Transcript | 5. lecture: Mikuláš Dzurinda’s era (Ivan Mikloš) - University for modern Slovakia

In the previous lecture we analysed Vladimír Mečiar’s ere and we closed the topic by a description of an unpleasant situation which he left the country in. Slovakia was in an international isolation, expelled from integration into the EU, NATO, OECD, she was considered as a black hole of Europe, with a high level of corruption, without foreign investments, and with a growing macro and microeconomic disequilibrium and deformations.

In that situation a political change happened in autumn 1998. Although Mečiar’s HZDS (MFDS) won elections, he was not able to constitute a government. A wide coalition took charge. The coalition consisted of centre-right parties, the Green party and transformed communists – the Party of the Democratic Left. Formally there were four parties in the coalition, but two of them were created by several parties, so in fact the coalition consisted of nine parties. Thus a wide coalition was not only possible but necessary as well. So all political powers were united and they joined together due to a necessity of a change and solving thorny problems. Another necessary thing was to reach an integrative deficit and to prevent from a definitive Euro-Atlantic isolation of Slovakia, or its attachment to Russia.

Challenges that this government had to face were huge. The state didn’t pay her obligations, borrowed money for more than 20%, insolvency and corruption were present everywhere, judiciary didn’t function, the three biggest state banks were on the brink of bankruptcy, Slovakia was isolated internationally, politically and economically as well.

In the first Dzurinda’s government I was a deputy Prime Minister without any department. My main objective was to coordinate work of single departments and at the same time I was also responsible for a coordination of supra-departmental projects as for example an entry into OECD, an anti-corruption government programme, finishing a split of property between Slovakia and the Czech republic, a restructuring coordination of banks, a coordination of work on a new bank legislation, a coordination of privatization of natural monopolies.

The government was confronted with difficult objectives, they had to establish a macroeconomic equilibrium and that demanded a restrictive fiscal and monetary policy. It was also connected with unpopular steps, a temporal economic drop and an unemployment growth. Employment was during Mečiar’s government artificially kept by an expansive fiscal policy and delaying and postponing inevitable bankruptcies. Therefore we had to proceed to a macroeconomic stabilization and microeconomic restructuring.

Politically it was very sensible and already first months of the Dzurinda’s government showed where the biggest problem would be. The Party of the Democratic Left, the transformed Communist Party of Slovakia, had serious problems to undergo unpopular, restrictive steps. Disagreements arose especially between Brigita Schmögnerová, the Minister of Finance coming from that party, and me as a deputy Prime Minister for SDK (Slovak Democratic Coalition). Schmögnerová, for example, refused the increase of VAT and some other excise taxes.

Those disputes lead to postponing necessary measures. The government acceded in October 1998 an there were no approved necessary measures up to April and May of the following year. Markets began to lose patience and several days before presidential elections the Slovak crown began to slump. There were two candidates in those presidential elections. Rudolf Schuster was the coalition candidate, chairman of Strana občianskeho porozumenia (Party of Civil Understanding). Vladimír Mečiar, the chairman of the opposing HZDS (MFDS) stood against him. The slump was enormous. In January 1999 a dollar cost 36 Slovak crowns; in May it was almost 44 Slovak crowns. I still remember a very stressful coalition meeting at the Government Office. Pale Rudolf Schuster still asked why now and what we would do. I repeated (together with the present governor of the NBS Vladimír Masár) those measures which I had tried to enforce for months, but the Minister of Finance, Schmögnerová still repeated her disagreement. She came up with nothing other than an import surcharge. She was given a day to come up with her proposals. We met in trio – Dzurinda, Schmögnerová and me another day in the Government Office of the Slovak republic. The Minister of Finance again talked about why not that and vice versa. Then the Prime Minister interrupted her and announced her she might choose – either she would agree with measures which I and NBS proposed or she would end. She broke. During a following press conference we announced a set of stabilization measures containing the import surcharge, which I had refused before due to considering it as non-systematic. It was an acceptable price which allowed keeping SDL (PDL) in the coalition and thus the Minister didn’t lose face.

Almost immediately, as we announced an agreement on realization of a stability set, together with the Prime Minister in the press conference, the markets appreciated it and the Slovak crown started to strengthen its position. Several days later Rudolf Schuster was elected for the president of the Slovak republic. He gained 57,2% of votes, his rival Vladimír Mečiar 42,8%.

The work then started up, although it was not simple. Stabilization of the three biggest state bank cost 12% of GDP, but there was no other possibility because we were in a state which in other way would collapse together with the whole economy.

At the end of the first Dzurinda’s government the macroeconomic equilibrium was established; banks were stabilized and privatised in favour of strong west banks; strong investors entered some other natural monopolies; the input of foreign investments was in progress; a business environment was being improved and Slovakia effaced the integrating deficit. We were basically ready for the EU’s expansion as well as our Visegrad neighbours who had had a significant advantage before Dzurinda’s government took charge.

It was not simple at all. Especially material, but also ideological disputes with the Party of the Democratic Left were in a background of a good deal lower and less effective progress than would be desired.

