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"Enfant terrible" of the Eurozone - Why did Slovakia refuse to bail out Greece?

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The European Central Bank in Frankfurt/Main, Germany. Picture: UggBoy. License: Creative Commons BY 2.0.

September 17, 2010
By Juraj Mesík

Shortly after a new ruling coalition formed Slovakia’s new center-right government, a small shock wave rolled through Europe. First the Slovak government and then parliament voted to withhold Slovakia’s share of a European bailout loan for Greece’s embattled economy. Not that Slovakia’s minute share of the package would mean a lot for the eurozone – the decision’s importance lay in its symbolism and, therefore, in politics. For those who followed Slovak politics prior to the June 12, 2010 election, the vote against the bailout came as no surprise. As elsewhere around the world, Greece and the PIGS’ crisis received its fair share of attention from the Slovak public, media and politicians. Lessons relevant to Slovakia’s own fast-growing debt and excessive budget deficit were drawn quickly and became a core part of the election battle. The previous government’s dominant party, Smer (which means “direction” in Slovak), was quickly — and accurately, for that matter — nicknamed by the media and opposition “Smer Greece”. Fiscal responsibility became an important theme in the opposition parties’ election campaigns, while Greece itself became a dark example of where Smer’s irresponsibility and rampant corruption was taking Slovakia.

In such a pre-election atmosphere, Slovakia’s former prime minister and Smer leader, the populist Robert Fico, had little incentive to hurry up with his signature under the euro-wall loan for Greece. Fico’s government had enough time and votes to get the loan and euro-wall through parliament before June 12. However, Fico tactically choose to avoid parliamentary debate on these issues, feeling that such debate would provide the opposition with a magnificent opportunity for a devastating critique of the government in front of the media and the public. By avoiding parliamentary debate, Fico actually pushed the opposition parties to articulate even more loudly their critique of fiscal irresponsibility in Slovakia and in Greece and repeat what a large part of the electorate started to expect to hear. A self-reinforcing promise to vote against a loan for “irresponsible, rich and corrupt Greeks living on excessively generous social allowances and pensions” quickly became an integral part of the opposition campaign.

There is no doubt that, had Fico’s government, corrupt to the bone, remained in power, it would not have dared challenge Brussels and the European powers. To attract the attention of bureaucrats in Brussels or of the public and politicians in Germany, France, the Netherlands, Sweden and the other EU net contributors was the very last thing the former government needed. “There are very few countries on the old continent where money from EU funds is stolen on such a scale as in Slovakia and where such complete corruption rules its distribution…” read one of many commentaries on the matter.

Throughout the course of the pre-election year, the Slovak media wrote openly about systemic corruption at all levels of the Slovak administration. A ubiquitous feature was the 20-30% provisions paid to “consulting companies” linked to political parties which controlled various government ministries. The only expertise of those “consulting companies” was a copy-paste function. Yet such companies provided the only guaranteed access to the Slovak government and to EU money, whether for genuinely necessary projects or those which were only phony schemes designed to swindle as much money as possible. Such extensive corruption in Slovakia was made possible by a nearly complete, programmatic paralysis of all formal domestic controls and investigation mechanisms.

The only power that could, in theory, effectively challenge it was the power of institutions in Brussels. Unfortunately Brussels, for its own internal reasons, continued in its established tradition of turning a blind eye to corruption, misuse of funds and misappropriation — a problem the EU have faced probably for decades. That blind eye did not see expensive empty motorways in Greece (and in Slovakia) leading from nowhere to nowhere. Fico’s government played — and would have certainly continued to play, had it got the chance — the EU game according the rules: we do whatever you want us to do — you send money and do not ask who got it and how we spent it. Continuing this game is important, for example, for constructing overpriced and unnecessary motorways in Slovakia , supported by EU funds as well as EIB loans, regardless of the lack of serious cost-benefit analyses or analyses of the fiscal consequences of excessive and fast-growing government deficits and debt.

Unfortunately for EU business as usual, the June 12 election yielded a tiny (and fragile) majority for the anti-Fico opposition. A new government of four political parties came together rather quickly: the Slovak Democratic and Christian Union (SDKU), the liberal Freedom and Solidarity (SaS), the Christian Democratic Movement (KDH) and Most-Hid, a party trying to bridge the gap between the Hungarian minority and the Slovak majority. Iveta Radicova became the prime minister, the first woman in such a position in (Czecho-)Slovakia’s recent history. After Radicova’s government was formed, most European political elites expected the Slovaks to do what they have done for most of history: bow to external powers. It would not be politically unfeasible to back away from campaign promises and say: We have to sign it -— Fico made those promises without our consent, but we have to keep them nonetheless.

