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Slovakia at an economic crossroads

March 7, 2019

Sometimes the image of a place depends on what one chooses not to notice. Slovakia, for example, is seen by German carmakers as a great place to invest, but is also a country where organized crime flourishes.

VW's Slovakia HQ
Image: picture-alliance/dpa

Slovakia reported the worst economic freedom results in Central Europe in 2018, falling to 65th in the latest Economic Freedom Index, published by the Heritage Foundation.

"We have been below average for a long time," said Jan Oravec, president of the Entrepreneurs Association of Slovakia (ZPS).

As US tariffs threaten its car exports, slower growth undercuts budget revenues and organized crime revelations expose murky links to public officials, the so-called Tatra Tiger is asking itself some hard questions.

VW Autoproduktion in Bratislava
VW has found an ideal place to extend its supply chain in SlovakiaImage: AP

Tiger tank running on low

The country has seen strong growth since it joined the EU in 2004, its economy closely linked — mainly via exports of manufacturing goods — with the German economy, where 23 percent of its exports end up. 

And while exports will be bolstered by production in Nitra-based carmaker Jaguar Land Rover, as well as Bratislava-based Volkswagen, the economy passed its cyclical peak in 2018, when it grew at 4.3 percent, as the global downturn hit the export-oriented economy, as the Institute for Financial Policy (IFP) reported recently.

The Finance Ministry last week revised its growth forecast for 2019 downwards. Compared with last September, it lowered its prediction by 0.5 points to 4 percent. "We're making this revision based on the situation outside Slovakia, and not in Slovakia," said Finance Minister Peter Kazimír.

Others believe it could be even lower. According to the UniCredit Bank analyst Lubomir Korsnak, growth will be 3.2 percent.

"Decreasing economic confidence indicators in Europe and the slowdown of many big Eurozone economies likely had their impacts on the export-oriented Slovak economy," said Slovenska Sporitelna analyst Katarina Muchova.

The Organization for Economic Cooperation and Development (OECD) predicts the economy will grow at 4.3 percent this year and 3.6 percent in 2020.

Porsche Cayenne Diesel
Porsche Cayennes are made in SlovakiaImage: Getty Images/S. Gallup

US tariff effect

Germany would likely be the biggest victim of US tariffs on car imports, but eight of the top 15 countries that export cars to the US are European. Slovakia, Hungary and Finland are among them, selling over $1 billion (€875 million) of cars a year each to the US, according to the US International Trade Administration.

Volkswagen, Slovakia's biggest private sector employer, produces Touareg SUVs, Audi Q7s and Porsche Cayennes for the US market in Bratislava.

The direct and indirect value added from car exports to the US was between 0.5 percent and 0.9 percent of output in Slovakia, Robert Stehrer, a trade economist at the Vienna Institute for International Economic Studies, calculated.

The Slovak Jaguar

Business wants more freedom

"Slovakia is an excessively regulated country, and its business community struggles to not breach a law," said Matus Posvanc of the F. A. Hayek Foundation, cited by TASR.

The Slovakian economy is held back, he argued, by a combination of a 2.5-percent levy on retail chains, higher surcharges for night and weekend shifts, a ban on shops remaining open on holidays and the increase in minimum wage.

The Country Report Slovakia 2019 by the European Commission last week added to the gloom. It praised Slovakia's high economic growth and low unemployment rate, but was critical of regional imbalances and the low quality of public institutions, education, science and research.

It was also critical of the effectiveness of tax compliance measures in reducing the high value-added tax gap, which is one of the highest in the EU.

The labor market, meanwhile, is tightening further, the EC report added and this exposes a number of structural challenges, pointing to demographic trends and changing production methods.

The EC pointed to the very high long-term unemployment rate, and also the low spending on active labor market policies, among the lowest in the EU.

Slowakei, Bratislava:  Jahrestag der Ermordung von Jan Kuciak und Martina Kusnirova
Public gathering "We won't forget! We go on!" on the anniversary of murder of journalist Jan Kuciak, February 21, 2019Image: picture-alliance/dpa/M. Martin

Corruption a key issue

The EC report went on to address corruption. "Organizational and procedural weaknesses at the police and prosecutor's level, as well as weak whistleblower protection, hinder the fight against corruption," it wrote.

Another challenge lies in improving the effectiveness of the justice system. "While the overall efficiency has been improving, concerns over the perceived independence of the judiciary persist," the EC wrote.

When Slovakia gained its independence in 1993, various organized crime syndicates moved in, including the Italian mafia which joined the former Yugoslavs and Albanians.

Read moreSlovakia: Thousands rally to demand police chief step down over journalist's murder

Several years ago, Slovak journalist Jan Kuciak began investigating organized crime in his country and collaborated with international reporters from the Organized Crime and Corruption Reporting Project. (OCCRP). Kuciak and his fiancee Martina Kusnírova were shot to death on February 21, 2018 in their home outside Bratislava. 

The US State Department last year identified Slovakia as a "jurisdiction of primary concern" in its International Narcotics Control Strategy Report. The country was described as having "a high level of domestic and foreign organized crime, mainly originating from eastern and southeastern Europe."

Head shot of a man (Jo Harper) with grey hair and brown eyes
Jo Harper Journalist and author specializing in Poland