Delayed government assistance put Slovakia’s competitiveness at risk

Source: spectator.sme.sk

A study compares measures to combat the impact of the coronavirus crisis in seven European countries.

Read in this story

-What are the three pillars on which the economic responses of the seven surveyed countries rest

-What the Labour Ministry thinks of the study’s conclusion

-What business organisations think about the anti-coronavirus crisis measures adopted in Slovakia

-What business organisations propose doing with the populistic measures taken by the previous government

Whoever gives quickly, gives twice, says a Slovak proverb. This is even more true when a drop in demand and drastic measures to prevent the novel coronavirus from spreading further have hindered economies across the globe. It seems that the measures in Slovakia have worked out and its population is one of the least hit by the COVID-19 virus. But this is not the case of its economy, which is expected to contract this year.

How big the challenge the Slovak economy faces in the end depends on the development in neighbouring countries, as well as the generosity of the state in providing assistance and incentives when re-opening the economy. For now it seems, based on a study comparing measures taken by seven countries to counter the economic crisis caused by the COVID-19 pandemic, that Slovakia is at loose ends.

“In the countries surveyed, Slovakia is the one where the government’s assistance has so far been the least generous, the most narrow in the use of instruments, and so far, the slowest,” reads the study Economic Crisis Responses in the Wake of COVID-19 Outbreak prepared by the Bratislava-based Centre for Public Policy (CVP) and the London-based Inline Policy.

In March-April 2020, the study compared measures adopted by the governments of Germany, the United Kingdom, France, Austria, the Czech Republic, Hungary and Slovakia, i.e. four countries in western Europe and three in the eastern part of the EU.

“We hope that the study will serve in Slovakia as well as other countries to open discussions on the effectiveness of the approach of individual countries or as inspiration for what instruments could be added to the so-far adopted schemes to combat the crisis,” said the study’s coordinator, Juraj Draxler, of the Centre for Public Policy and former education minister, as cited by the Denník N daily.

Business and industry associations and employer organisations assess the measures taken in Slovakia as helpful, but too slowly adopted, too complicated and administratively demanding, pointing out that these are decisive for the future competitiveness of Slovakia.

“Already before the general elections and the outbreak of the crisis, we had pointed out a sharp decline in Slovakia’s competitiveness, which began to be visible mainly after 2014-2015,” said Ján Pribula, secretary general of the Slovak Automotive Industry Association (ZAP). “The coronavirus crisis has only deepened this problem.”

The Slovenský Živnostenský Zväz (SŽZ), an association of self-employed trade and craft workers, added that the state assistance is set at a very low level compared to neighbouring countries.

“It seems as if the government expected companies to be able handle the drop in sales on their own,” said Miriam Bellušová, secretary general of SŽZ. “But this is a risk for their future competitiveness – especially if we take under consideration how much support the restart will entail in the surrounding countries and in Slovakia.”

Three pillars

In all the surveyed countries, the economic response rests on three dominant pillars: moratoria on various payments (taxes, social security and healthcare contributions, loan repayments, rents, etc.), wage subsidies and crisis loans. Details that vary between countries include the use of direct payments (grants) and the use of industry-specific programmes.

The basic premise of general government action in most cases seems to be that the crisis will be deep, but relatively short in its main phase. It therefore makes sense for state aid to be massive: companies are basically able to survive; they just need support for a few months until the situation returns to normal, reads the study.

In almost all countries covered by this survey, governments have considered maintaining confidence in the future a priority.

“That is why it was paramount for them to quickly announce what measures would come, while the actual implementation takes longer,” reads the study.

Implementation is usually hampered by three reasons: the need to change legislation, including the state budget law, the administrative complexity and, in several cases, the need to notify the European Commission where EU rules require so.

The Slovak government’s response to COVID-19

“As the Slovak economy is dependent on European and global demand for its exports, the country will be more damaged by the global fall in demand and consumer confidence, than pure lockdown measures,” reads the study, highlighting that the Slovak economy is severely dependent on export from its large automotive sector. “The government measures were to a large extent aimed at preserving employment, liquidity for individuals and SMEs, and maintaining creditworthiness in the economy.”

The Slovak cabinet of Igor Matovič (OľaNO), appointed shortly after the pandemic hit Europe on March 21, announced the First-Aid for Economy package, worth eur1.5 billion per month or about 1 percent of GDP on April 1. This was followed with other assistance packages, while these contained wage subsidies, which the study sees as somewhat misleadingly referred as the kurzarbeit (short-time work) scheme used in Germany or Austria, deferral of compulsory social and health insurance payments, taxation packages, state sponsored loans, loan guarantees and loan deferral, etc.

