Mencinger: Many Slim Years Awaiting Us
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The famous Slovenian economist believes that the roots of the crisis
there were laid in 2005, when Slovenia abandoned previous model of
transition, one of small changes and growth, which can be financed
with one’s own saving, and not with the sale of property, he expects
long-term stagnation in most European countries, including Slovenia
and, even though he believes he is unjustly accused f being a Euro-
skeptic, he fear of the disintegration of the EU which reminds, in
many respects of the former Yugoslavia, writes Dražen Simić in the
Biznis i Finansije (BiF) magazine.
Biznis i Finansije: Among the EU member countries, Slovenia is one of
the countries that was hit the hardest by the economic crisis, the GDP
drop by around 10 percent and the drop of exports by over 20 percent.
Slovenia emerged from the crisis with a GDP growth last year of 1.2
percent an expected GDP growth this year of 2 percent. The estimates,
when speaking of economic growth within the next 5 years, envisage an
extremely modest growth of the GDP, between 2.2 and 2.8 percent
annually. What is it that the Slovenia government should concretely do
in order to achieve stronger growth and to reduce the number of the
unemployed, and how realistic is it for this to happen.
J.Mencinger: I believe a growth of 2.8 percent will no longer be
considered modest. I expect long-term stagnation, i.e. fluctuations
around a zero growth rate within a very long period of time in most EU
countries, so I see no reason why Slovenia should be an exception. In
the last, Slovenia’s “natural” growth was around 4 percent, which was
also the average in the period between 1993 and 2004. The growth
fluctuations were small, and growth was achieved with an internal and
The faster growth between 2005 and 2008 was detrimental and, for the
first time, there was a large deficit on the current account.
Actually, a record growth was achieved in that period, created with
the inflating of two baloons; the construction and financial ones.
These two sectors of the economy grew by as much as up to fifteen
percent annually, with the help of the credit expansion which also
created the dependence of companies on credits. Especially after
entering the euro zone, the growth of credits was higher than 30
percent annually. And credits were largely used for the purchase of
securities, real estate, but the expansion and take-over of companies.
Since domestic deposits did not follow credits, banks, in order to be
able to credit all this, borrowed abroad. Even though the present
growth of exports enables emergence from the zone of stagnation, this
emergence is being prevented by the large illiquidity of the non-
financial sector, the imbalance between credits and deposits in banks
and the indebtedness of banks abroad. Stagnation is also being
contributed to by the attempts at carrying out an excessively radical
and fact consolidation of the public debt being dictated by the
If we were to have a capable government, which we do not, not even
such a government, due to the well known political situation, would be
able to do much. There are two reasons for this. First of all, this is
being prevented by the system in which there are no real boundaries
between the economic policy and the economic system. Every triviality
and stupidity is being decided on in parliament. Secondly, Slovenia is
no longer a state in the economic sense, but rather an EU region, and
the economic policy being imposed by the European Commission is
BiF: Whether and to what extent is the current economic situation in
Slovenia the result of a model that excessively protected Slovenian
companies from foreign competition or whether it is the result of the
fact that Slovenia, as a small country, and its economy, strongly
depend on the economic conditions in Europe?
J.Mencinger: The current economic situation is, first of all, the
result of the complete dependence on the economic conditions in
Europe, especially in Germany. A large number of bigger companies in
the industry produce components for the automobile industry and the
industry of durable consumer goods, which have been hit the hardest by
the crisis. Therefore, the crisis could not be avoided. And as regards
foreign competition, no one, at least not formally, protected domestic
producers, because we had to abandon any protection already at the
time when we were drawing closer to the EU. However, I too, if I can,
buy Slovenian goods and goods from the former Yugoslavia.
However, the present economic situation would be different if, in
2005, we had not abandoned what we call the Slovenian model of
transition, and that is the model of small changes and growth, which
we can finance with our own saving, and not with the sale of property.
Unfortunately, that model was abandoned after 2004. In 2005, we
entered a period of gambling. All of a sudden, everyone started
believing in fast growth and in 30 percent yields of various
“economic” activities. The savings in banks, due to the low interests,
which are partly the result of entering the EU, and especially the
euro zone, was used for speculative activities. Instead of saving in
banks, people bought securities at various funds, directors bought
“their” companies with credits, and banks gladly cooperated in this
and “imported” cheap money, in order to be able to credit everything.
In only three years’ time, the net debt, which was zero euros still at
the end of 2005, has growth to 10 billion euros. When the crisis came,
the virtual wealth was reduced to a quarter, and the debts remained.
Simply speaking, we threw ten billion into the garbage, and foreign
banks picked it up.
BiF: What will happen to big Slovenian companies, such as Mercator or
Pivovara Laško, will the Slovenian government continue, with direct
and indirect measures, to protect them from takeovers and is there any
long any point in such protection?
J.Mencinger: These companies are victims of what was happening between
2005 and 2008, when everyone focused on financial “products”, and not
on jobs which, judging by their names, they were supposed to deal with
– Laško with beer, Istrabenz with gasoline, CPM with road repairing,
the church with souls. Financial holdings became company owners, while
they could no longer repay the credits with which they had obtained
these companies. Due to the mortgages, banks took the companies, and
they are now trying to sell them. Since there is not enough money in
Slovenia, these companies are being sold to foreigners, and the
government is not preventing this. On the contrary, Slovenian Prime
Minister Borut Pahor constantly keeps speaking about the necessity of
the arrival of foreign investments.
BiF: Will they, eventually, be taken over by the competition from
Croatia and the rest of the EU and what will, in this case, be the
consequences for the Slovenian economy.
