EU Commission Urges More Ambitious Reforms in Slovenia
"No major structural reforms were taken in 2011," the Commission says in its assessment of the national reform and development programme for 2012 presented in Brussels on Wednesday.
"The challenges already identified last year remain relevant in 2012", the report says, warning that the intensification of market pressures lends new urgency to credible and durable fiscal consolidation, cleaning of bank balance sheets and pension reform.
While the government is planning a renewed attempt at pension reform for the end of 2013, no further details are provided and "the degree of ambition of these reform plans seems modest given the scale of the challenge".
Failure to address other challenges already noted by the Commission last year can "hamper the economy's adjustment and return to growth".
"Notably, labour market segmentation remains high in Slovenia and skills mismatches are being observed, with risks of transitions from short-term to long term unemployment. The business environment is not attractive enough for businesses and investors."
In June 2011 the Commission proposed six country-specific recommendations for Slovenia, concerning public finances (especially the excessive deficit), pension reform, banks' balance sheets, the segmentation of the labour market and the encouraging of investment.
While the new budget and reform plan follows most of the Commission's guidelines, the Commission feels it is not detailed enough, failing to specify how and when the reforms of the pension system, the labour market and the business environment will be adopted, who will implement them and how much they will cost.
The main goal of the medium-term budget strategy is reducing the deficit below 3% of GDP in 2013, the Commission however says that "there are risks that the deficit outcomes could be worse than targeted throughout the programme period" and that "the measures for the period 2013-15 are not yet fully spelled out".
The Commission moreover unveiled an analysis of Slovenia's macro-economic situation, which says that rapid growth, credit expansion and strong domestic demand have left Slovenia with a legacy of "thinly capitalised banks reliant on foreign funding", over-indebted companies, and a bloated construction sector.
Another problem is the "high real estate prices, deteriorated cost-competitiveness and a large negative net international investment position".
Solid economic growth and strong export performance would help correct these imbalances, "however this is difficult to achieve in the face of weak external demand, a shrinking construction sector, private sector deleveraging and fiscal consolidation".
"It will take a substantial amount of time to overcome these obstacles given the weaknesses identified in the economy's adjustment capacity," the Commission says.
Slovenia is urged to seek solutions for imbalances by reducing the state's shareholdings, addressing challenges in the business environment and refraining from public and minimum wage policies that could put pressure on wage costs.
In a separate in-depth analysis of the macroeconomic environment, the Commission said Slovenia has "serious macroeconomic imbalances" that are not excessive but nevertheless need to be addressed.
The report suggests the authorities pay close attention to the deleveraging of companies, stability of banks and the unfavourable developments regarding external competitiveness.
The combination of a widening trade deficit and inefficient borrowing is "not an appropriate model for the future," the Commission suggests.