By Martin Santa
BRATISLAVA, July 9 (Reuters) - Slovakia, the euro zone's
newest and poorest member, swore in a reform-minded centre-right
government on Friday that has pledged to push through reforms to
help put it back on a convergence path with the richer West.
The export-reliant economy has one of the lowest public debt
burdens in the euro zone, at 35.7 percent of gross domestic
product, but that is seen rising fast unless Prime Minister
Iveta Radicova's cabinet reins in spending and revamps welfare.
Analysts say the euro zone member needs to slash its fiscal
deficit, fix its pension and healthcare sectors, reduce a
jobless rate near 12.25 percent, crack down on corruption, boost
law enforcement and improve its business climate.
The country must also decide on the euro zone safety net
mechanism agreed by the previous government but that Radicova's
coalition opposes.
The following are key political risks to watch in Slovakia:
EUROPEAN FINANCIAL STABILITY FACILITY (EFSF)
Bratislava needs to deliver its stance on The European
Financial Stability Facility, a special purpose lender of last
resort for euro zone states cut off from market financing.
The EFSF, which may lend up to 440 billion euros ($558
billion) with guarantees from euro zone states, was initially to
become active on July 1, but delays in completing necessary
procedures, notably by Slovakia, have drawn out the process.
Radicova's SDKU and SaS have baulked at signing the deal
agreed under the previous leftist government, saying Slovakia,
the euro area's poorest member, should not have to pay for the
misdeeds of richer but more heavily indebted states.
They have also said they will not back Bratislava's 800
million euro contribution to Athens' 110 billion euro bailout
agreed by EU states.
What to watch:
-- Finance Minister Ivan Miklos is expected to travel to
Brussels to meet his euro zone counterparts on Monday "to
negotiate" and deliver Slovakia's position.
-- Miklos told Reuters on Wednesday all options were open,
but promised to be as quick as possible with the decision.
Political analysts said Radicova's cabinet will sign the
agreement as it will not risk a row with its European partners.
-- Analysts say diplomacy may prevail and the Slovaks could
back down and support the Greek loan. A refusal would hurt
solidarity in the bloc and could have negative implications for
any need for future cooperation in case another member needs
aid.
FISCAL CONSOLIDATION
Slovakia will miss the 5.5 percent of gross domestic product
fiscal deficit target for this year agreed with the European
Commission, as a drop in tax revenue is expected to boost the
gap to 7 percent, up from 6.8 percent in 2009.
That could put it off of its pledge to cut the shortfall to
the European Union prescribed level of 3 percent of GDP by 2013.
Details and outlook will be delivered later in summer.
The centre-right parties aim to cut the fiscal shortfall by
cutting spending and reducing waste but have pledged not to
change Slovakia's flat 19 percent income and corporate tax.
Analysts say substantial changes of the state-run pay-as-you
go pension system, taxes, and adjusting social and healthcare
transfer systems are needed.
The economy is expected to lead the European Union in growth
this year, but that will be based mainly on exports and many of
those producers are foreign owned, so they bring in little
budget revenue.
What to watch:
-- Radicova's coalition holds 79 of parliament's 150 seats,
a slim majority that could create hurdles to the government's
reform programme.
-- The economy heavily depends on net exports. Analysts warn
fading effects of European governments' financial support
programmes could hamper consumption, hit Slovak growth and curb
budget revenues as the domestic economy remains weak.
-- Without changes, Slovakia is likely to miss the European
Commission deadline to bring the gap to a requested maximum
level and a radical consolidation could be needed. Some analysts
believe there will be hikes in some taxes, which could cause
tension in the ruling coalition.
SLOVAK-HUNGARY RELATIONS
The two nations have had rocky relations for centuries.
There was hope that both countries' EU entry in 2004 would
smooth relations, but in recent years they have eroded to the
point that analysts feared violence could erupt.
Fico's decision to invite far-right Slovak Nationalists into
his cabinet in 2006 sparked a new series of diplomatic and
political rows with Budapest, and the policies of Hungarian
rightist Prime Minister Viktor Orban, who has tried to give more
rights to ethnic Hungarians abroad, has also stoked tensions.
What to watch:
-- The presence of the mostly ethnic-Hungarian party
Most-Hid in the cabinet is seen as a positive step towards
easing bilateral tensions. Radicova will travel to Budapest on
July 20 to meet Orban.
-- Radicova plans to rein in conflicting laws on ethnic
minorities that which limit the use of minority languages in
official capacity and strip its citizens of their Slovak
nationality if they take citizenship in another country.
