Regional Economic Conference on Euro-Zone Challenges and Opportunities
Speech by Angel Gurria, OECD Secretary-General
Bratislava, Slovakia, 4 April 2007
I am pleased to participate in this conference, which is examining the challenges and benefits of Slovakia’s adoption of the Euro in January 2009.
When the Slovak Republic became a member of the OECD in 2000, it joined some of the world’s most industrialised nations, demonstrating its attachment to basic values shared by all OECD members. It adopted OECD’s instruments, practices and policies, which have served as a powerful tool for progress.
Like accession to the OECD, joining the EU three and a half years later represented another important step towards further integration into the global economy. In both cases, accession spurred Slovakia to adopt policies that have permitted it to become more open and more competitive.
In the past few years, Slovakia has provided us with a remarkable example of a country that has not only acknowledged the need for major reform but which has moved quickly and decisively to actually implement it. The upcoming adoption of the Euro represents the next stage in Slovakia’s integration into the European Union and the global economy.
This integration is proceeding apace. The Slovak Republic has become an attractive location for Foreign Direct Investment not only from other European Union countries, but also worldwide. Annual foreign direct investment inflows, which amounted to only a few hundred million 10 years ago, reached two billion dollars in 2005.
Investors from outside the EU can enjoy a favourable regulatory and tax environment together with access to the world’s largest internal market: the EU. The openness of the Slovak economy is demonstrated by remarkable growth in import penetration – that is, the proportion of imports of goods and services as a percentage of total final expenditure. Import penetration grew from 34.7% in 1995 to 48.5% in 2005, or twice as much as for the OECD as a whole.
Slovakia has promoted policies and institutions that strengthen its capacity for sustained economic growth and improved productivity. GDP per capita has risen to 51 per cent, in PPP terms, of the EU15 average in 2005, from 44 per cent in 1998. This trend should continue, with steady convergence towards the EU average.
The gains for the Slovak economy can also be seen in the increasing importance of exports in the country’s GDP, especially to Germany and the Czech Republic.
Your success in building a modern automobile industry is a perfect example of economic integration at work. It demonstrates the contribution that regional integration can make towards improved competitiveness not only within the European economy but also as a building block for competitiveness in the global economy.
Volkswagen, PSA Peugeot-Citroen and Kia all have major assembly plants here and automotive parts companies have followed, from Europe, North America and Asia. Their activities are fully integrated into the European economy.
Moreover, you are benefiting from the growing interaction between the automotive industry and its universities and training centres, creating the opportunity to move up the value-added ladder. It is not surprising that the automotive industry has become a source of pride for Slovaks.
And it is not just the automotive industry. There are other interesting foreign investment plans for the future.
Slovakia’s plan to adopt the Euro at the start of 2009 can only add to its potential. Meeting the conditions for adoption of the Euro will further strengthen the fundamentals of the economy. Once the Euro is adopted, you will enjoy lower interest rates, access to the very deep and liquid euro credit markets, and exchange rate stability with your major trading partners in the euro zone. The removal of exchange rate constraints and transaction costs linked to the use of a separate currency will make Slovakia even more attractive as a business location.
But capturing these benefits will depend on the development of a sound environment for business. It will depend as well on success in pursuing responsible fiscal policies and achieving a pro-competitive regulatory environment. And it will depend on sharing the benefits of growth in an equitable way.
In joining the Euro area, Slovakia can learn from the experiences of countries like Spain, Portugal and Greece, well documented by the OECD. In Portugal, the lower interest rates that came with the euro led to a short-term economic boom. But because fiscal policies were not tight enough, imbalances began to build up, including a large external account deficit and high household and corporate debt. By the time the government intervened to tighten fiscal policy, private demand was already weakening. The result was a particularly sharp slowdown and protracted weak economic performance. Slovakia must be attentive to avoid a similar boom-and-bust cycle.
Spain, too, enjoyed a mini-boom, but the government took early advantage of windfall gains from strong government revenue growth and lower interest payments on government debt to reduce the public deficit. Rapid fiscal consolidation may have dampened growth, but it helped to prevent a boom-bust cycle following the adoption of the euro. Continued prudent fiscal policies have helped Spain to keep economic growth at a relatively steady pace ever since.
The principal lesson to be drawn from these experiences – and from that of Greece, which joined the euro zone in 2001 – is the need for fiscal policy to offset the boom in private demand that is likely to result from lower interest rates. In addition, with the adoption of the Euro, Slovakia will lose the shock-absorber capacity that it currently enjoys thanks to its own exchange rate and monetary policy. Your economy will have to become more flexible – in order to adjust quickly and positively to changes in circumstances, and at the lowest cost.
Slovakia is clearly on the way to creating many of the conditions for success. Indeed, one can foresee that it one day could become a “Slavic tiger” ready to rival Ireland’s “Celtic tiger”.
Before we get to that stage, however, there is much more to be done if Slovakia is to achieve its full potential.
Employment opportunities, especially for older workers and young women, must be improved. More of the benefits of economic growth need to be shared with low-income earners. Greater competition in energy and telecommunications would bring clear benefits. More investment is needed in research and development.
More can also be done to encourage entrepreneurship. For example, it still takes too long to establish a new business in Slovakia – 25 days, compared to 2 days in Australia, 3 days in Canada and 5 days in Denmark.
Above all, improving the outcomes from the education system is critical, since what we refer to as human capital is an indispensable asset for competitiveness.
The OECD has strong policy experience in all of these areas. As the date for euro membership draws closer, we look forward to working closely with Slovakia in continuing to improve the capacity of the country for further gains in competitiveness and productivity, learning from other OECD members’ experiences, both the successes and the failures.
Tomorrow, we will publish the OECD’s latest Economic Survey of the Slovak Republic, which will highlight some of the necessary reforms that lie ahead. I will reserve further comment for tomorrow, but leave you with this thought: Slovakia is on the right track, and it is well-positioned to take advantage of the opportunities offered by globalisation.
I am convinced that Slovakia can face the challenges I have just mentioned successfully, and take its place in the euro zone and in the global economy.