The economy of Slovenia

Gaining independence in 1991, Slovenia emerged relatively unscathed from the break-up of Yugoslavia, in contrast to the other new republics that were seriously damaged by conflicts. Slovenia’s traditionally strong contacts with neighbouring Austria and Italy, as well as Germany, were a valuable basis on which to build the newly independent nation’s economy. Indeed, in comparison with the other new Member States that joined the EU in May 2004, Slovenia’s economy was among the strongest.

Despite this strong basis, however, Slovenia has still had to undertake the complex transition to an open, market economy in the years since independence. And once EU membership came into prospect, the goal was to achieve convergence with the euro area. The new Member States have had to undertake significant economic reforms, but Slovenia has travelled most of the transition route without suffering a major shock.

Gradualist

In fact, successive governments’ overriding aim in economic policy has been to favour stability, adopting a gradual approach to structural change explicitly designed to avoid major shocks. “This Slovenian ‘gradualism’ has worked up until now. But that inevitably means there are still considerable challenges facing Slovenia, whereas other new Member States have already dealt with these in response to external shocks which Slovenia has managed to avoid,” says Filip Keereman of DG ECFIN. “It will be interesting to observe how Slovenia’s economy develops in the coming years, especially once the euro is introduced. Being part of the euro area puts a premium on the Slovenian government advancing with the more painful structural reforms in order to maintain competitiveness and healthy growth.”

One success in the Slovenian approach is the stabilisation in the government deficit, reduced from around -4% of GDP in 2000 to less than -2% now. And government debt also is comparatively low, at below 30% of GDP. Following a period of managed depreciation by the central bank, stabilisation of exchange rates has also been successfully achieved in the framework of the exchange rate mechanism (ERM II), which Slovenia joined in June 2004.

Conquering inflation has been the trickiest problem in ensuring the convergence necessary for euro adoption. Around the time of independence in 1992, the inflation rate was in triple digits, but was brought down to about 6% by 1996. The introduction of value added tax (VAT) in 1999, replacing the former sales tax, caused inflation rates to climb to 9% again. Over the past three years, government and the monetary authorities have worked together to control this, and inflation has been reducing steadily since then. In particular, wage agreements in the both public and private sector have ensured there are no excessive rises in consumer spending power, which has limited demand and contributed to lower inflation rates.

Restructuring

In common with other transition economies, Slovenia has seen a shift away from manufacturing towards the service sector. With a 65% employment rate, and a comparatively low unemployment rate of just over 6%, Slovenes have not suffered from industrial restructuring in the way that their counterparts in other transition economies have. However, progress in privatisation has been considerably slower than in most other new Member States.

HICP Price inflation (y-o-y percentage change)

© Commission services

The private sector accounts for less than two-thirds of GDP, a relatively low share, and the state remains keen on controlling economic actors, either directly or indirectly (through controlling shares in nominally private companies). The public sector still plays a major role in industries such as telecoms, steel, banking and insurance. Part of the problem is a reluctance to cede control of key sectors to foreign investors. Indeed, Slovenia actually has a negative foreign investment (FDI) balance, with Slovenian investments in other former Yugoslav republics in particular exceeding foreign investment inflows.

“Strategic foreign investors haven't been seen as adding strength to the economy, although the current government seems to have loosened policy a bit. There are goals for further privatisation, and some preparation work ongoing, but without much urgency,” notes Keereman. “But without attracting external capital, it is difficult to imagine economic growth strengthening to 5%, as the government targets.”

A view of the old town © EPA PHOTO/Antonio Bat

In common with all Member States, Slovenia has delivered its national reform programme (NRP) to the Commission, as part of the Lisbon process of fostering growth and creating jobs in the EU. Slovenia’s NRP is largely based on the national development strategy. Widely debated, with strong media coverage, the need to enhance the economy's potential has widespread support across the country. And the Prime Minister has recently built on the strategy with a ‘partnership for reform’ designed to boost the pace of structural changes. This partnership has support from several (but not all) of the opposition parties.

“With the economy seemingly doing reasonably well, it is an opportune moment for further reforms,” reckons Keereman. “Tax reform, reductions and restructuring in public spending, and an overhaul of the pension and healthcare systems are all needed to meet the imminent challenges of globalisation and population ageing. To this end, Slovenia also needs to become more business-friendly. There are too many administrative and tax barriers to entrepreneurs and not enough financial support for private enterprise. Moreover, further deregulation and liberalisation is essential to make the economy more flexible, and to enable Slovenia to continue improving its competitiveness.”