pronouncements, Mr Fico
insists that he will not let spend-
ing rip – even once his country is
safely a member of the euro –
and that he is committed to the
goal of reducing the structural
deficit to 0.9 per cent of GDP by
2010.
strides during a very benign eco-
nomic environment, when Ger-
many was growing strongly and
foreign investment poured into
the country – last year FDI came
to $2.1bn, or 2.8 per cent of GDP.
The economic situation is very
different now, with food and
energy prices soaring, and
The most obvious problem is
the over-stretched labour market,
particularly in the booming west
of the country.
“It’s really difficult to find
workers,” says Martin Pytlik, a
board member of Tatra Banka.
“We’re having trouble finding IT
and risk management specialists
Ignacio Jaquotot, chief execu-
tive of VUB, says that the NPL
ratio at his bank was closer to 35
foreign currencies’
per cent eight years ago, before it
came under foreign ownership. It
is now just over 1 per cent. interest in exotic foreign curren-
Slovakia’s banking sector, cies,” says Mr Jaquotot.
92 per cent of which is in foreign Joining the common currency
hands, has also been very con- may end up having a larger
servative. The loan-to-value ratio impact on Slovakia’s banks than
for most mortgage loans rarely
exceeds 70 per cent, less than in
the turmoil unleashed by crisis
in the US housing market. One
countries such as Poland, where area where banks will take a hit
100 per cent and even higher
loans are increasingly common.
is in foreign exchange transac-
tions, which will shrink rapidly.
Foreign expertise has also made “A substantial part of our

S
lovakia joins the eurozone
next year, becoming only
the second ex-communist
country to do so – an
achievement many thought
unlikely and one that continues
to elude its former Soviet-bloc
neighbours.
The government of Robert
Fico, the prime minister, regards
euro entry as its signal accom-
plishment and a rebuke to those
who warned two years ago that
the coalition created by his Smer
party with smaller xenophobic
and populist parties would lead
to economic disaster.
“In 2006 many politicians,
many analysts, many people,
believed that my government
would be very bad for the coun-
try, for the economy, for every-
thing,” says Mr Fico. “But the
fact is that, in 2008, we have the
highest economic growth in the
European Union, we have control
over inflation, there are only pos-
itive trends. The introduction of
the euro is another success of
this government.”
easy part. Most of the heavy lift-
ing had been done by his prede-
cessor, Mikulas Dzurinda, who
undertook radical reforms that
turned Slovakia into a European
tiger. But the reforms, combined
with corruption scandals and
chaos in the governing coalition,
so disenchanted voters that they
replaced Mr Dzurinda’s centre-
right government with Mr Fico
and his left-wing populists.
All Mr Fico had to do was not
up-end the reforms, as he had
promised during the election
campaign. That he accomplished.
“We haven’t witnessed a major
reversal of reforms as had been
suggested before the election,”
says Jan Toth, chief economist
for ING bank in Slovakia.
The result is an economy
which grew at 10.4 per cent and
which is expected to expand by
7.5 per cent this year. That
growth has unleashed higher
inflation, at an annualised 4.6 per
cent in June, but the government
remains confident that it will not
spin out of control.
“We will continue the consoli-
dation of public finances,” he
says, adding that wage increases
will be limited to increases in
The European Central
Bank has expressed
‘considerable concern’
over the country’s
ability to restrain
inflation
productivity, which last year was
7 per cent.
Hoping to stifle the inflation
that is a natural result of a fast-
growing economy catching up
with more developed partners,
Slovakia argued for and received
a very strong final conversion
rate – 30.126 korunas to the euro
– which made exporters wince
but pleased voters and should
keep inflation under control for
the next couple of years.
Slovakia made its biggest
growth in western Europe slow-
ing. That spells potential trouble
for one of Europe’s most open
economies, but so far the govern-
ment has no plans for any kind
of deeper economic reforms.
When pressed, Jan Pociatek,
the finance minister, pauses and
lists a series of measures he calls
“small things” such as centralis-
ing procurement and merging
the customs and tax offices.
Most of Mr Pociatek’s efforts
seem aimed at ensuring that
prices do not surge too high next
year, when the euro is intro-
duced. He is setting up a special
committee that will compare
prices in Slovakia and neighbour-
ing countries, with the power to
intervene, while Mr Fico warns
retail chains not to take advan-
tage of the currency change.
“We will try to fight specula-
tive movements,” says Mr Poci-
atek.
That approach may please Mr
Fico’s voters, but may not be
enough to ensure Slovakia’s con-
tinued rapid development.
and they are becoming very
expensive.”
Slovakia’s national unemploy-
ment rate is 7.4 per cent, but that
conceals enormous regional dis-
parities. About 200,000 Slovaks
have left to work abroad.
“People with high potential
have left the country and we
really miss them,” says Peter
Hajas, CEO of Sario, the Slovak
investment agency.
Finally, there is the country’s
greatest success but also its
greatest risk – the car industry.
Cars account for about a third of
exports. But if the current eco-
nomic turmoil and high fuel
prices cause a fall in European
auto sales, the impact on Slova-
kia could be big.
“We are nervous that a huge
proportion of investments are in
car production,” says Mr Fico.
For a small, export-oriented
economy, the coming years could
be difficult, but Slovakia has
already beaten the odds by
becoming one of Europe’s most
striking success stories.
local banks more stable.
The Austrian and Italian banks
that dominate in Slovakia stuck
closer to the traditional business
of taking deposits and making
loans instead of investing in
exotic US securities, which has
spared them the worst after-
effects of the subprime crisis.
Unlike in neighbouring Poland,
where the real-estate market is
softening, in part because of an
earlier influx of speculative capi-
tal from foreign investors, apart-
ment prices in Bratislava, which
is too small to attract much out-
side interest, remain firm.
They are expected to rise by
about 20 per cent this year and
by about 10 per cent next year,
according to Colliers, the real-
estate company.
Real-estate prices are also
climbing outside Bratislava,
thanks in large part to new car
factories and other foreign
investments in western Slovakia.
“Apartment prices have soared
in Zilina over the past few years.
It’s making it difficult to pull in
profit in corporate business
comes from FX transactions,”
says Martin Pytlik, another Tatra
board member. “It used to be a
big advantage for us, but now it
will become a disadvantage,
which we will have to deal with.”
Regina Ovesny-Straka, the
chief executive of Slovenska
Sporitelna, agrees that euro
adoption is likely to have a nega-
tive effect on local banks’ profits.
Joining the common currency
could lead to large corporations
handing all their banking to a
single large European bank,
pushing local banks out.
“It is not our target to be a
leading European bank for large
corporate clients,” says Ms
Ovesny-Straka. “We are a retail
bank that also serves SMEs.”
At Tatra Banka, executives
have already studied the impact
of euro adoption in such coun-
tries as Portugal and Slovenia.
“We will have to focus on the
retail business and small and
medium enterprises,” says Mr
Kascak.

