So far Slovakia has been a European success story, but now the euro is threatening to spoil it. Like the rest of Eastern Europe, the Slovak economy was in ruins when Communism collapsed in 1989. Four years later, when Czechoslovakia fell apart and Slovakia and the Czech Republic each went its own way, it was generally expected that Slovakia would be in for a hard time. The dissolution of Czechoslovakian, including the break-up of the koruna, the Czechoslovakian currency, went unexpectedly smoothly, but many doubted whether Slovakia, one of the poorest regions in Europe, would be able to survive without Czech subsidies. The Slovaks surprised them all.
In the late 1990s, the Slovak government sought the advice of a group of British libertarians, who recommended a radical liberalization of the economy. The Slovaks took the advice; the results were staggering. After painful self-imposed economic reforms, Slovakia boomed. In 2004, the country was able to join the European Union (EU). That same year it introduced a 19% flat tax rate, which led to further economic growth. Investors flocked to the country. In 2007 the Slovak economy grew by more than 10%.
But then the euro was introduced. The EU treaty obliges new member states to adopt the euro currency as soon as they fulfill the economic requirements. In 2009, Slovakia dropped the koruna and became the first of the EU countries from the former Soviet bloc to join the eurozone. Today many Slovaks are sorely regretting that decision: it is costing them dearly.
Last year, the economy of Greece, one of the 17 eurozone countries, collapsed. During the past decade, the Greeks have borrowed so much that they are no longer able to service their debts. Today, Greece is on the brink of bankruptcy. The economies of Portugal and Ireland, two other eurozone countries, have also run into difficulties. This has forced the other 14 eurozone partners to come to the assistance of the Greeks, the Portuguese and the Irish and bail them out to save the common euro currency.
The Slovaks have refused to participate in the 2010 bailout of Greece. As one of the smaller eurozone countries, it was allowed to skip helping Greece. Nevertheless, it was criticized by the EU authorities in Brussels for "lack of solidarity." The Slovaks are obliged, however, to contribute some $10.9 billion to the euro-rescue fund EFSF (European Financial Stability Facility). The politicians in Bratislava refuse to do so. They argue that Slovakia restructured its own economy through tough cost-cutting without receiving a cent from other countries in the West. They point out that the countries which Slovakia is being called upon to assist have a higher GDP per capita than Slovakia.
The euro dispute is currently straining Bratislava's relations with Brussels. It has also put Slovakia's governing coalition under pressure. Last July, the EU agreed to pay a second bailout to Greece. This is needed because if Greece does not receive a second rescue package of $110 billion, it will default.
As the sovereign debt crisis is also threatening to spread to Italy, the EU has decided to enlarge the powers of the EFSF. To become effective, however, this decision needs the unanimous approval of the parliaments in the 17 eurozone countries.
Slovak Prime Minister Iveta Radicova has isolated herself by speaking out in favor of the enlarged rescue package. Her coalition partner, the Freedom and Solidarity Party (SaS), is vehemently opposed to the EU agreement, which, it says, would lead Slovakia "on a direct path to socialism." Says SaS leader Richard Sulik, "We have to let Greece go bankrupt."
The events in Slovakia have made Poland, the Czech Republic and other non-eurozone eastern European EU states wary of the obligation to adopt the euro under the terms of their EU adhesion. Two weeks ago, Poland, the Czech Republic, Lithuania, Latvia, Hungary, Romania and Bulgaria announced that they might hold referendums on the euro take-up.
In Estonia, which joined the eurozone earlier this year, many already regret having done so. When the Estonian Parliament debated the enlargement of the EFSF recently, opposition leaders pointed out that Estonians had suffered years of belt-tightening to prepare for eurozone entry and that in the light of this, Tallinn's contribution to the rescue fund is unfair.
In Slovenia, discontent is also growing. The country broke away from Yugoslavia in 1991, joined the EU in 2004, and the eurozone in 2007. Like the Slovaks and the Estonians, the Slovenes have little sympathy for countries that are not displaying the fiscal discipline that they were forced to endure before becoming EU and eurozone members. Last week, Slovenia's Parliament ousted the cabinet, paving the way for general elections later this year. As a result, the Parliament is not likely soon to approve the enlargement of the EFSF powers.
Meanwhile, some of the larger Western eurozone countries, such as Italy, do not seem to be taking the eurozone crisis seriously enough to take the drastic measures which the governments of former communist countries such as Slovakia, Slovenia and Estonia took in the past years. The Italian government urgently needs to enact economic reforms to solve its huge debt problem. Italy has a powerful economy. It ranks among the world's biggest industrial nations and is a member of the G-7. If the Slovaks were able to overcome their economic problems, then surely Italy should be able to do so.
For a long time, however, Prime Minister Silvio Berlusconi has avoided every drastic measure, and austerity packages were consistently watered down. This wavering has upset the markets. Last week, the rating agency Standard & Poor's downgraded Italy's credit rating. In early August, the European Central Bank (ECB), the EU institution that administers the monetary policy of the eurozone, began buying large amounts of Italian sovereign bonds to keep down Rome's borrowing costs. The ECB purchases are controversial: Brussels would like to expand the powers of the EFSF so that the latter could conduct the bond-buying operations. No wonder parliaments in Slovakia, Estonia and Slovenia do not want to go along with this. Why should they provide the money for bailouts of countries such as Italy? Out of a "solidarity" which the countries in Western Europe never had for their brothers in the East?
