The heroes of Europe are to be found in Slovakia. The Slovak government is the only Eurozone government that did not participate in the €110 bn. bailout of Greece. While all other governments of the Eurozone work toward further centralization, an economic government and Euro bonds, only the Slovaks resist this trend toward inter-european transfers via bailout funds.
While the Slovak parliament had rejected the specific Greek bailout, it gave in to the creation of the “rescue fund”. However, it was only after massive pressure and the threat of “political sanctions” that they assented to the foundation of the European Financial Stability Facility (EFSF) of €750bn.
Prime Minister Iveta Radicova explained in August the Slovak resistance to European bailouts:
We had a difficult time with fundamental reforms between 1998 and 2002.And no one helped us. We did not get a cent. Nothing. It was our citizens who had to carry the burden and it was not easy. But we got through this phase with very unpopular, painful reforms. How should I tell our citizens that we should now help those who are not prepared to do something themselves.
Radicova shows more common sense than can be expected from European politicians. Indeed, Slovakia did commit to necessary structural reforms and cut public spending, against resistance on part of the population. Note: the Slovaks did this without the need for the EU commission or Germany to “impose” reforms, as is now the case in Greece, Spain or Portugal.
Finally, Greece is also undertaking unpopular reforms. Why does Greece get a reward in the form of a bailout while Slovakia did not? Not only did Greece defer the necessary reforms, but the Greek government lived beyond its means by borrowing and indirectly monetizing its debts. Thereby, it made all users of the common currency pay for its extravagancies. This was facilitated by the perverse setup of the monetary union. The Eurosystem allows for the monetary redistribution in favor of government with the highest deficits. Several independent governments can use one (central) banking system to finance their deficit spending (I explain the mechanism in detail in my book The Tragedy of the Euro).
By living beyond its means, the Greek government subsidized an uncompetitive Greek economy. Wage rates could remain artificially high as the Greek government paid generously for a large public sector, public employees, pensioners, and unemployed. At the same time, the Slovak government forced through unpopular reforms, reducing the public sector and making its economy more competitive and productive.
It is understandable that Slovaks feel uneasy about paying for the artificially high living standard of the Greek population via direct transfers. As a Slovak one might well think: “How have we been so stupid to do these reforms? If we’d waited a little bit longer and lived beyond our means, we might well have gotten the reward of a bail out like the Greeks.” One must take into account, however, that Slovak reforms were before the entry into the monetary union. Once you have entered, the incentives for reforms drop dramatically, as a bailout can be expected.
An intriguing fact is that GDP per capita in Greece is almost 50% higher than in Slovakia ($29,400 vs. $21,200). Hard working poorer Slovaks are expected to bailout lazy Greek bureaucrats? Unelected EU commissioner Olli Rehn was not embarrassed to accuse Slovakia of a “lack of solidarity” and criticize the decision of the democratically elected Slovakian parliament.
Recently, Ivan Miklos, Slovak Finance Minister, stated that Greece should restructure its debt. Such an acknowledgment of reality is not found often among politicians. Politicians must know that a restructuring will be necessary sooner or later. But they do not dare to say so. Miklos also stated that the EFSF was a mistake.
It is honourable that Slovak politicians call the EFSF for what it is, and that Slovakia resists the redistribution and tendency toward centralization in the EU. Unfortunately, Slovakia is not big enough to really matter in the fight for the future of Europe. Its contribution to the Greek bailout would have been less than 1% of the total (€ 800 million). Thus, Greece was bailed out anyway.
Unfortunately, politicians of countries that would make a difference do not resist the advancement on the fast track toward a transfer union. German chancellor Angela Merkel, by just saying that Greece should restructure and that the EFSF was a mistake, could bring down several governments in peripheral countries by causing a surge in their bond yields and their eventual default. This could stop the process toward centralization of power in Europe and the prospects of a transfer union. Yet, Merkel fails to defend the interest of the common man in Germany and in Europe. She should look to Slovakia for inspiration.