Leftwing populist surprises critics

and emerges as a wily survivor
POLITICS Two years ago, when Robert
Fico cobbled together an
Jan Cienski unlikely coalition with a
profiles Robert xenophobe and a former
authoritarian, his election
Fico, the successful victory was greeted with a
prime minister shudder by the rest of
Europe and by fear from
businesspeople and econo-
mists, who worried he would
junk the reforms that had
made Slovakia a star per-
former.
Today, Mr Fico is at the
helm of a country enjoying
the fastest growth in Europe,
Contributors his Smer party is no longer
Jan Cienski shunned in the European
Warsaw and Prague parliament, he is by far the
Bureau Chief country’s most popular poli-
tician, and Slovakia is
Tom Nicholson
FT Contributor months away from becoming
the second ex-communist
Rohit Jaggi country to adopt the euro,
Commissioning Editor after Slovenia.
“Compare 2006 and 2008
Steven Bird and what was said about my
Designer government, that we are a
catastrophe,” says Mr Fico,
Annabel Cook
sitting at a conference table
Katie Carnie
Picture Editors in the government building
in downtown Bratislava.
For advertising details, “Are we? Today, Slovakia
contact: Regina Gill on is seen as a success story. I
+49 69 156 85 161, Fax + understand why the opposi-
43 69 596 44 78, email: tion is so nervous,” he says.
regina.gill@ft.com, or your During the 2006 election
usual Financial Times campaign, Mr Fico ran
representative strongly against the eco-
nomic reforms championed
by Mikulas Dzurinda, the
former prime minister who
introduced a 19 per cent
flat tax, privatised most
state-controlled companies,
reformed the healthcare and
pension systems, and ended
Slovakia’s international
isolation by leading it into
Nato and the EU.
But Mr Dzurinda’s frac-
tious coalition, the arro-
gance of many of its leaders,
and the constant drip of cor-
ruption allegations around
the government combined
with reform fatigue to
prompt voters to hand power
to Mr Fico, a lawyer and
nationalist who joined the
Communist party shortly
before the collapse of the
Soviet bloc.
Mr Fico’s earliest weeks in
power seemed to confirm the
worst fears of the sceptics,
when he questioned the
timetable of joining the euro
by 2009, causing the koruna
to lurch downwards on cur-
rency markets.
However, a meeting with
central bank governor Ivan
Sramko prompted Mr Fico to
temper his comments and
reconfirm the earlier com-
mitment to adopt the euro as
soon as possible.
The straitjacket imposed
by the Maastricht criteria
limited Mr Fico’s ability to
do much to swerve Slovakia
from the path it had been set
on by Mr Dzurinda.
“It hasn’t been very easy”
to introduce social pro-
grammes while keeping
spending under control,
admits Mr Fico. He avers
that his is a social-demo-
cratic government that
always keeps in mind ordi-
nary people.
‘They are playing
with the image of
being a leftist
government
without doing
anything significant’
Instead of reversing most
reforms, Mr Fico resorted to
revolutionary populist slo-
gans followed by incremen-
tal changes in unpopular
programmes, such as ending
small user fees for accessing
the healthcare system.
He has also flailed away at
popular targets such as the
media, greedy retail chains
and energy companies.
“They are playing with the
image of being a leftist gov-
ernment without doing any-
thing significant,” says Vil-
iam Patoprsty, chief econo-
mist with UniCredit in
Slovakia.
He adds: “They haven’t
done anything to change Slo-
vakia’s reputation as a busi-
ness-friendly country or
destabilise the economy.”
Despite a lack of follow-
through, Mr Fico remains
enormously popular, a testa-
ment to both his political
skills and to the divided
opposition.
His abilities were demon-
strated this year when the
opposition joined forces to
try to block a controversial
media bill by threatening to
prevent the ratification of
the Lisbon treaty reforming
the functioning of the EU.
Despite the media bill
coming under fire from
many quarters across
Europe, Mr Fico was able to
pose as a defender of the EU.
He ended up splitting the
opposition by luring away
an ethnic Hungarian party,
and both passing the media
law and getting the Lisbon
treaty ratified.
“Fico played it brilliantly.
He is really the best politi-
cian in the country,” says a
foreign diplomat. “The oppo-
sition is nowhere while Fico
rules all he surveys.” Popular: Robert Fico has maintained his leftist image Peter Zakovic
FINANCIAL TIMES WEDNESDAY JULY 23 2008 ★ 3
4 ★ † FINANCIAL TIMES WEDNESDAY JULY 23 2008
FINANCIAL TIMES WEDNESDAY JULY 23 2008 ★ 5

