Slovenia: EU Presidency Adds to Full Domestic Agenda

Posted: 02 January 2008  

by Roman R. Kessler

Slovenia’s political and economic trajectory carries importance beyond its limited Alpine boundaries. Formerly the principle trading arm of Yugoslavia, Slovenia sets the economic benchmark for Central Europe today. The richest ex-communist state, Slovenia is also the only former Yugoslav republic now a member of the European Union (EU) and the only former communist country to date to adopt the Euro. Impressively, the Slovene economy continues to expand (an estimated 5.8 percent this year), making it the fastest-growing in the Euro zone. Yet Slovenia’s accomplishments cannot conceal its many domestic economic problems. The task of tackling these issues, together with Slovenia’s EU presidency, presents Prime Minister Janez Janša’s center-right government with a full agenda going into an election year.

Slovenia faces a series of challenges. Wage demands are mounting as a new middle class emerges amid soaring inflation. The European Central Bank (ECB) is indignant over Slovenia’s increasingly lax fiscal policy and lackluster efforts at further reform. Inflation stood at 5-6 percent for October and November – well in excess of the Euro zone’s target of just below 2 percent. Slovenia will have a hard time fending off these inflationary pressures as the ECB primarily sets interest rates for the Euro zone’s more mature economies. Current low interest rates could encourage the emerging middle class to build houses and take out more mortgages – a development that could add to boom-and-bust cycles.

Other economic issues are looming on the horizon for Janša and his cabinet. The internal market lacks competition, fueling public sector strikes. Marko Kranjec, the country’s top central banker, has highlighted the lack of competition as a key flaw in the Slovene economy. Speaking metaphorically, he stated that Slovenia's domestic market resembles that of the United States during its late-19th century industrialization phase. Policymakers must move forward on prudent wage policy, enhanced competition, some financial literacy and improved fiscal policy. Otherwise, the Alpine country will also be more prone to external shocks. Slovenia’s Euro zone partners are watching to see how their newest fellow member performs.

Adding to this list of items on the domestic front, Slovenia assumed the EU’s six-month rotating presidency starting January 1, 2008. This holds particular significance as Slovenia will be the first former communist country to lead the EU. Internal politics, however, threatened to sour Slovenia’s EU presidency before it had even started. The aftermath of the national presidential runoff on November 11th could have jeopardized thoughtful preparation for taking on responsibilities at the EU level. In the runoff, Danilo Türk of the Social Democrats beat Prime Minister Jansa’s favourite, Lojze Peterle, for the post of President. Shortly afterwards, Janša accused the Social Democrats of defaming Slovenia abroad by allegedly involving themselves in a petition, signed by 570 Slovene journalists, claiming that Janša and his government exerted political pressure on the press. To bolster his standing at home and abroad, Janša decided to move for a confidence vote. If he had lost, new elections would have followed; thus, a possible coalition collapse loomed only weeks before assuming the EU presidency. Slovene as well as European governance was on the line. As it turned out, Janša won the vote in parliament and thus the support of a united coalition in a 51-to-33 outcome. Opinion polls showed a rise in the Democrats’ ratings.

In practical terms, the EU presidency adds a wealth of foreign-policy items to the calendar. The Slovenes have set as a high priority the signing of Stabilization and Association Agreements (SAAs) with all states in the Western Balkans. A few Balkan countries are candidates for EU membership. But Croatia is the only one that may be ready to do so by the end of the decade. The others will need at least five years to prepare, estimates say. Bosnia-Herzegovina already tripped once on its way to EU candidate status over its ethically divided police force. Montenegro, having circumvented the ECB by adopting the Euro unilaterally, and Macedonia with its high unemployment, have equally thorny EU applications. Slovenia’s EU presidency can do little more than pave a few more meters on their road to accession.

Slovenia has also backed Serbia’s bid for candidate status, though relations with Serbia might be dominated by the breakaway province of Kosovo. Slovenia will seek a common position for the 27-nation bloc on how to handle the question of Kosovo and manage any further instability in the former Yugoslavia. With parliamentary elections scheduled for autumn 2008, Slovenia’s leaders have their work cut out for them during the first semester.

Roman R. Kessler is an economics correspondent for Dow Jones Newswires in Frankfurt and a contributor to the Wall Street Journal. He can be reached at kessler.roman@gmail.com.

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.