INTERVIEW: Miklos leads Slovakia into Eurozone's awkward squad

By bne IntelliNews March 7, 2011

Nicholas Watson in Bratislava -

Slovakia has only been a member of the euro for just over a year, but it has already kicked up a fuss about contributing to the bailout fund for other Eurozone members and now looks as though it might've managed to kill a Franco-German proposal to harmonise corporate tax rates across the bloc.

Ahead of a couple of EU summits in March that will do much to define how the Eurozone fares this year and further into the future, Slovakia joined other smaller member states in fighting a key part of a draft plan - the so-called "competitiveness pact" - that is designed to impose more fiscal discipline on the 17 countries in the Eurozone, which was discussed by officials on February 28.

According to leaked copies of the blueprint published on March 1, the proposals comprise limits on debt levels written into national laws, higher retirement ages based on demographics, the abolition of index-linked wage increases, unified bank crisis-resolution mechanisms, measures to boost workforce mobility and, controversially, a common corporate tax base. German Chancellor Angela Merkel and French President Nicolas Sarkozy want Eurozone leaders to agree the competitiveness pact at a meeting scheduled for March 11. The pact is virtually a precondition for German agreement to extend and make permanent the €440bn bailout fund for Eurozone members, which needs to be agreed at a second meeting on March 24 otherwise investors could take fright over doubts about the fiscal sustainability of the weakest Eurozone economies.

However, a common corporate tax base is a no-no for low taxation countries like Slovakia, who together with Ireland, Cyprus, the Netherlands and Malta immediately began lobbying against this part of the plan. "In general, we agree with the competitive pact as it was announced. There were six priorities and we have only partial reservations about one, which was the corporate tax harmonisation - on all others, we agree," Ivan Miklos, Slovakia's deputy prime minister and minister of finance, tells bne. "I accept the rationale behind this proposal, but the final result will actually be the worsening of the competitiveness of the whole of Europe, not only the new countries with low tax rates."

Miklos - a polished, sharply dressed, fluent English-speaking economist, steeped in the libertarian principles of the Austrian school of economics - says the main problem with trying to harmonise direct taxes such as corporate tax rates is that places like Slovakia have managed to cut corporate taxes to 19% and below by broadening the base through the closing of loopholes and ending exemptions. Germany, on the other hand, has a much narrower tax base because of the tax code's many exemptions, special rates and other deductions. If the EU decides to go down the path of having a common tax base, then it is unlikely to choose the Slovakian model, since broadening the tax base is, by its very nature, very politically unpopular. "So if we have a narrower base than today, we will have to impose these exceptions and increase tax rates, because the more narrow the tax base, you need higher rates to gain the same revenues, so this will worsen our competitiveness."

Slovakia may be winning the argument. During the Globesec 2011 forum in Bratislava on February 24, Janos Martonyi, minister of foreign affairs for Hungary, which currently holds the rotating EU presidency, let slip that the priority for his country's term as president is to get "these five or six principles" adopted.

In an interview with Stuttgarter Zeitung published March 6, German Finance Minister Wolfgang Schaeuble said he hoped a basic agreement would be reached over the pact at the March 11 meeting. "The government's goal is for the basic decisions to be made clear on Friday, so that afterwards finance ministers can move to work out the details," he told the newspaper.

Fighting on several fronts

On another front, Slovakia is trying to force through a new way of calculating the credit guarantees that Eurozone members will contribute to the next bailout fund, the European Stabilisation Mechanism (ESM), that will replace the current fund in 2013.

Slovakia wants the way that each country's contribution to the ESM is calculated to account for the strength of the economy - including GDP level, public debt and the development degree of the financial sector. For the current European Financial Stability Fund, the contributions correspond to the amount of reserves particular countries have in the European Central Bank, which in turn are partly dependent on the population of particular countries. According to Slovakia, the new way, backed by Slovenia and Estonia, of calculating guarantees within the ESM would be fairer and more beneficial to the Eurozone's poorest members.

Slovakia's membership of the Eurozone's "awkward squad" is, ironically, in direct contrast to how its citizens generally feel about the single currency since it was adopted in 2009.

At the end of February, the latest Eurobarometer survey carried found a high level of trust among Slovak citizens in the EU and its institutions, like the European Central Bank. As many as 71% of Slovak citizens said that they trust the EU, which is 28 percentage points above the EU average. Slovaks place the most trust in the European Parliament (76%), the ECB (68%), the EU Council (67%) and the European Commission (66%), while their own national institutions such as the Slovak parliament, government and courts do not enjoy such high approval ratings. "Despite the problems faced by the eurozone in 2010, it's gratifying to say that Slovaks have kept faith in the euro," Andrea Elscheková-Matisová, head of the European Commission Representative Office in Slovakia, told the TASR newswire.

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