Slovakia

Transformed by deferred gratification High­f lier hit

PROFILE
BEZ GROUP

Tom Nicholson
on a company that
values modesty
The headquarters of the BEZ
Group, a transformer maker,
could use more than a lick of
paint. The executive parking
lot is a patchwork of cracked
asphalt, while the main
office building, a stodgy
communist low-rise on the
outskirts of the Slovak capi-
tal, advertises space for rent.
Inside, the furniture and fit-
tings date back to the 1970s.
Not what you might
expect from a fast-growing,
export-based company that
saw sales jump 55 per cent
last year to almost €57m.
But for Juraj Smatlik, the
chairman, modesty is a
cardinal corporate virtue.
“Look at my office, look at
the furniture in this room,”
he says, patting the olive-
green nap on a boardroom
chair. “All originals from the
time of communism. A lot of
companies go out and buy
new carpets as soon as they
open, but it’s better to be
humble and invest all your
assets in your future.”
Mr Smatlik and his part-
ners bought BEZ for about
$500,000 in 1996 during Slova-
kia’s wild privatisation era,
when many new owners
were only interested in mak-
ing a quick buck.
“A lot of them figured that
the first thing to do when
they got their hands on a
factory was suck all the
money out of it, sell the
assets and go buy a yacht.
But my dream was to take a
communist dinosaur that
was stuck in its tracks and
turn it into a company that
could compete in foreign
markets,” he says.
When he bought it, the
Humble: Juraj Smatlik
factory was only operating
four days a week, having
lost most of its customers
with the break-up of the
Soviet bloc and then Czecho-
slovakia in 1993. The new
owners cut the workforce
from 650 to 230, and opened
offices in the Czech Republic
and Russia to recover its
traditional markets.
The key to rebuilding the
business was membership of
the European Union in 2004.
After that, European clients
who had spurned non-EU
producers came knocking.
“When we approached the
Austrian power company
EVN in 1997, they wouldn’t
even talk to us,” says Mr
Smatlik. “But in 2004, they
came themselves. They told
us that, while we were out-
side the EU, we were not
reliable partners for them.
Today we supply two Aus-
trian energy companies.”
In that same year BEZ
made a crucial acquisition,
buying Skoda Plzen’s former
transformer division, ETD
Transformatory, giving it a
wider product range.
The ETD acquisition was
crucial in winning a €6.5m
contract in 2005 from MTU
Friedrichshafen, part of the
DaimlerChrysler Group. “If
we hadn’t bought the Skoda
Plzen division, neither com-
pany would have got that
contract,” Mr Smatlik says.
“It was a real breakthrough,
and allowed us to take big
steps forward. We can now
win other customers such as
MTU because we offer a
whole portfolio.”
Apart from its Czech and
Russian clientele, BEZ also
’My dream was to
take a communist
dinosaur and turn
it into a company
that could compete
in foreign markets’
supplies European energy
giants such as Germany’s
E.on and RWE, while indus-
trial clients include
Volkswagen and Siemens.
The company, which
exports 90 per cent of its pro-
duction, is benefiting from
renewed investment in elec-
tricity grids worldwide due
to high oil prices.
Paul Greeman, an invest-
ment banking specialist
based in Slovakia since 1991,
believes BEZ is reaping the
benefits of the foresight it
showed in the ETD deal.
“They’ve put together and
executed a long-term strat-
egy of anticipating what is
going to happen in the mar-
ket and positioning them-
selves for it,” he argues.
“They haven’t gone for the
easy money and cashed out,
but instead made some
strong capital investments
and built themselves into a
regional winner.”
So is it finally time for
BEZ to buy some new furni-
ture? Not yet. “The entire
business success of the
Anglo-Saxon culture is based
on the principle of deferred
gratification,” says Mr Smat-
lik. “We did the same thing,
and we’re still doing it.”
by turbulence
still confident
SKYEUROPE
The plucky low­cost
airline is changing
its flight plan by
slashing costs,
reports Jan Cienski
SkyEurope, once one of Slo-
vakia’s high-fliers and an
example of plucky central
European entrepreneurship,
is in deep trouble and trying
to restructure itself and
change its business model
while being buffeted by soar-
ing fuel prices and a likely
shake-out among European
airlines.
SkyEurope was one of the
first airlines to see the
potential in central Europe-
ans flying west once the
now very large,” says Mr
Bitter, predicting that Sky-
Europe will finally turn a
profit next year.
The scramble to profitabil-
ity will not be easy. Ryanair
is fighting hard in Prague,
and in Bratislava it carried
almost as many passengers
as SkyEurope. For the
moment SkyEurope’s base in
expensive Vienna allows it
to compete against high-cost
Austrian Airlines.
“In Vienna we have east
European costs but west
European revenues,” says
Mr Bitter, adding that the
airline also has the advan-
tage of operating out of one
of Europe’s fastest-growing
countries, and plans to focus
on offering a friendlier
service than its Irish rival
Ryanair.

