Eurozone to resume digging its way out of debt hole

 

Slovakia’s parliament refused to ratify the expansion of the European Financial Security Facility (EFSF) on Wednesday. As usual with ‘No’ votes, a second vote was called and the decision was reversed on Thursday leaving the bailout fund ratified, the ruling coalition in tatters and Slovakia facing its second general election in less than two years.

The original vote failed to pass after Freedom and Solidarity (SaS), a junior partner in the ruling coalition, refused to endorse the proposal. It was later passed with the support of the opposition Direction – Social Democracy (Smer) in return for early elections.

In an interview with Germany’s Spiegel, SaS leader Richard Sulik explained why his party didn’t support the proposals.

“Slovakia has the lowest average salaries in the euro zone. How am I supposed to explain to people that they are going to have to pay a higher value-added tax (VAT) so that Greeks can get pensions three times as high as the ones in Slovakia?”

He’s got a point. Slovakia will now contribute €7.7 billion (about eleven per cent of GDP) to the bailout fund. With a population of 5.4 million and a GDP less than one per cent of the eurozone total, Slovakia will now be forced to prop up a country with living standards at 89 per cent of the EU average while their own is just 74 per cent.

It’s hard to see how prolonging the agony of a Greek default serves the purpose of Slovakian taxpayers. This will simply transfer more of the liability from the private sector to taxpayers when it does eventually happen. It’s hard to find someone arguing that Greece will pay its debts and the debate is now about how to manage an ‘orderly default’. This is not a guarantee as any ‘haircut’ taken on the bonds purchased will mean a loss for the taxpayer.

When asked if he had any advice for Greece after Slovakia escaped its own economic crisis a few years ago:

“They have to make cuts in the state apparatus. The Slovaks could also give them a few good ideas about the tax system. We have a flat tax when it comes to income taxes. Our tax system is simple and clear.”

Slovakia may be a small country but they have some big ideas and it’s not just Greece that can learn from them.

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