August 7, 2020 (09:53)

Why has the Slovak industry suffered the most among EU countries?

The largest decline in industrial production among EU member-states is illustrative of the economic crisis in Slovakia, which is developing against the general background of the recession in the world economy. As of June 2020, Slovak industrial production decreased by 33.5% as compared to the same period of last year.

 

A similar negative trend is observed in other Central and Eastern European countries, in particular in Hungary (-27.6% of industrial production), Romania (-27.4%), and the Czech Republic (-25%), which precede Slovakia in these figures. A common feature of the structure of the economies of these countries is a significant share of the automotive industry, which in Slovakia reaches 49.5% of industry (forming 13.9% of GDP and generating 46% of exports).

 

The automotive industry in the EU has been affected by the economic crisis the most. While the EU industry decreased overall by 20.5% (06.2020/06.2019), automobile manufacture decreased by half. The lack of diversification in Slovak industry leads to both a rapid decline in industrial production during the crisis and rapid economic growth during the recovery period. This scenario was previously observed in 2008-2009 and is associated by the expert with a decrease in demand for goods of automotive manufacture in the countries – main trading partners of Slovakia, which are Germany, the Czech Republic, France and Poland.

 

Despite the presence of sufficiently modern and productive plants in Slovakia, represented by four leading automotive companies, two of which produce electric vehicles, the internal problem of the industry is the low level of innovative activity. According to the Bloomberg Innovation Index 2020, Slovakia ranks 41st in the global innovation ranking, being among the least innovative economies in the EU and outpacing only Bulgaria, Croatia, Cyprus and Malta.

 

Slovakia’s small, open, export-oriented economy has not only experienced the largest decline in industrial production in the EU, but also the largest decline in automobile manufacture among member states, with the decline amounting to 56.9% as compared to the same period of last year. In the meantime, France, Spain, Hungary and Romania reduced automobile manufacture by 51-52%, Germany – by 49% and the Czech Republic – by 43%.

 

According to our experts, the decline in industrial production in Slovakia will continue during the third quarter of 2020. According to the results of 2020, the economic crisis in the Slovak Republic may lead to a loss of 12% of GDP (starting from EUR 11 billion), an increase in the state budget deficit up to 9% of GDP, growth of external debt to more than 60% of GDP and unemployment of more than 10% of working population (Slovakia’s GDP in 2019 amounted to EUR 92.3 billion). The actual size of economic losses and the duration of the recovery of the country’s macroeconomic indicators to the level of 2019 will depend primarily on the situation in foreign markets, over which Slovakia has no influence.

 

The main tool for balancing public finances and stabilization of the situation in the economy of the Slovak Republic is the use of EU aid funds.

 

It is expected that under the new 2021-2027 EU budget (expenditures in the amount of EUR 1074.3 billion), adopted at the EU summit on July 21, 2020, Slovakia can use up to EUR 18.6 billion of additional aid. Under a recovery fund in the total amount of EUR 750 billion, which is aimed at rebuilding EU economies, approved on the same day, Slovakia could receive up to EUR 7.5 billion in grant aid between 2021 and 2023 and up to EUR 6.8 billion in highly profitable long-term loans.

 

In addition, Slovakia has the opportunity to use the investment resources of the previous seven-year EU budget for 2014-2020 in the amount of up to EUR 8 billion until the end of 2023.

 

Thus, the total amount of EU aid funds available to Slovakia is currently estimated in the amount of EUR 40.9 billion.

Most of the financial resources available to Slovakia under the European Economic Recovery Plan can be consumed by the Slovak economy within 2021-2024. Provision of such funds is subject to National Recovery and Resilience plan that has to be submitted by the Slovak government to the European Commission till October 15, 2020, which should meet the objectives of the European Commission and contain projects aimed to increase the resilience of the national economy, its decarbonisation and digitalization.

 

According to our experts, the implementation of large national projects involving investments in education, science, medicine, public administration (such as infrastructure development of new medical centers, etc.) will have a positive multiplicative effect on employment and production.

 

At the same time, it should be noted that Slovakia has traditionally been characterized by low efficiency of use of available EU funds, the consumption of which did not exceed EUR 1.5 billion annually. Thus, out of the amount of EUR 19 billion provided for in the EU budget in 2014-2020, Slovakia was able to use only EUR 6 billion. At present, in order to intensify the consumption of available EU financial resources, the Slovak government of Prime Minister Igor Matovič (representing pro-European populist conservative party OľaNO) is enhancing the state structures involved in the process of developing European investments.

 

According to experts, the available financial resources of EU aid funds are sufficient to stimulate the recovery of the Slovak economy in the medium term in the context of the global economic recession and the negative impact of the COVID-19 pandemic. The effectiveness of the use of available EU financial resources will depend on the ability of the Slovak side to prepare and implement relevant investment projects.

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