Production
region was admitted to the
European Union in 2004. It
exploded from having a
single 30-seat Embraer jet in
2002 into being an airline
offering flights from bases
Smiles may not be enough
of a draw in a tight-fisted
region, says Aleksander
Domaradzki, transportation
analyst with DGL Polska, a
consultancy. “Money is still

reaches top
throughout the region.
Other airlines also piled in
but, while passenger num-
bers are rising, profits have
been hard to find, especially
for the local start-ups. Air
a driver in the region. Would
you pay more to have some-
one smile at you? I
wouldn’t.”
Despite the changes, Sky-
Europe remains financially

speed in
Polonia, an early Polish low-
cost carrier, went bust; Cen-
tral Wings, an affiliate of
state-owned Lot Polish Air-
lines, is losing money; and
SkyEurope has never been
constrained, reporting cash
of only €13m at end of the
first quarter of this year.
“Our liquidity is not the
strongest,” admits Mr Bitter,
who cut his low-cost teeth at

auto sector
in the black. airlines like India’s Spicejet
SkyEurope’s growth, while and the now bankrupt
fast, was also increasingly V Bird of the Netherlands.
chaotic. Its schedule became SkyEurope’s failure to
so confusing that even the earn money during the
company’s CFO was previous fat years could
stranded in London after leave it vulnerable during an
MOTOR INDUSTRY Kia was drawn to the area in missing his flight because he
part because of the cheaper work- had not figured out when his
Rapid expansion and force – car workers earn about a own airline was flying.
state­of­the­art factories fifth of the salaries of their Ger-
man counterparts. But more impor-
With fuel prices starting
their steep increase last
cannot conceal growing tant was Slovakia’s close ties to year, it became increasingly
labour shortages, the export-oriented auto industry
in the rest of central Europe – a
clear that SkyEurope’s
growth was unsustainable.
reports Jan Cienski cluster that runs from southern Losses were €24m last year,
Poland to northern Hungary and and cash was dwindling. ‘Would you pay

