Slovakia

1) REFERENCES

Commission Opinion [COM(97) 2004 final - Not published in the Official Journal]

Commission Report [COM(98) 703 final - Not published in the Official Journal]

Commission Report [COM(1999) 511 final - Not published in the Official Journal]

Commission Report [COM(2000) 711 final - SEC(2001) 1754 - Not published in the Official Journal]

Commission Report [COM(2001) 700 final - SEC(2001) 1754 - Not published in the Official Journal]

Commission Report [COM(2002) 700 final - SEC(2002) 1410 - Not published in the Official Journal]

Commission Report [COM(2003) 675 final - SEC(2003) 1209 - Not published in the Official Journal].

Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

The 1998 Report noted that Slovakia had made little additional progress in its preparations for participation in economic and monetary union.

In its 1999 Report, the Commission found that the country had made little progress in preparing for participation in EMU.

In its November 2000 Report, the Commission found that no specific progress had been made with regard to the legislative adjustments necessary to bring Slovak law into line with the Community acquis.

The 2001 Report noted that significant progress had been made with regard to the independence of the central bank and direct financing of the public sector.

In its October 2002 Report, the Commission found that no further progress had been made as regards EMU as Slovakia already satisfied the requirements in connection with the adoption of the acquis.

In its November 2003 Report, the Commission finds that Slovakia meets the commitments and requirements arising from the accession negotiations and that it will be in a position to implement the acquis from the date of accession onwards.

The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The third stage of EMU began on 1 January 1999. This date will entail far-reaching changes for all Member States, even those not taking part in the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the Stability and Growth Pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to have liberalised capital movements.

Member States not taking part in the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common concern by all Member States, who must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must, in due course, comply with them on a permanent basis.

EVALUATION

Following the fall of the Czechoslovak communist regime in 1989, the country rapidly embarked on a programme of privatisation under relatively favourable circumstances. Slovakia was hard hit by the loss of markets to the east, and the impossibility of reaching agreement on an economic policy was the factor which triggered partition. This aggravated the country's economic problems: the cessation of transfer payments from the Czech Republic highlighted major imbalances in the budget and the balance of payments. Furthermore, the transition process was impeded by political instability and the lack of social consensus: privatisations were not resumed until June 1995. In 2001 per capita income expressed as a percentage of the average in the European Union (EU) was 48%. The 2002 Report concluded that the Slovak Republic was a functioning market economy. As long as it continued with the reforms, it should be able to cope with competitive pressure and market forces within the Union. The 2003 Report notes that unemployment is on the way down but still high, falling from 18.6% in 2002 to 17.7% in the first half of 2003.

1997 was the fourth consecutive year of strong economic growth in Slovakia. From 6.5% in 1997, the growth rate of gross domestic product (GDP) in real terms fell to 4.4% in 1998. This economic slowdown was due mainly to the Government's efforts to curb investments and consumption in order to hold down imports and to restrict the trade deficit and the current-account deficit. In 1999 the economic downturn continued, with a growth rate of 1.9%. The growth rate in real terms was 2.2% in 2000. It has since recovered, rising to 3.3% in 2001. During the first quarter of 2002 growth continued to accelerate rising to 3.9% The 2003 Report notes that real GDP growth accelerated further, to 4.4% in 2002. It fell back to 3.9% in the first half of 2003.

With regard to public finances, the overall general government deficit rose sharply from 1.3% of GDP in 1996 to some 5% in 1997. According to Slovak statistics, it was 5% in 1998. Reducing the deficit was central to the Government's macroeconomic stabilisation programme. The deficit was equivalent to 3.7% of GDP in 1999 and 3.4% the following year. In 2001 it was allowed to rise to some 4.9% of GDP. In 2002 expected net borrowing rose to 5.3% of GDP. The public debt has increased significantly in recent years, mainly as a result of restructuring in the banking sector. Gross public debt rose from 29.7% of GDP in 1997 to 49.8% in 2001. On the basis of the harmonised European standards (ESA 95), which take into account the costs of restructuring the banking sector and privatisations the deficit between 1997 and 2001 ranged from 4.5% to 6.5% of GDP, with the exception of 2000, when it peaked at 12.7% GDP. The 2003 Report notes that the general government deficit reached 7.2% of GDP in 2002, an election year. The Slovak authorities have forecast a deficit of 5% of GDP for 2003 and 3.9% for 2004. It could fall just below the 3% threshold in 2006. The public debt fell to 44.3% in 2002, mainly reflecting the use of part of the receipts from privatisation.