Elections in 2002 resulted very surprisingly. The result allowed continuation of the Dzurinda’s government with only one change. Instead of the Party of the Democratic Left there was a new liberal Alliance of a New Citizen who entered the government. The party was ruled by Pavol Rusko. Thus there was a centre-right coalition which quite quickly agreed on a necessity of deep structural reforms based, along the completion of the integration, on weakening the state’s role, an increase of a rate of economic freedom, improvement of the business environment. In other words, there was the strong agreement on the necessity of reforms which would raise Slovak competitiveness and would start a high economic increase and an increase of employment.

The second Dzurinda’s government, in which I had a possibility to be a deputy Prime Minister and Minister of Finance, moved Slovakia significantly forward especially by realized economic reforms, within the most important were:

The reform of public finances – lied not only in a continuation of a deficit and debt reduction, but also in the establishment of a new strict European methodology ESA95; in cancelling almost all state funds; in usage of yields from privatization only for costs of a pension reform and the cut-down of the national debt.

• A fiscal reform – maybe it is internationally the best-known Slovak reform based on the flat tax rate introduction at the level of 19%, unification of VAT to the same level without exceptions and without cancelling some other taxes (a dividend tax, a gift tax, a real estate-transfer tax).
• A fiscal decentralization – the core of this reform is in clearly set rules, according to which local governments got a share of central happening and also of competition strengthening and responsibility of local governments.
• A reform of the labour market – it lied in a fundamental flexible growth of the labour market, especially in cancelling obstacles by accepting but also by dismissing employees.
• The pension reform introduced a strong second pillar, within which employees save money for pensions. Their money are processed and evaluated by pension fund management companies. This reform is very important not only from a view of an increase of future pensions, but also due to a view of long-lasting sustainability of public finances, which would in future collapse in case of a single continuous pillar system.
• A reform of a social system based on a thesis „it is worth working”, which made paying-out stricter and motivated to the activity.

A reform of the health system was based on a decrease of wastage and an excessive demand (by introducing low fees for receipts, seeing doctor, stays in hospitals or ambulance transportations). It was also based on increasing efficiency and decreasing an oversupply (unnecessary sickbeds, wastage, excess expenses) by an introduction of competitiveness and hard budget restrictions.

Slovakia entered the EU together with other V4 countries and Baltic countries on 1 may 2004. We became thus a respected country thanks to our reforms. Slovakia was in 2004 proclaimed the most reformed country in the world by the World Bank. Very popular was especially the fiscal reform, thanks to which the input of foreign investments in Slovakia grew. We became from the black hole of Europe a reforming tiger of Europe and we even passed our Visegrad neighbours in integration due to starting the EU entry which was then accomplished in the first Róbert Fico’s government. But the most important was that an economic growth, which started thanks to reforms, improved the quality of lives of Slovaks. Tens of thousands of the unemployed got jobs, the rate of poverty declined.

Results of two Mikuláš Dzurinda’s governments, especially of the second one, are really impressive. Here is the sum of the most important ones:

• The highest cumulative economic growth from 2000 up to now from all the countries in the EU27
• The rating of Slovakia (S&P) was in 2000 three degrees under the Polish one and four degrees under the Czech one and the Hungarian one. In 2005 we had the highest rating (1 degree over the Czech and the Hungarian one, two degrees over the Polish one)
• The unemployment rate was decreased between 2001 and 2006 from 19,3% to 13,4% and then it fell to 9,6% in 2008
• The deficit of public finances was decreased from 12,3% in 2000 to 3,2% in 2006 and then to 1,8% in 2007
• The public debt of Slovakia was decreased from 50,3% in 2000 to 30,5% in 2006 and then to 27,8% in 2007.
• A risk of poverty was decreased from 13% in 2005 to 12% in 2006 and then to 11% in 2007.

Dzurinda’s governments undoubtedly moved Slovakia forward. No else country did it better. Apart from economic results it is necessary to emphasize successes in other areas. We didn’t only reach our neighbours but we also overtook them in integration efforts. We became a respected country in the world. The proof of that was, for example, a fact that the summit Bush – Putin took place right in Bratislava in 2005.

From rough results concerning all things that were done during two M. Dzurinda’s governments it might seem it was simple. It wasn’t. And it wasn’t done without any mistakes, foot-faults and lapses. Necessary reforms and changes always hurt. They are never simple and they are often refused by people. There were lots of factors and circumstances thanks to which it was successfully done in spite of all problems. An agreement on a necessity of reaching the integration deficit played a very important role in the first Dzurinda’s government. But the work that was done by Mikuláš Dzurinda at that time was, according to my opinion, the most crucial one. To keep various coalition governments together for eight years and to do at the same time so much work it really requests many skills, a lot of energy, tenacity, patience and good luck as well. I just mention that Mikuláš Dzurinda dismissed from the government two chairmen of two coalition parties (in the first government it was the chairman of SOP Hamžík, and in the second one the chairman of ANO Rusko). In spite of those dismissals he managed to keep the governments and enforce almost all necessary changes and measures.