S
tanding on the factory floor
of the new Kia car factory
in north-west Slovakia, a
careful scan of the welding
area reveals that the only things
moving are the bright yellow
Hyundai robots: there is not a
person in sight.
“Labour costs in Slovakia are
lower, but people seeing the fac-
tory are surprised it is so state-of-
the-art,” says In-Kyu Bae, presi-
dent and chief executive of Kia in
Slovakia, a unit of South Korea’s
Hyundai.
While hundreds of workers
labour away further down the pro-
duction line installing equipment
on Cee’d, Sportage and other mod-
els that roll down the single pro-
duction line, the empty welding
floor is a sign that the low-cost
labour that helped drive Slovakia’s
car miracle may be beginning to
run dry.
The Kia factory currently runs
two shifts. To staff the first shift, it
set up a bus line to transport work-
ers from nearby Zilina. For the sec-
ond shift, it built up a bus network
to ferry workers in from as far as
100km away. If a third shift is
started, there could be real diffi-
culty finding labour.
“It is not easy to find workers,”
says Mr Bae, who spends his spare
minutes tending the lush flowers
planted along walkways joining
factory buildings. He is so keen to
make the point that he switches
into English from his native
Korean to stress the issue. “Unem-
ployment is too low in this area.”
It is a problem facing Slovakia’s
other carmakers as well.
“Each plant requires a lot of
labour. You’ve got to find it, train
it and then retain it,” says Peter
Cooke, professor of automotive
management at Britain’s Bucking-
ham University.
includes the western Czech Repub-
lic. In Kia’s case, it plans to send
engines to Hyundai’s factory just
across the border in the Czech
Republic, while taking transmis-
sions from its sister factory.
The spine of Slovakia’s car
industry runs from Bratislava, the
capital, in the south, the site of a
Volkswagen factory, through
Trnava, about 50km to the north,
where France’s PSA Peugeot
Citroën has a factory, and on to
Zilina, nestled against the Czech
and Polish borders in the
north-west, where Kia’s first cars
rolled off the production line in
late 2006.
The country has the highest per-
capita car production in the world,
with about 106 cars made for every
1,000 Slovaks; cars make up about
a third of exports.
The sector’s weight is certain to
grow. Last year, the big three car
factories produced 572,000 units,
almost double production in 2006.
This year production is expected to
be about 675,000 before reaching
full capacity of close to 1m by 2009,
says Lubos Vanco, managing part-
ner in Slovakia for KPMG, the
consultancy.
Slovakia was a late starter in the
region, with only Volkswagen tak-
ing the plunge and investing in
1991, before the break-up of Czech-
oslovakia.
“We found good skills and
trained workers. Czechoslovakia
was a country with a tradition of
making cars,” says Andreas Tost-
mann, chairman of Volkswagen
Slovakia.
Other carmakers held back,
scared off by the populist govern-
ments of Vladimir Meciar in the
1990s and by the fear that Slovakia
would be left on the periphery of
Europe while neighbours such as
Poland, Hungary and the Czech
Built by robots: Kia’s plant near Zilina risks a shortage of humans
Republic were admitted to Nato
and the EU.
But the economic reforms of the
previous centre-right government
of Mikulas Dzurinda and Slovakia’s
2004 entry into the EU alleviated
those fears, prompting PSA and
then Kia to build their factories.
In addition to cheaper workers,
the Slovak government was much
more aggressive than its neigh-
bours in wooing carmakers. The
government also promised to
upgrade Slovakia’s rickety infra-
structure, pledging to build a high-
way from Bratislava to Zilina by
2006.
The country has Currently, the highway peters
the highest per­capita out in the hills just outside Zilina,
creating massive traffic jams lead-
car production in the ing into the city and headaches for
world, with about the suppliers who followed Kia to
Slovakia, but the government
106 cars made for promises to have the highway com-
pleted by 2010.
every 1,000 Slovaks Those parts suppliers are becom-
Bloomberg
ing a key part of the economy as
well. Mr Tostmann says that, as of
last year, Slovakia-based suppliers
for the first time outpaced those
from Germany, sending him €1.8bn
in components while €1.7bn were
sourced from Germany.
With both car factories and sup-
pliers vacuuming up much of the
labour force, expansion of the car
sector is doubtful. Like Mr Bae, Mr
Tostmann brings in workers from
up to 100km away, and the unem-
ployment in Bratislava is even
lower than in Zilina.
For now, workers are much
cheaper than in western Europe,
and their productivity, when given
the same equipment, is compara-
ble. However, pay is also rising
steadily – Mr Bae says he is raising
salaries by about 9 per cent a year.
“I think the car industry has
probably reached its potential in
terms of assembly plants,” says Mr
Cooke.
The danger prompted York
Capital Management, the
US-based private equity fund
that controls 30 per cent of
SkyEurope’s equity and
90 per cent of the voting
rights, to push aside the
company’s two founders last
year, replacing them with
outsiders who cut their teeth
on other low-cost airlines, to
try to save SkyEurope.
“SkyEurope was a great
story but a lousy business,”
says Jason Bitter, the air-
line’s Irish-Canadian CEO, at
SkyEurope’s new headquar-
ters near Bratislava airport.
“We were brought in by the
supervisory board with the
mandate of turning this com-
pany around and turning it
into a real business.”
Their first step was to
chop the airline’s network,
pulling out of Hungary and
Poland to focus on hubs in
Bratislava, Vienna and
Prague, while laying off
workers and slashing costs.
The schedule was revamped
to become more predictable
and to increase flight fre-
quency to popular destina-
tions.
The airline flies 14 modern
Boeing 737-700 NG airliners,
giving it one of the youngest
fleets in the business and
one which is more fuel effi-
cient than many of its rivals.
As a result, SkyEurope
recorded a 17.7 per cent
reduction in costs in the first
half of this fiscal year,
despite a 42 per cent
increase in fuel prices,
making it one of the few air-
lines without a fuel hedge
to report a decrease in costs.
“Our cost advantage is
more to have
someone smile at
you? I wouldn’t’
Aleksander Domaradzki,
DGL Polska
era where fuel costs are
likely to stay high.
“The future for every air-
line is pretty challenging at
the moment and, given the
data we are seeing from
them, they are in an even
more challenging position
that other airlines,” says
Andrew Lobbenberg, an air-
line analyst with ABN
Amro. “Companies with
plenty of cash will survive –
that, in the short term, is
more important than the
quality of the business
model.”
Michael O’Leary, Rya-
nair’s famously frank CEO,
predicted in a recent confer-
ence call that only the profit-
able low costs such as his
own and easyJet have any
hope of surviving the com-
ing downturn. “Loss-making
low-fare airlines, which are
just high-cost airlines, will
go bust.”
But Mr Bitter remains con-
fident the turnaround began
in time to save SkyEurope.
“If we had last year’s cost
base with this year’s fuel
price I don’t know if we’d be
sitting here right now,” he
says.
“Now we are in the right
market with the right cost
base. We just have to get the
revenues and then we’re
there.”

