On Eurozone budgetary constraints

Cross-posted from Credit Writedowns

“Slovenia becomes the new problem child of the EU”. This is the headline today in Handelsblatt, a leading German financial newspaper. Below is a translation of that article and a few comments:

Slovenia was long regarded as a model country. But now it is becoming a new problem case for the euro-zone. The government needs to cut vigorously to avoid Greece’s fate.

Jean-Claude Juncker, chairman of the Euro group, and Luxembourg’s Prime Minister, has called on the small country to take drastic cost-cutting efforts.The government in Ljubljana must not increase the national debt. Otherwise a fate similar to Greece’s could threaten Slovenia.

In 2007, Slovenia was the first Eastern European EU country to join the euro zone. The small country of two million inhabitants has long been regarded as economically sound. But since the financial crisis, the national debt has grown from year to year. According to the latest estimate by the EU Commission, the budget deficit for the year will have risen to 5.8 percent of gross domestic product (GDP). In 2010, the ratio stood at 5.6 percent. The public debt will account for 42.8 percent of GDP in December. A year earlier, it was 38 percent. Euro group chief Juncker criticized foremost that the Slovenian population rejected the revamping of the state pension system and an increase of the retirement age in a referendum earlier this month. "Slovenia must now get to grips with problems elsewhere. An agreement on pension reform would have been the easiest way," Juncker said, according to the Slovenian news agency STA. The government must now take "quick and brutal" decisions.

In the beginning of the month, the Slovenian central bank chief Marko Kranjec had already warned against a rejection of the pension reform. The country must definitely do something about the rapidly growing national debt. "If things continue at this place, our country will find itself in Greece, Portugal or Ireland’s position," the central bank head said.

Slovenia is certainly still a good bit below the EU average with its level of debt, which is about 80 percent of GDP. Investors, however, are worried about the extremely rapid growth of the Slovenian government debt in such a short time. In 2005, the rate was 27 per cent of GDP. This year it will exceed the 40 percent level.

Gunter Deuber, Eastern Europe specialist at Raiffeisen Banking Group in Vienna, warns of a growing loss of credibility for this small country. With its open economy, Slovenia has so far always been regarded as fairly reliable and solid. At present, potential problems have been overlooked due to the crisis in Greece. Slovenia has to be careful, however, as international investors could turn away soon. "Slovenia is trying to find its way," laments Deuber. The openness of the previous era has been lost somewhat. The country is now increasingly closing itself off from the outside.

I would say the tone of the article is somewhat overstated since there is clearly no comparison between Slovenia and Greece on debt-to-GDP metrics. However, Slovenia’s problems highlight the fundamental deflationary bias of the euro system and all fixed exchange rate systems more generally.

In the wake of a deep recession, private sector demand falls. Income falls with it, causing tax receipts to fall even as budgetary needs rise due to automatic stabilizers. This opens up a wide government deficit. In general, this is what you want fiscal policy to do; the public sector picks up the slack for the private sector in and coming out of recession.

However, the euro acts as a gold standard for national governments within the euro zone as EMU has fixed their (now abolished) national currencies to an external currency they do not create. The Slovenian government needs to ‘get’ euros like any other euro currency user. This makes it vulnerable to liquidity concerns. Slovenia does need to be concerned given heightened awareness of euro zone budgetary problems. This is the risk governments run in abdicating currency sovereignty. Monetary policy is abdicated and fiscal flexibility is reduced as was initially desired in setting up the euro zone. That will likely mean cuts in Slovenia, adding yet further to fiscal policy as a drag throughout the euro zone.

Source: Slowenien wird zum neuen Sorgenkind der EU – Handelsblatt

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. GermanQR

    Oh for God’s sake this is getting ridiculous now. So 42% debt is too much debt, according to whom? And a temporary 5% deficit has to be curbed? At this rate their total debt will reach Germany’s very own debt to GDP ratio of 83% in 9 years. Oh no!!!!!!!!

    Way to fan the flames of market hysteria, Handelsblatt.

    It’s clear to me that Germany (not Slovenia, or some other such nonsense) has definitely become the EU’s worst problem. Enough already. We should kick THEM out of the EU and tariff the hell out of them. We should have never tolerated:

    1.- Their imposing a 1.95 DM/EUR exchange rate: it was always going to mean ruin for the rest of us. Chinese-style currency manipulation, anyone?

    2.- Them and the French imposing too-low interest rates that were good for them, but ultimately destroyed the Southern and Irish economies.

    It’s bad enough without having to hear them say how lazy Southern Europeans are (when in fact they have less vacation time and work longer hours), or how profligate and irresponsible they are (when Spain was running a budget surplus as late as 2007, when Germany was busy colluding with France to breach the 3% Stability pact limit).

    Just shut the F up already and help solve the mess you were instrumental in creating.

    1. and i

      Well said. I’m wondering if people from other countries in the EU are joining the Greeks (in Greece) in their protest… It’s getting hot, I’d be there but I’m across the ocean.

