Dire Straits

The crisis is hitting Slovenia badly. If countries like Iceland, Ireland, Hungary and the Baltic countries are paying the price for more or less completely opening up their economies in a manner which put a smile on late Milton Friedman‘s face, Slovenia seems to be reaching the end of the rope of a labour-intensive-socially-responsible-state-run capitalism. Or at least an attempt at that. As most of you know, pengovsky doesn’t really feel at home in economy, but then again it turned out most economists don’t feel at home in economy, so it’s OK :mrgreen: But fact of the matter is that in Q2 of 2009 year-on-year GDP fell nearly 10 percent. Vast majority of Slovenian industry creates little added value and some companies that were on life-support even when the times were good are now going bust.

The goverment of Borut Pahor is going about handling the crisis in a rather awkward manner. Curiously enough, the left block had been elected (among other things) on a ticket of being ready to face the onslaught of the crisis, while the previous government of Janez Janša feigned ignorance on the issue, with Janša famously saying just before elections that you don’t prescribe antibiotics to cure a cold. Fast forward nine months, and the new government is simultaneously dealing with a credit crunch, failing companies, unsustainable pension system, unprecedented rise in public sector wages and a severe lack of money. Not to mention an occasional tycoon

Throughout the spring and summer the main preoccupation was alleviating the effects of the credit crunch. Since Slovenian banking sector at the time was underdeveloped (to great dismay of free market zealots and IMF), exposure of Slovene banks to toxic assets and other elements of investment-banking alchemy was minimal. However, it turned out that their exposure to home-grown bad debt was quite substantial as they bankrolled many an MBO, most notably that of Istrabenz and Laško Brewery, but also MIP meat processing factory (driven into the ground by management bleeding the company to death while MBOing) as well as NFD investment company headed by Stane Valant which was heavily involved in helping Boško Šrot and Igor Bavčar with their MBOs. As you know, there was a lot of political pressure exerted on banks to stop extending these loans, especially since value of various stock that was subject of these MBOs went south, which meant that there suddenly wasn’t enough collateral. So the banks started requisitioning assets which they previously bankrolled.

But in the autumn the crisis struck for real and first big companies started to fail. Case in point being Mura, based in Murska Sobota (located in Prekmurje region, which is the most underdeveloped region in Slovenia), the largest textile factory in Slovenia which for the past ten or fifteen years was basically just a subsidiary of the local unemployment office. Every government to date was more keen on keeping 3000+ strong workforce employed, if only by throwing shovelfuls of money at them. Not that they earned a lot of money, because they didn’t (around 450€ monthly can hardly be called a decent paycheck), but 450 euros time 3000 employees time 12 months means a lot of money every year for more than a decade. Keeping Mura and its workers on life support always server a higher purpose. First of all it meant keeping the unemployment statistics down artificially in an already impoverished region. Then there was the EU membership where Slovenia needed a more or less clean bill of economic health. Then there was the adoption of the euro, where this bill of health needed to be squeaky clean. Then we had a period of very high economic growth (albeit artificially fuelled) under Janša when it would be politically impossible to allow Mura to go bust while GDP grew at about 7 percent yearly. Then the music suddenly stopped and after a string of angry protests and several suspicious offers to “save” the company, the latter finally filed for bankruptcy, putting almost all of its 3000+ employees on the dole at the worst possible time.

One of the reasons companies are going bust is also the fact that there is simply not enough money in state coffers. This year’s budget was re-balanced twice in a single year, something which hasn’t happened for a very long long time. This only shows how fast the macroeconomic outlook was changing. In fact, most schemes which the government put in place in the beginning only went so far and while they did alleviate the immediate blow of the crisis (like allowing companies to cut working hours per week and covering the difference in wages out of state budget), the problem was painfully simple: not enough money was rolling in. So instead of simply boosting public consumption (a classic Keynesian anti-crisis measure) the government had to start cutting down costs too.

Primarily this means reneging on the deal struck with the public sector unions while times were good that their wages will go up in the near future. What looked like a simple mathematical exercise under PM Janša became impossible under PM Pahor. The unions predictably don’t give a pair of fetid dingo’s kidneys, saying that they will not have the crisis being solved over their backs and demand (among other things) a higher tax on bigger income. As you know, this has been tried, but the idea was DOA. Other major public expenditures include health care and pensions. The latter were a source of a near-miss within the coalition last couple of weeks, as the government debated whether to freeze pensions on their current level. Naturally, this sent Karl Erjavec of DeSUS (pensioners’ party) through the roof, his being a single issue party and all. In the end a slower rise in pensions was agreed, which allowed the 2010 budget to be put together just in time (the budget has to enter parliamentary procedure no later than October 1st).

At the same time a comprehensive overhaul of the pension system was proposed by minister of labour Ivan Svetlik, which – among other things – proposes that pensions should be calculated based on one’s wages for the entire duration of his active status (today only the best 18 years in a row count) as well as increasing the minimum retirement age to 65. Then there’s the health care reform also aims to redistribute the monies its sector, much to the dismay of the doctors which were used to get more money every time a problem needed to be solved. Usually the problem wasn’t solved (such as waiting periods) but they got to keep the money anyway. And there’s the question on where to get the money if less people are/will be paying taxes due to unemployment and companies will no longer be posting big profits. One of the more likely solutions is implementation of the real-estate tax. It remains to be seen whether that will ever see the light of the day. State coffers are empty indeed, but this tax apparently cannot start to be levied earlier than 2011!

In these circumstances the government put together the 2010 budget, which is aimed to keep the deficit at around 5% and yet to be development-oriented. It was organised in such a way that it pursues specific strategic policy goals (like modernising the railway infrastructure) rather than just incrementally financing programmes which may or may not yield results.

Then there’s the opposition whose leader only a year ago accused the left bloc of trying to cause panic, but which chastises the government for its apparent sluggishness in handling the crisis. SDS even proposed its own agenda on how to go about it. This can be summed up in one sentence: cut taxes and increase spending. Which is basically what they have been doing while they were in power until 2008, only they did that by ballooning the country’s debt in a very good macroeconomic climate.

But at the end of the day one fact remains. Janez Janša and his SDS are not in power, while the left bloc is. And they said that they are can handle the dire straits this country will be facing and that we should all get ready for them. But while they may really have expected times like this, I have a distinct feeling that never thought they’d be so long, so bad and so frequent…

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Agent provocateur and an occasional scribe.

One thought on “Dire Straits”

  1. I appreciate the socialized health care (though the doctor’s office is often run like an insane free for all) and some of the other basic services (schools, government offices), but beyond that, this government has got to stop shoveling money into everyone’s pockets. Why the hell do high school students get money from the government? Can someone explain this to me? Also why are college students living like kings sitting in university and eating cheap meals for upwards of ten years? As long as people are comfortable in this paternal state where is the motivation for anyone to do anything?

    Now there is this panic because this population is aging, so they are pushing women to have babies as quick as they can, to the point that I have seen quite a few pregnant teenage girls. Now it is a great idea to try and “replace” the population but only if you assume that all those kids have parents who can afford them and will grow up to be wage earnin’ tax-payin’, law- abidin’ members of society who won’t be any additional drain on government coffers, but this is a BIG IF. This government is rolling the dice on some really shoddy odds.

    There has got to be a hundred better ways to run this country.

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