Need for more development meets picturesque town

REAL ESTATE
Strong growth is
leading to some
tensions, reports
Tom Nicholson
In rustic Devin, a village of
1,000 at the confluence of the
Danube and Morava rivers,
fishermen are a common
sight even on weekday
mornings, keeping a sleepy
vigil over much-used rods.
These hunched figures are
as much a part of Devin as
its castle, first mentioned in
10th century chronicles, and
now a gaunt ruin guarding
the frontier with Austria and
the Czech Republic.
But the pace of life in
Devin is accelerating: nearby
Bratislava, whose population
is expected to double over
the next two decades, is
sprawling in every direction,
and picturesque Devin is too
inviting a destination to
escape notice.
Swedish international
developer Skanska is plan-
ning 23 low-rise apartment
buildings on a slope over-
looking the town. The
project will double Devin’s
population, and according to
Lubica Kolkova, the mayor,
will clash with the local
architecture, environment
and way of life. “If it goes
ahead, this place will never
be the same,” she says.
For Skanska, local resist-
ance being fanned by Ms
Kolkova is part of the chal-
lenge of doing business in
transitional economies. The
company was issued the nec-
essary permits by the previ-
ous mayor, but is now in
talks with Ms Kolkova to
find a consensus with the
current administration.
“We haven’t put a spade in
the ground there, even
though we have our permits
and are entitled to get on
with it,” says Noel Morrin,
senior vice-president for sus-
tainability at Skanska’s
headquarters in Sweden.
“But we recognise that
Devin has a cultural impor-
tance within Bratislava and
Slovakia, and we’re in dis-
cussion with them about
what we build and how we
build it.”
It is a process that will
inevitably be repeated in
towns and villages around
the Slovak capital, driven by
a local real estate boom. The
price of housing in Bratisl-
ava has doubled over the
past five years on the
strength of the country’s EU
membership and its eco-
nomic prospects. Prices are
expected to rise as much as
20 per cent this year, after 25
per cent growth in 2007.
Migrant workers continue
to flock to the capital from
the east of the country,
where unemployment is
among the highest in
Europe, while wealthier
Bratislavans exchange apart-
ments in communist-built
tenements for family houses
in nearby towns.
“Bratislava will grow to
1m, so until you create the
necessary housing for those
people, prices aren’t going
down,” says real estate
consultant Laurie Farmer.
The boom is not confined
to residential real estate.
Opinions vary as to
whether Bratislava already
has too many office projects
in the pipeline, but Mr
Farmer argues that develop-
ers would have no trouble
filling new buildings for at
least the next three years.
“Demand is as strong now
as it’s ever been,” he says.
“If you need 2,000 metres of
office space right now,
where are you going to rent
Foreign developers it? The space just doesn’t
may be setting exist.”
Bratislava has 800,000
new standards of metres of office space, about
conduct in the a third of what is on offer in
Prague and a quarter of that
rough­and­tumble in Budapest, but local
monthly rents of €10-€20 per
real estate market metre are roughly compara-
ble to those in the Czech
and Hungarian capitals, as is
the local 9 per cent office
vacancy rate.
If there is a chill in the
Slovak real estate market, it
is coming from banks, which
have grown skittish follow-
ing the US mortgage crisis.
Developers now need as
much as 40 per cent equity
just to get in the door, com-
pared with 10 per cent cash
two years ago, and their
records are also being exam-
ined more closely.
This is weeding out
weaker local companies and
forcing others into joint
ventures with international
developers such as Holland’s
Rodamco and Ireland’s Quin-
lan.
The presence of foreign
developers may also be set-
ting new standards of con-
duct in the rough-and-tum-
ble real estate market.
Ms Kolkova, after all, was
able to appeal to Skanska’s
code of conduct and its
commitment to avoiding
“unacceptable environmen-
tal and social risks” in call-
ing on the company to com-
promise.
“Our code of conduct is
just as applicable in Bratisl-
ava as anywhere else in the
world,” says Mr Morrin.
“Property development is
potentially messy every-
where, not just in Slovakia.
However, we are willing to
talk about how we adapt or
adjust what we are permit-
ted to build so that the local
community feels more com-
fortable with it, within eco-
nomic reason.”
6 ★ FINANCIAL TIMES WEDNESDAY JULY 23 2008

