Slovakia: Rolling Back Reforms After Euro Entry?

Posted: 30 November 2007 

by Kristina Mikulová

A year and a half has passed since Slovaks voted out liberal premier Mikuláš Dzurinda in favor of socialist Robert Fico. Prime Minister Fico has vowed to undo the successful liberal reforms of his predecessor, but he has so far been held back by the country’s upcoming accession to the Euro zone (scheduled for January 1, 2009). The socialist premier’s fondness for popular policies indicates that he is poised to brush off his plans to “socialize” the Liberals’ pro-market renovations of the economy once he gets the single currency under his belt. On the other hand, economists insist that the complex structures created by the previous government offer little room for revisionism. The question remains how the government will bridge the gap between the expected and the possible – and what it will cost the Slovaks. With the date for Euro zone entry approaching, few dare to predict what will happen next. Yet on balance it looks like Mr. Fico will not be so bold as to nix the reforms altogether.

Though Fico’s Social Democratic party (known as Smer) has not fulfilled its pre-election pledge to completely abolish the Liberals’ reforms, Smer has taken steps which have left these reforms severely scarred. True, the structural reforms’ foundation, the flat tax and the two-pillar pension scheme, have so far been preserved. Reformed healthcare has held on as well. Yet Smer, together with its two nationalist coalition partners, has squeezed VAT on books, internet and medicines, tightened the labor code, abolished patient co-financing and granted pensioners a one-shot Christmas bonus. More profound changes now seem to be under way. A key bill that would dilute the “second pillar” of Slovakia’s pension system will likely soon become law. (Set up by the Liberals, the second pillar refers to a system allowing Slovaks to save for their pensions in accounts administered by private pension firms). The Smer-led government is also considering legislation to halt hospitals’ transformation to joint-stock companies – an effort started by the previous government to reduce debt in the health sector.

The Prime Minister’s political performance so far has earned him and his cabinet an unprecedented popularity rating of nearly 45 percent. More popular than any premier in Slovakia’s history, he is poised to retain the momentum until the next general election in 2010. Well-liked by the electorate, Fico still feels the pressure to roll back the Liberals’ reforms even further.

Importantly, the socialist premier will also seek to preserve his image as a people’s politician – an image which helped elevate him to his post. To keep voters satisfied, Fico might want to span the divide between his bold pre-election promises and lame post-election policies. According to one recent study, Fico has only fulfilled 43 percent of his 50 most-popular pledges. And polls indicate that Smer’s electoral base – especially the young lower middle class – expects Fico to overturn Dzurinda’s reforms. Thus far, the premier has blamed his quiescence on the need for fiscal discipline before accession to the Euro zone. Senior members of his party, however, have repeatedly stressed that voters will be compensated as soon as the European Central Bank loosens the reins in 2009.

Yet Fico is well aware that to overturn the reforms would be risky and costly. Dzurinda’s  center-right government established a resilient structure that has set serious commitments for years to come. Should today’s left-leaning cabinet choose to carry out its pre-election promises, it would run a risk of ruining a robust economy and losing numerous international arbitrations, either with foreign investors or companies managing health insurance and pension savings. Fico is keen to avoid such difficulties. He has recently offered additional incentives to Slovakia’s major foreign investor, the South Korean automobile giant Hyundai-Kia, and agreed to negotiate the future of the second pillar with companies that manage pension savings.

Smer must also consider the reaction of its junior coalition partners. Though the two fringe parties in the government allegedly have little influence on cabinet decisions, they might be able to pull more strings than expected. HZDS, led by former semi-authoritarian premier Vladimír Mečiar, has repeatedly made attempts to pose as mediator between Fico’s Social Democrats and companies managing pension savings. Along with xenophobic SNS, Mečiar’s party has also opposed Smer’s plans for a “millionaire tax” and a single health insurance company.

Additional opposition to reform rollback could come from within Fico’s own party. Observers believe that the government’s pro-business wing seeks to preserve the structural reforms in order to remain on good terms with the country’s leading businessmen. The connection between capital and politics is a burdensome heritage of the 1990s, and many of the businessmen who now support Smer once stood behind Mečiar and HZDS.

Finally, the premier could suffer further inconvenience from Slovakia’s leading journalists, economists, intellectuals and other elites, whose support proved crucial for Dzurinda’s reformist project five years ago. Recently, economists in line with Central Bank Governor Ivan Šramko have publicly condemned Fico’s attacks on the second pillar while voices in the media have accused him of incompetence and bigmouthed populism.

At the end of the day, Fico knows that the fulfillment of his pre-election promises would cost him more than he can afford to pay. Though he may be tempted to acquiesce to voters’ demands, he is also aware of the commitments underpinning Dzurinda’s structural reforms. Besides, formally adopting the Euro in 2009 will leave Fico with slightly more than a year to implement his pre-election program in time for the 2010 general elections. Thus, one can suspect that the national debate over the future of reforms that catapulted Slovakia from “black hole in the middle of Europe” to “Europe’s top reformer” might not be resolved until after the next elections.

Kristina Mikulová is a CEPA Associate Scholar and works for the Financial Times correspondent to Slovakia and the Czech Republic. 

The views expressed in this article are those of the author and do not necessarily reflect the opinions of the Center for European Policy Analysis.