The Slovak Republic. An analysis of economic functioning in an incomplete monetary union

Dossier / Travail , 2017 , 20 Pages , Note: 1,3

Economie politique - Etudes de cas

An analysis of how and to which extent the Slovak Republic can deal with membership within an incomplete monetary union.

This paper discusses the developments in the Slovak Republic in the context of its membership within a so-called incomplete monetary union, a construct as laid out by De Grauwe in the book "The Economics of Monetary Union".

This paper relies on publicly accessible data and, to a lesser degree, expert literature.
For many comparisons, the author draws comparisons with the Czech Republic due to its similar size, geographic location and economic position, with the key difference being the Czech Republic’s sovereign currency and the resulting means of independent monetary policy. Additional metrics are also compared to the results of the entire Eurozone and to the largest Eurozone economies of Germany and France.
The goal of this paper is to determine to what degree the Slovak Republic benefits from membership within an incomplete monetary union and what steps can or have been taken in order to mitigate the risks of membership.

Table of Contents

Introduction

Membership in an Incomplete Monetary Union
Unemployment Rates
Wages , Labor Unions and Prices
Government Debt and Deficit
Current Account Balances
Openness
Financial Institutions
Risk of Default
Industry Structure

Conclusion

List of References

Introduction

This paper discusses the developments in the Slovak Republic in the context of its membership within a so-called incomplete monetary union, a construct as laid out by De Grauwe in the book The Economics of Monetary Union.

This paper relies on publicly accessible data and, to a lesser degree, expert literature. For many comparisons, the author draws comparisons with the Czech Republic due to its similar size, geographic location and economic position, with the key difference being the Czech Republic’s sovereign currency and the resulting means of independent monetary policy. Additional metrics are also compared to the results of the entire Eurozone and to the largest Eurozone economies of Germany and France. The goal of this paper is to determine to what degree the Slovak Republic benefits from membership within an incomplete monetary union and what steps can or have been taken in order to mitigate the risks of membership.

Membership in an Incomplete Monetary Union

Slovakia, also known as the Slovak Republic, is a small country located in Eastern Europe. With a population of only 5.1 million people, the country is about half the size of the Czech Republic - the other half of former Czechoslovakia - from which the Slovak Republic peacefully split in the Velvet Revolution of 1989 ("The World Factbook — Central Intelligence Agency", 2016).

In terms of economic prowess, the Slovak Republic has undergone drastic changes in the past 30 years. Of particular importance, Slovakia liberalized its economy during the early 2000’s and was able to join the European Union in 2004 and the Eurozone in 2009. Shortly after joining the EU, Slovakia experienced strong growth and its economy became intertwined with those of other EU member states rather quickly. Even before joining the European Union Slovakia exhibited a highly open economy and traded large volumes with other European countries (Chen, Giustiniani, & Semmelmann, 2014).

In the following sub-sections, the most important metrics of the Slovak economy are reviewed. In doing so, asymmetries with other economies of the European Union are reviewed and ways to reduce their effects are discussed.

Unemployment Rates

Unemployment is one of the most obvious metrics that can be used to show asymmetries between Slovakia and the rest of the Eurozone. It has traditionally been a problem for Slovakia. As can be seen in Figure 1, Slovakia’s levels of unemployment have been higher than that of the Eurozone average for all years since at least the year 2000. After accession into the European Union in 2004, unemployment in Slovakia started to decline considerably. One reason for this decline is that Slovaks have shown a strong willingness towards mobility; they have migrated to more economically prosperous areas outside of Slovakia (interestingly, mobility within the country is a long-running problem). In 2007, approximately 7% of Slovakia’s active workforce was working in another country, some 177,000 individuals (Chen, Giustiniani, & Semmelmann, 2014). In 2014, official statistics show that 134,000 were working in another country. Due to the way official statistics are recorded, some actual foreign workers are ignored in this number. Estimates suggest that a more realistic number may be as many as 250,000 (Minarechova, 2015). Moreover, in 2014 36,000 Slovaks studied abroad.

Figure 1 displays nicely that while Slovak unemployment remains high relative to other European nations, its development has started to move in parallel with the that of the Eurozone’s average movements. This at least implies that the business cycles and economic development between Slovakia and the Eurozone are becoming synchronized.

Here it can be concluded that while unemployment in general is not in line with that of the Eurozone, its general development is strongly linked to the economic performance of Slovakia’s neighbors. The Slovak workforce’s willingness towards mobility is one step that European integration enables to help reduce the effects of this imbalance.

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Figure 1: Harmonized Unemployment Rate in Selected EU Countries (adapted from "Unemployment - Harmonised unemployment rate (HUR) - OECD Data", 2016)

Wages , Labor Unions and Prices

As can be seen in Figure 2, the Slovak workforce also shows some degree of flexibility in the adjustment of labor costs. Wages increased strongly in the early 2000’s, but Slovakia also accepted wage stagnations and even slight decreases in periods of economic turmoil much more readily than France, a common example of structural rigidity in the labor market. This willingness to accept lower wages represents an additional means by which imbalances can be reduced.

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Figure 2: Unit Labor Costs Development in Selected EU Countries (adapted from "Productivity - Unit labour costs - OECD Data", 2016)

On a related matter, trade union membership has quickly dwindled in recent years as is visible in Figure 3. According to the most recent data available, less than 14% of the Slovak workforce is represented by a labor union. The largest labor union in 2010 was KOZ SR (the most recent year for which English-language data was readily available) and, according to the European Trade Union Institute (2010), approximately 95% of all workers who were members of a labor union belonged to it. This implies that this labor union is highly centralized. A centralized labor union is expected to be beneficial in mitigating the risks of an incomplete monetary union because it acts in the interest of varied workers, has access to a wealth of information about industries and their projected performance (De Grauwe, 2014). Nonetheless, with such declining rates of membership it is questionable whether labor unions in Slovakia pose any serious limits to the flexibility that would be needed to overcome the dangers of incomplete monetary unions. It can therefore be concluded, that this lack of strong, decentralized labor union helps to ensure additional flexibility in the labor market.

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• Université: University of Applied Sciences Berlin
• Cours: The Economics of European Integration
• Note: 1,3
• Auteur: Bachelor of Arts John Peacock (Auteur)
• Année de publication: 2017
• Pages: 20
• N° de catalogue: V366625
• ISBN (ebook): 9783668453777
• Langue: anglais
• mots-clé: Slovakia, Slovak Republic, Economics, Incomplete Monetary Union