Slovakia

Selling the idea that small is beautiful

TOURISM only find five-star quality in
Austria.”
Tom Nicholson on Kempinski’s other five-star
efforts to market project in Slovakia, the Grand
Hotel in the High Tatra resort
a ‘cute’ destination town of Strbske Pleso, will open
this autumn.
The chain is partnering

G
eorge W. Bush once got
Slovakia and Slovenia
mixed up. Infamy, in
the two capitals Bratisl-
ava and Ljubljana, but under-
standable elsewhere in the world,
where these two benign, pretty
countries must compete for a
place on the tourist map.
The Slovak capital (pop.
450,000), while immeasurably
more attractive than when the
communists handed it over in
1989, is merely “cute” by compar-
ison with nearby Prague, Buda-
pest and Vienna.
The High Tatra mountains,
while scenic, stretch for
barely 50 kilometers; the highest
peak, Gerlach, is fully 2,000
metres short of Mont Blanc. And
so on.
Small wonder, then, that after
a blip following Slovakia’s EU
entry in 2004, when investors and
curious Europeans came to take
a look at one of the Union’s new-
est members, tourism figures
dipped in 2007.
In the first quarter of 2008,
Bratislava hotels had an
average occupancy rate of
57.1 per cent, according to a
study by Deloitte, the consul-
tancy, well below the EU average
of 62.7 per cent.
“It’s clear that Bratislava has a
problem,” says Tomas Hasala,
owner of the Limba travel
agency, which books Slovak holi-
days for foreigners.
“There are too few rooms on
the market, which means that
hotel prices are at least 30 per
cent too high, on a level
with Vienna or Prague. But
Bratislava, while it has a lot
of potential, doesn’t have as
much to offer as Vienna or
Prague.”
And with tourists starting to
give Bratislava hotels a miss,
preferring to visit Slovakia on
daytrips from Vienna or Buda-
pest instead, others further
down the hospitality food chain
are starting to feel the pinch as
well.
Charles Sebesta, a Briton who
Peak performers: Koncista and Gerlach, the high points of the High Tatra mountains that are Slovakia’s secret tourism weapon
owns two luxury restaurants
in Bratislava’s Old Town with
his wife, says that he has
begun thinking up excuses when
guests ask why the streets are so
empty.
“I tell them Slovaks tend to go
away on the weekend,” he says.
“The reality is that there just
aren’t enough people visiting.”
So what can be done? For Mr
Hasala, part of the problem is
already solving itself, as more
than a dozen hotels are either
under construction or on the
books, which will inevitably cut
room prices and make the city
more competitive.
“We also have to realise that
most tourists come to Slovakia
from neighbouring countries
such as Poland and the Czech
Republic.
“Slovak tourism officials
have always dreamed of attract-
ing visitors from Germany,
France and other western
countries, but they should
make sure they have branches
in every Polish regional city
before opening an office in
Paris.”
Meanwhile, the opening of
several five-star hotels in Slova-
kia, including two by the Kem-
pinski chain, promises to attract
more affluent visitors across the
border who, until now, have been
lodging in Vienna, only 60km to
the west.
Alamy Images
“With the Kempinski River
Park in Bratislava, as of next
summer we will get business
travellers back to the Slovak
capital,” says Konstantin Zeuke,
Kempinski’s boss in Slovakia.
“They will no longer have to
travel back and forth from
Vienna to Bratislava during
the week because they can
with J&T, a Bratislava-based
capital group, which is develop-
ing ski runs and four hotels in
the mountains as part of a €250m
project that should be finished by
2011.
“The High Tatras offer very
good recreational facilities and
beautiful mountains and lakes,
but it’s a niche destination and
needs to be promoted more
worldwide,” says Mr Zeuke, add-
ing that Kempinski would use its
own channels to “bring a new
customer mix to the High Tatras
from countries such as the US,
Russia and Germany”.
J&T founder and partner
Patrik Tkac says that the small
size of the mountains, and their
‘Bratislava has a
problem. There are
too few rooms on the
market and it doesn’t
have as much to offer
as Vienna or Prague’
proximity to the airport at
Poprad that has regular flights
from London, increases their
attractiveness for travellers look-
ing for convenience.
“You can sell the Tatras,” he
says. “Nowhere in Europe is
there a lowland airport so close
to a mountain chain. You can be
at your hotel in 15 minutes,
whereas in the Alps you may
have to drive for an hour or
more. Our plan is to rebuild the
Tatras, or perhaps to reclaim
them from the ashes.”
But whether they’re selling a
mountain getaway or a city stop-
over, pitching to a Polish back-
packer or a Parisian jetsetter,
tourism professionals agree on
one thing – little help can be
expected from politicians, at
home or abroad.
“We don’t want government
support,” says Mr Tkac. “It’s
enough if they don’t do anything
to hinder us.”