However, Radicova’s government chose not to bow for reasons which are not as simple as they may appear. One reason may be that the government would not have been able to sustain a yes vote. During the political struggle against Meciar, there emerged a rather small but vocal group among Slovak intellectuals and political activists supported by private and public donors from America. Their support included imports of ideologies and rhetoric from the American Republican Party. Several of these EU-hypercritical, climate change-denying, Iraq war-supporting, etc. etc. etc. intellectuals recently became MPs, elected on the list of Most-Hid. Another group of rather unreliable MPs got into parliament with SaS. We can speculate that, if Radicova were to support the Greek loan, some of these MPs would abstain or vote no, denying the government a victory. Such disunity so early in the new government’s tenure would have an extremely negative effect on its public image and prospects.

Another possibility is that Radicova and her team would not have had the guts to oppose the official eurozone and Brussels positions, were there not silent encouragement, or at least acceptance, from at least some influential EU member states and political leaders. Everyone knows that the Greek bailout was largely unpopular in many other countries, Germany being the most visible and significant case. For the sake of the euro, Merkel had no choice but to agree on the Greek bailout. Slovaks, given their relative insignificance, had that choice. It is possible that, in the shadows of lobbies in at least some European capitals, Slovak politicians were patted on the shoulder by those who did not have the freedom to do what they and their voters wished to do: stand up and let the Greeks, and the banks that loaned to them, pay their debts, thus sending a strong warning to other governments and banks considering the Greek path.

Finally, it is no speculation at all to say that the Radicova government inherited a financially devastated country. In 2008, the year before Slovakia adopted the euro, Slovak public debt was only 28% of the country’s GDP; it will reach around 43% of GDP by the end of this year. This figure, however, does not include more than 1 billion euros in hidden debt created by the construction of a highway using a fake public-private partnership (PPP). Two more highway PPPs, much more expensive than the first one, were being prepared for signing in 2010. If the costs of these three PPPs are included, Slovakia’s real public debt of would exceed 51% of GDP in 2010 — an increase of 80% in just two years since joining the eurozone.

Slovakia’s debt is growing slowly compared to its budget deficit, which grew from 2.2% of GDP in 2008 to 6.3% of GDP (3.15 billion euros) in 2009. According to the approved national budget, the deficit was expected to be 5.5% of GDP in 2010 but will more likely reach 7.5% to 8.0%. This deficit likewise does not include debts created by the planned PPP motorways. If the plans for two more PPP motorways materialize, as Fico’s government intended, the 2010 deficit would reach the Hellenic levels of 15% of GDP. It should be mentioned in this context that the EU-controlled European Investment Bank is still seriously considering contributing to this potentially astronomical, albeit hidden, budget deficit by loaning 1 billion euros for one of the PPPs. It appears unlikely that the Radicova government will decide to continue in the reckless impoverishment of Slovakia, hidden or otherwise. The new government has already set a goal of reducing the budget deficit from the level of 7.5-8.0% of GDP inherited from Fico’s flamboyant spending to 3% of GDP by 2013, starting with a 2.5% GDP deficit reduction in 2011.

How that 2.5% reduction is going to be achieved in 2011 is currently a hotly debated issue. A mix of measures is most likely to include an increase in VAT and changes in the taxation of labor as well as savings in government expenditures, possibly including layoffs of around 10% of administrative employees. An 800-million-euro contribution to the Greek bailout would not fit such deficit-reduction and austerity plans. It is generally accepted that Radicova’s government — or Slovakia, if you wish — will pay some political price in Brussels for rejecting the Greek bailout. If Brussels (and maybe Berlin, Amsterdam, and Stockholm?) start taking a much closer look at how EU funds are used in Slovakia and start subjecting Slovakia’s funding requests, for instance at the EIB, to much stricter scrutiny, then the Slovak “no” may become a multiple blessing.

And then there is one additional moral — albeit tiny — aspect: Many politicians in Slovakia were quick to emphasize that it is in fact immoral for a poorer country (i.e. Slovakia) to express solidarity with a richer one (i.e. Greece). Unfortunately the same politicians, and the Slovak public in general, are completely reluctant and aloof when it comes to Slovakia’s notoriously insufficient development aid – standing at pitiful 0.1% GDP for several years - towards much, much poorer developing countries. Maybe it is up to wealthier Europe to remind Slovak politicians and the public that expecting solidarity and assistance from rich countries and denying it to poorer ones is at least immature, if not deeply immoral. Especially for a country which claims the moral high ground.

Dr. Juraj Mesik has been extensively involved in the development of the environmental movement and the broader civil society. Mr. Mesík is also the author of numerous commentaries and analytical articles published in opinion-making dailies.