      Remember, if you’re not a bank, you’re next!

      “”The situation that the workers are going through is tragic and we are near poverty levels,” said Spyros Linardopoulos, a protester with the PAME union blockading the port of Piraeus. “The government has declared war and to this war we will answer back with war.”

      A peaceful demonstration of 20,000 people in Athens was soon marred by outbreaks of violence, when two groups clashed. One side took refuge near a coffee shop, and police fired tear gas in an attempt to clear the crowds and get them out.

      The situation quickly degenerated, with masked and hooded youths pelting police with chunks of marble ripped off building facades and steps. They set fire to giant parasols at an outdoor cafe, using some to form barricades, and smashed windows of a McDonalds outlet and other snack shops.”


      1. GermanQR

        It’s clear at this point French banks own the French Government, German banks all but own the German one, (despite the fact that the German EXPORTERS’ lobby should have some degree of leverage with the government. But they don’t. They would certainly love having both a weaker euro and functioning economies in their neighbourhood).

        It’s all about the banks and the rentiers. They can not be allowed to take a hit under any circumstances. Extreme poverty in Greece? 25% unemployment in Spain? So be it. Let’s just dig in and peddle unending propaganda so that gullible Germans think it’s all about hard-working Germans paying for other people’s luxury expenditures down South.

        Too bad the Germans are buying the lies. Doesn’t bode well for the EU.

    2. MontanaMaven

      Yes, I agree. The Greeks work longer hours and are more productive than the French, Germans or Americans. They retire on average later. So you can see why they are more than resentful that after massive cuts to their salaries and pensions, the predators want more pounds of flesh that just aren’t there and are excusing them of being lazy deadbeats.

      The Greeks understand war. I traveled there in the 1980s and there are monuments to the thousands of murdered Greeks during WWII by the Germans. They understand that now war is being waged using finance. Usurious interest rates are used instead of machine guns.
      Michael Hudson at Global Research
      “The moral is that creditor foreclosure – or voluntary forfeiture to pay international bankers – has become today’s preferred mode of economic warfare. It is cheaper than military conquest, but its aim is similar: to gain control of foreign property and levy tribute – in a way that the tribute-payers accept voluntarily. Land is appropriated and foreclosed on – or, what turns out to be the same thing, its rental income is pledged to foreign bank branches extending mortgage credit that absorbs the net rent. The result is economic austerity and chronic depression, ending the upsweep in living standards promised a generation ago.” http://www.globalresearch.ca/index.php?context=va&aid=24217

  2. Benghazi Medical Crisis

    euro acts as a gold standard for national governments within the euro zone as EMU has fixed their (now abolished) national currencies

    ~~Edward Harrison~

    Although I hate to take sides on foreign issues, when Ned Flanders is in trouble, we all in trouble. Could we offer useful suggestions? Could companies indigenous to Slovakia also increase debt load? Issue long term bonds? Is Kia a Slovakian Company? Who knows? One thing for sure, “A Slovakian Government tax holiday on all taxes could get Slovakian Companies revved up for competitive edge. Strikes by labour bosses could be outlawed by martial law. Corporate bond auctions could finance expansion, modernization, and restructuring.” Is USA at the dawn of similar dilemma? Should our analogous remedy be applied pro-facto? Do Americans and All-Americans Also need gigantic tax holiday to get the cold engine revved up to idle speed?

    We in a heap o’ trouble, Boy

  3. Hugh

    “Euro group chief Juncker criticized foremost that the Slovenian population rejected the revamping of the state pension system and an increase of the retirement age in a referendum earlier this month”

    Kleptocracy, anyone? Go after those the social safety net. Ignore that Slovenia’s public debt is increasing because in bad economic times that is a perfectly normal response.

      1. Jim

        Gordon Gecko was incarcerated.

        How many of the ECB or EuroZone bureaucrats will be incarcerated within the next five years?

        I would settle for these OverPaid Goldman/McKinsey Rejects to resign if Greece leaves the EuroZone.

  4. Linus Huber

    It is interesting that the tendency to ignore the reason of being in the present difficult situation. During good years governments should have reduced their debt (having a budget surplus) to be ready for these difficult periods of time. But the system cannot work when we produce deficits at all times, during good years and bad years. I am not sure that it is simply the politician’s fault or whether it is a phase of society when basic accounting principle suddently do not matter anymore.

  5. Ransome

    Deficits are symptoms. You need a diagnosis before considering treatment. What is the unemployment rate?

  6. Rodger Malcolm Mitchell

    The euro nations voluntarily surrendered the single most valuable asset any nation can have: Monetary Sovereignty. And for what? A bit more trading convenience? I predicted this in 2005, and now the chickens have come home to roost.

    For those of you who feel Monetary Sovereignty is hard to understand, better study it, if you want to understand economics.

    Rodger Malcolm Mitchell

  7. Firean

    Will Junket not be happy until all EU countries finances are run by central EU finance minister(s) ? In the meantime he just stirs the sh*t.
    When will they be setting Poland up ?

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