Main challenges are inflation

and competitiveness
Guest Column
MARTIN BARTO
The road that led Slovakia
to the euro began more
than five years ago, when
the Slovak government
approved the first important
document regarding the
adoption of the European
Union’s common currency.
On July 16 2003 Ivan
Miklos, the then finance
minister, and Marian Jusko,
national bank governor,
submitted the strategy for
adopting the euro to the
government.
This document analysed
the position of the small
open Slovak economy,
described the steps
necessary to fulfil the
conditions and contained a
joint statement of
government and central
bank to make efforts to
adopt the euro by 2008 or
2009.
It is now clear that after
five-and-a-half years, this
project will be successfully
completed.
The main factors behind
this achievement are the
economic reforms
introduced by the
government of Mikulas
Dzurinda between 2002 and
2006, particularly in public
finance, taxation, labour
market, social policy, and
the pension system.
The reforms triggered
unprecedented GDP growth
due to a strong inflow of
foreign investment and
significant increases in
productivity.
The positive impact of
reforms peaked in 2006-07,
creating a window of
opportunity to fulfil the
most difficult Maastricht
criteria on inflation and the
public finance deficit in a
sustainable manner.
The 2009 entry date was
set in September 2004 after
it had been decided the
costs of pension reform
must be included in the
public sector deficit.
In July 2005, the
government adopted a
changeover plan.
The next important step
was when the Slovak
koruna joined the Exchange
Martin Barto: Slovakia will be closely watched
Rate Mechanism II on
November 28, 2005.
The successful
participation of the koruna
within this mechanism was
also a necessary
prerequisite for adopting
the euro, since with that
step the central bank
essentially lost its exchange
rate tool.
ERM II accession was
earlier than expected, but
that proved crucial when a
crisis developed in February
2006, resulting in early
elections and a change of
government.
After a lesson
administered by financial
markets in June and July
2006, the new government
of Robert Fico, the prime
minister, decided to
continue with the euro
adoption strategy set by its
predecessors.
Mr Fico’s government of
left-wing social democrats
went on with – what was
for them – a painful
continued consolidation of
public finances and set a
plan for a balanced budget
by 2011.
The alternative scenario
of not moving towards the
euro would have resulted in
slower growth, a rising
public deficit, high inflation,
and a volatile currency
leading to stagnation.
In March 2007, the central
rate of the koruna in the
ERM II was revalued by 8.5
per cent and in May 2008 by
another 17.65 per cent. This
was the first such
behaviour of a currency
within the ERM II.
Reforms of health
care and education,
especially the
country’s research
capacities, are
needed
The double revaluation
was the result of the
exceptional economic and
labour productivity growth
of the swiftly converging
Slovak economy.
In May 2008, the
European Commission
concluded that Slovakia met
all the criteria to join the
euro and finally the Council
gave the green light for
adoption on January 1 2009.
The Slovak road to the
euro was a unique
experience for both Slovakia
and European authorities.
The country had a floating
exchange rate regime while
rapidly converging with the
rest of the EU, which was a
unique situation.
Discussions of whether
the permanent
strengthening of the koruna
was in line with the ERM II
requirement of its
movement around the
central parity, how the
trend appreciation of the
koruna influenced the
economy and especially the
issue of inflation and how
the Slovak economy might
operate with the fixed
exchange rate regime were
detailed, extensive and very
useful.
They also might give a
view on how similar
candidate countries will be
judged in the future. This
made Slovakia a pioneer for
central and eastern Europe.
Its pioneer role has not
ended; the country will be
closely watched once it
joins the euro zone. The
most interesting questions
are how it will live without
a monetary policy and how
it will tackle inflation
without currency
appreciation.
The government of Robert
Fico has to continue a
sustainable and credible
fiscal consolidation, even
beyond a balanced budget.
Labour market flexibility
has to improve, including
tackling labour mobility
and high structural
unemployment.
Wage growth should not
outpace labour productivity
growth. This could be a
problem in some professions
and some regions.
Liberalisation of the
economy should continue
alongside efforts to enhance
competitiveness. To use all
opportunities brought by
the euro, Slovakia should
also focus on further
reforms in healthcare and
the education system, as
well as developing currently
undersized and inadequate
research capacities.
Martin Barto is deputy
governor of the Slovak
National Bank.