No Bailout for Slovenia

At some point, it has to stop. After the rescue package for Cyprus, there is talk about more such packages, most specifically one for Slovenia. But it is likely that other countries will follow suit — Malta may be next.

And among the large European economies, Italy and France are mentioned. Soon half of the members of European Monetary Union would be under the bailout.

This cannot continue. Rescue packages can be used properly to avoid true disasters, such as the collapse of Lehman Brothers in the United State. But these shields, critical as they can be, cannot be overused.

What about Slovenia’s hopes to receive funds from the European Stability Mechanism (ESM)? I hope that they would not be granted.

I realize that this is a serious decision either way. Slovenia, which is in recession for the second year in a row, needs more than four billion euros this year to service its debt, to balance the budget and recapitalize the banks.

That does not seem like a large amount of money in the bigger scheme of things. In addition, Slovenians would wonder why nothing would be coming to them, while all the other countries so far have received emergency funds.

For starters, let us look at the country’s economic assets. Slovenia has a solid economic base. It has well-trained workers. Many renowned companies have established operations in the country, including Siemens, Bosch, IBM and Microsoft.

For years, Slovenia’s economy has grown faster than that of the eurozone. The national debt of the country last year was only 54% of GDP, compared with Germany’s 82%.

There are several important reasons not to grant Slovenia a rescue package. The most important is political. While it is important in a monetary union to show solidarity to member states, that must have its limits.

Nation states must also be prepared to absorb a significant amount of what’s involved in overcoming a temporary economic shock, or the cost of significant adjustments, on the domestic front.

In Germany, for example, the Hartz reforms were introduced a decade ago. They initiated profound labor market reforms, and were based on the principle of “demand and support.”

In practice, this meant that people would only get government support if there was no other solution, and that they were making a significant contribution to the adjustment process themselves.

In this way, Germany managed to slow the rise of social expenditures significantly and, at the same time, to put the economy on a more sustainable path.

Something similar is needed now for the euro. Again, the support tools are in danger of running out of control, even if this currently does not take the form of transfer payments, but loans.

Of course, the “troika” — the experts from the EU, IMF and ECB — always require a national contribution, which is very painful for the country. But why must that contribution always take the form of bureaucratically imposed austerity and reform programs?

Why can’t one put more emphasis instead on the pressure of business failures and payment delays?

After all, within any given national economy, the government also does not automatically come to the aid of each and every business that has gotten into trouble to prescribe bailout money and restructuring programs.

The rejection of a rescue package for Slovenia would make clear to potential candidates for bailouts that they cannot more or less automatically trust that help will arrive.

If such a precedent were established, then the support of the populations in creditor countries for the common currency would also rise. The monetary union would not be seen as a one-directional wealth redistribution system.

Slovenia does not need money to get back on its feet. It requires overall confidence by international investors. That confidence, currently shattered, only returns when there are drastic reforms in the economic system.

As things stand, underneath the gloss of modernization, the uneasy marriage of government and business, which dates from the time of the communist regime in Yugoslavia, scares many. These shady ties must be abolished.

If the country were to get money from outside now, it would not increase the willingness to make such reforms, but rather reduce it. Conversely, the refusal of bailout money would help to break the resistance of certain social groups against reforms.

I do not deny that without a bailout the markets might force Slovenia temporarily to pay a steep 7% interest rate, which is more than the current rates in Greece, Portugal and Ireland.

But although this is a high rate, it will only hold true for a limited time, until the moment the government sits down in earnest to make the reforms that are necessary.

Those reforms include measures such as reducing the minimum wage, which is the highest in Europe, allowing for the privatization of banks, utilities, insurance, a textile company, a trade group, more transparency in public tenders, more flexibility in working time rules to compensate for fluctuations in the workload — and stricter rules for holding referendums.

To avoid any misunderstanding: It is the Slovenians’ sovereign right to hold on to all these measures as they are currently in place. But so is living with the consequences.

One cannot insist on having one’s (special) way on rules and regulations — and then expect others to pay for the predictable consequences of the likely fallout.

There are also some fears about contagion in the eurozone if the Slovenians do not pay their debts on time or if banks there go bankrupt. I do not share these fears.

The largest Slovenian bank Nova Ljubl-Jánska Banka, has total assets of just EUR 16 billion — hardly more than a large savings bank in Germany. No other country would likely be affected. Financial markets are not likely to misinterpret this precedent.

In conclusion

The case of Slovenia can become a useful litmus test for the eurozone. If the members reject a rescue package for the country, that move may cause irritation temporarily.

In the long run, however, the markets will react positively if the trend towards a transfer union is stopped and popular backing of the euro increases.