J.Mencinger: I do not know that. Even though I am considered an
advocate of the “domestic economy” I have nothing against foreign
ownership, and my stand is “sell what you have to and do not sell what
you do not need to”. What does a farmer who sells his land become? A
hired hand. And what will we become if we sell our production wealth?
Labor force, which, in the present times, does not have many rights
and increasingly resembles some kind of production material. There is
also an important macroeconomic reason for considering foreign
acquisitions. Look at the balance of payments of countries in Eastern
Europe. Deficits are increasingly the result of the outpour of profit.
In the crisis period of 2009 and 2010, the outpour of profit from the
ten “new” EU members was three times larger than the arrival of
I especially have no prejudice against buyers from countries of the
former Yugoslavia, if at issue are buyers who become company owners,
and not only property owners and if they too are not buying everything
on credit, which they will be repaying through the exhaustion of the
purchased company. Recently, because of the gambling in the period
between 2005 and 2008, Pivovara Laško had to sell the Fructal company
to the Serbian Nektar family company. As far as I know, at issue is an
honest family company. If we already had to sell it, I believe this is
better than if Fructal had been sold to an investment fund, either
Slovenian or foreign, who is only the owner of the property and who
buys only to sell the company again after a few years with a profit,
after having earned from the sale of the land, real estate and other
things, which he can sell. Nektar will probably maintain the Fructal
brand and the production in Vipava, and it will buy fruit from farmers
in the Vipava valley.
BiF: What does the weakening of big Slovenian companies, which were
among the biggest investors in this area in the previous years, mean
for the countries in the region and their economies?
J.Mencinger: The opinion I have about foreign investors in Slovenia is
the same as my opinion about Slovenian investors on the territory of
the former Yugoslavia. The same applies to them – “sell what you have
to and do not sell what you do not need to”. But that is your concern.
We Slovenians quite certainly have certain advantages, we know one
another, we know the language, although in the period of gambling, our
companies, especially banks, overdid it with “the seeking of
opportunities and spreading in the Balkans”.
BiF: After Slovenia became independent it received assistance and
recommendations from the IMF, having done mostly the opposite of what
the IMF had proposed and which later proved to be a good move by the
Slovenian authorities. Does Slovenia now need assistance from the IMF
or would such a move bring Slovenia more harm than good?
J.Mencinger: I don’t know why we would need the assistance of the IMF
or any other international institution, either in the form of advice
or in the form of money. We did sink in the mud, but our public debt
of around 45 percent of the GDP is among the lowest in the EU. It is
lower in only six out of the twenty seven EU member countries, while
the average in the EU is 65 percent. The net financial position, i.e.
the net indebtedness of Slovenia, banks, companies, the population and
the state, which is 12 billion euros, is low compared to many other
countries. The problem with that debt is the large share of banks
resulting from the ratio between the credits and the deposits in
Slovenia, where the credits are sixty percent larger than the
deposits, so the ratio between the deposits and the credits is 1: 1.6,
which means that banks can give credits without seeking money abroad.
BiF: The IMF’s assessment is that Slovenian banks are insufficiently
capitalized and that their recapitalization is inevitable. Does that
mean that Slovenia will abandon the present practice and open the
banking sector to foreign investments and what consequences will this
have on the Slovenian economy?
J.Mencinger: I know nothing about this assessment of the IMF. The two
biggest banks, NBL and NKBM, have just passed the European stress
test, although NLB just barely. Recapitalization is quite certainly
useful, but it must not be done as it is being done in our country;
half of Slovenia kept discussing it for half a year instead of five
people deciding on it in total secrecy in one afternoon. However,
banks are everywhere even much more recapitalized, because states
could not help saving them.
Foreign banks have free access, but that does not mean that we have to
sell them our banks. Banking is not a very complex business and, in
normal times, it brings large profit. Why should I sell banks and
where should I invest the money I received from the sale. No one knows
the answer to the question as to why only 24 percent of the banks in
Western Europe are owned by foreigners, while in Eastern Europe, with
the exception of Slovenia, it is 90 percent.
BiF: Is there an alternative to foreign investors entering Slovenian
J.Mencinger: There is, if there is not enough money let them remain
BiF: In your recent appearance in the media, you compared the current
situation in the EU and in the euro zone with the situation in the
former Yugoslavia prior to its disintegration, but you also assessed
that “the EU will quite certainly not last longer than the Austro-
Hungarian Empire”. Will the euro and the EU survive and how long?
J.Mencinger: I do not know. The euro is a political project and
symbol, and this is also its problem. As such, it is similar to the
idea of “brotherhood and unity”, so that everything that is now
happening in the EU resembles Yugoslavia. The differences between the
EU member countries are no smaller than those among the former
Yugoslav republics. What suits the developed, does not suit the less
developed. In the case of the euro as well there is no mechanism from
emerging from the euro zone, and in Yugoslavia we had no mechanism for
a republic to leave Yugoslavia. And what is the most worrying in the
EU is what I call “the Yugoslav syndrome”, namely, the conviction that
others are taking advantage of you.
BiF: What would the possible disintegration of the euro zone mean for
Slovenia and for countries in the region?
J.Mencinger: Even though I am considered a euro-skeptic, which is not
justified, I fear a disintegration of the euro zone because of the
high price, most probably an uncontrolled break-up, and because of
insecurity. For countries in the region that do not have the euro
“that would mean a return to the set-up they had when the German mark
was the main currency in the region and somewhat higher expenditures.
However, I believe Slovenia would manage, if for no other reason then
because we have experience with the introduction of the tolar and the
abandoning of the Yugoslav monetary system.
September 16, 2011