Inflation remained relatively moderate compared with other countries in transition. In 1999 it averaged 10.6% compared with 6.7% in 1998, following significant increases in administered prices. The rise in prices measured by the consumer price index (year-on-year basis) remained below 8.4%, its level at the end of 2000. In 2001 it fell to 7.3% on average and in July 2002 it dipped to a historically low level of 2% year-on-year. The 2003 Report notes that in 2002 consumer price inflation fell to the exceptionally low level of 3.3% as an annual average. It rose again in 2003 to around 8%. This is largely due to adjustments in administered prices and indirect tax hikes.

On the monetary and exchange-rate policy fronts, the koruna has been fully convertible since 1 October 1995. Its exchange rate was pegged to a basket of currencies comprising the German mark (60%) and the dollar (40%). There was a fluctuation margin of some 7% around the central rate. However, on 1 October 1998, the National Bank decided to allow the koruna to float, because it was no longer able to defend it against mounting domestic devaluation pressures. The pressures to which the currency was subjected depleted exchange reserves. Following further pressure in May 1999, the currency was some 14% down against the euro. By contrast, in 1999 and 2000 the National Bank had to take action several times to slow down the rate of the koruna's appreciation. In the summer of 2002 the koruna fell in value but staged a subsequent recovery. The 2003 Report notes that the reduction in interest rates, together with market interventions, has helped to mitigate the pressure for an appreciation of the Slovak crown and to prevent an associated loss in competitiveness.

In 1998 Slovakia recorded a current-account deficit in excess of 10% of GDP. The deficit narrowed to 5% in 1999 and to 3.7% in 2000 but then doubled in 2001 to 8.6% of GDP following a surge in demand on the domestic market and a slowdown in exports. Nevertheless, Slovakia can still easily finance its current-account deficit and, in addition, buoyant receipts from privatisations have recently added significantly to its foreign reserves. The 2003 Report notes that the current-account deficit exceeded 8% of GDP again in 2002. However, it was more than fully covered by FDI inflows amounting to almost 17% of GDP in 2002.

With regard to structural reforms, the 1998 Report found that restructuring in the banking sector had made little, if any progress. A large majority of firms belong to the private sector, accounting for some 80% of GDP. However, the Government continues to have considerable influence on the economy. A group of firms deemed "essential" has been excluded from the privatisation process. Slovakia has redirected its exports to European markets following the dismantling of the Soviet trade bloc and the dissolution of the federation with the Czech Republic. The 1999 Report noted that the Slovak Government was working on a vast programme of structural reform including the restructuring and privatisation of banks, a review of the legal and regulatory framework, the abolition of the "strategic firm" concept and the introduction of a regulatory framework for public market services, among others. The 2000 Report noted that the legal system necessary for the smooth operation of a market economy was largely in place but that it should be implemented more effectively. The 2001 Report stated that Slovakia had made progress in implementing new structural reforms, in particular as regards banking and the privatisation of the last state-owned enterprises. Reforms still need to be carried out in the social arena, in particular the health and pension systems. The 2002 Report stated that significant reforms of the health system had been carried out but that expenditure remained comparatively high. The 2003 Report notes that the Slovak Government has been moving more decisively to tackle the structural unemployment. Further measures to improve the legal framework for a market economy have been instituted. Its effective implementation is also being enhanced.

With regard to the independence of the central bank, the Commission noted in its 1998 Report that central bank legislation was not fully compatible with Community rules and it criticised legislation which enabled the central bank to finance the Government directly to a limited extent. The public authorities still had privileged access to financial institutions. The 2000 Report stated that efforts should be made to align legislation with the acquis as regards both the independence of the central bank and the prohibition of all direct financing of the public sector. The 2001 Report found that Slovak legislation complied, on the whole, with the acquis following amendments to the National Bank Act, which came into force in May 2001. The 2002 Report stated that the country had made little, if any progress in improving its administrative capacity for planning the budget and modernising the budgetary information system. The 2003 Report notes that Slovak legislation has now been aligned with Community law.

With regard to the progress made in the negotiations, Slovakia has accepted the EMU acquis and complies with it fully. The administrative structures needed to implement and enforce the acquis are in place. Negotiations on this chapter were closed in December 2002. Slovakia is meeting the commitments it made in the accession negotiations in this field. No transitional provisions have been requested.

Last updated: 18.03.2004