April 14, 2010
While the attention of Europe and the world media remains concentrated on Greece and the other ‘PIGS’, the financial irresponsibility of other states in the euro zone appears to be being happily ignored by the European Central Bank and encouraged by the institutions of the European Union.
This is happening despite the fact that such behaviour will sooner or later inevitably lead to a ‘Hellenisation’ in other countries of the euro zone.
One of the most quickly ‘Hellenising’ countries is the newest member of the euro zone, seemingly safe Slovakia. One may say that size of Slovakia’s economy is so insignificant that it is not worth attention. That may be true. What is significant, however, is not the size of Slovakia’s economy. It is flagrant ignorance and neglect by the ECB and EU institutions that was there also at the beginning of Greek story.
In the last year prior to adoption of euro (2008), the public debt of the Slovak Republic was a splendid 28% of the country’s GDP. According to official data, Slovakia’s public debt will reach 41% of GDP by the end of this year. Still very good by EU standards, so where is the problem?
The problem is in a very simple trick of creative accounting. The Slovak government is using a grey zone in the rules set by Eurostat and ECB for not counting PPP projects in public deficit and debt. Right after the adoption of the euro, the Slovak government got enthusiastically involved with a politically attractive but very costly programme of constructing highways through so-called ‘public private partnerships’ – PPPs.
The total investment costs of the three PPP highways guaranteed by the Slovak government are supposed to be over 6.6 billion euro – a lot of money for a small economy. Despite different rhetoric, all the real economic risk in these PPP projects is borne by the government, which will guarantee their repayment over the next 30 years.
A full guarantee of the PPP debts by the government is requested by the private partners, who are all very well aware that the projects will never recover their costs and their economic justification is entirely based on wishful thinking.
Including the costs of the PPP highways, the real debt of Slovakia grew to over 40% of GDP in 2009 and will reach 51% of GDP in 2010 – that is an increase of a good 80% in just two years since the adoption of the euro.
However, Slovakia’s debt growth is rather slow compared to the speed at which the country’s budget deficit is growing. It was 2.2% of GDP in 2008, grew to 6.3% of GDP (or 3.15 bln euro) in 2009 and, according to the approved national budget, should reach a by the standards of recent times modest 5.5% of GDP (3.75 bln euro) in 2010.
These figures, however, do not include the cost of the PPP highways. When we add those, the figures are shocking: the PPP contract signed in 2009 was for 1.075 bln euro, and two more PPPs prepared for 2010 will cost more than 5.2 bln euro (or 7.65% of GDP). In other words, if not stopped by the EU or the ECB, the Slovak government’s real deficit in 2010 will reach a ‘Hellenic’ level of 13.15% of GDP, while pretending that it is only 5.5% of GDP.
The fast growth of Slovakia’s public debt is not only being ignored by the ECB and the relevant EU institutions – it is actually directly encouraged and enabled by European Investment Bank, an European Union banking institution. According its website, ‘the EIB furthers the objectives of the European Union by making long-term finance available for sound investment’.
Without an EIB loan of 1 billion euros currently being considered by the bank for the Slovak PPP highways, private banks would not take the risk of financing the highways. One has to ask the logical question: is 13.15% of GDP a ‘sound EU objectives’?
I asked these questions in an open letter to the president of the European Central Bank, Jean-Claude Trichet, in in February 2010. My letter was never answered. Well – why should people accountable to no-one bother answering commons from Europe’s remote periphery?