While it is sometimes very difficult to compare individual supports and instruments, the study concludes that Slovak government assistance has been the least generous, the narrowest in the use of instruments, and the slowest out of the seven surveyed countries.

Views of labour and economy ministries

The Slovak Labour Ministry considers it premature to assess the overall level of aid in each EU country, as several measures have just started to be implemented and each country has been implementing their schemes within a specific legal context.

“For example, support for small businesses under the German scheme may seem very generous at first sight, but support under the German scheme is the taxable income of the companies concerned,” Veronika Husárová, spokesperson of the Labour Ministry, told The Slovak Spectator. “On the contrary, within Slovakia’s support schemes it will be a transfer not subject to income tax. The CVP study does not sufficiently analyse these matters.”

The ministry does not agree with the finding that Slovakia does not provide any direct payments (grants) to companies, claiming that most assistance offered by the Labour Ministry is a direct payment.

“The scheme for closed companies, where the state offers a grant of up to 80 percent of the employee’s salary, is very similar to a comparable British scheme, which the authors evaluated as one of the examples of grant aid,” said Husárová.

She stresses that the key objectives in setting up assistance were to help anyone whose income had been reduced by the crisis and to the extent that the levels of the assistance were as fair as possible for each applicant category.

“We don’t think that it is more appropriate to compensate everybody with the same contributions, regardless of the rate of losses,” said Husárová.

The Economy Ministry considers the adopted measures as effective and continues to come up with new measures. It holds talks with travel agencies on measures preventing bankruptcy as well as protecting their clients so they do not lose money paid for cancelled holidays. Another important measure still being discussed is partial refunding of rentals for closed shops and other units, specified Katarína Svrčeková, spokesperson of the Economy Ministry.

Business sector: measures far from sufficient

Business associations and companies perceive the study’s conclusion that Slovakia is lagging in the provision of state support as not a good signal for investors. They assert that the coronavirus crisis has only uncovered problems the Slovak economy suffered before the crisis hit, stressing that Slovakia is one of the most industrial countries in Europe and simultaneously one of the most open economies. Also, they perceive the adopted measures as insufficient and often administratively very demanding, while restrictions imposed on businesses are too drastic when the real numbers of COVID-19 positive people in Slovakia are taken into consideration.

“The cabinet has created a hysteria in the population of something coming,” Peter Serina, executive director of the Business Alliance of Slovakia (PAS), told The Slovak Spectator, calling for an extensive opening of the economy. “But in reality the number of those who have contracted the COVID-19 disease is not high enough even to declare a regional influenza epidemic, less still a state of emergency throughout Slovakia.”

In his opinion the cabinet led by Prime Minister Igor Matovič should stop playing the saviour, because its actions and inability to perceive reality will cause more economic damage and may ultimately cause more deaths than the virus itself.

Serina considers the adopted financial support measures for companies as correct, but points out that the conditions for companies to qualify for assistance are complicated and not transparent enough.

“Moreover, the government, while offering assistance, adds in the same breath that the exploitation of the assistance is punishable and that fines are high,” Serina said. “As a result, people prefer not to ask for assistance when they aren’t in a borderline situation because they don’t know if they filled in the applications correctly and whether this will not ultimately result in a fine.”

Serina further warns that measures like the flat-out ban of terminations of rentals and protection of businesses from bankruptcy and distrains can lead to deceitful actions and that these measures would be exploited by dishonest business persons.

The Federation of Employers’ Associations (AZZZ) points out that the current crisis has exposed negatives of populistic measures adopted by the previous cabinet like the high increase in the minimum wage and its setting to 60 percent of the average wage, the binding of wage surcharges to the minimum wage, holiday vouchers and retirement age cap. These measures are now putting companies under extreme pressure, which would in all probability result in layoffs, opines the AZZZ.

“We consider it necessary, at least for a certain period, to revise the so-called social packages and other populist social measures so that they do not have fatal consequences for companies,” said Miriam Filová, spokesperson of the AZZZ. The federation requires changing the formula for calculating the minimum wage or cutting work surcharges from the minimum wage.

Also, the AZZZ is calling for the forgiveness, and not just deferral, of some compulsory payments as it is now, as well as a reduction or complete scrapping of VAT for restaurants, at least temporarily, to prevent this sector from collapse.

“The measures should be put into practice as soon as possible, as flexibility and response time are very crucial in these times,” said Filová.

Andrej Lasz, general secretary of the Association of Industrial Unions (APZ), added that Slovakia did not prepare for bad times during good ones.

“Compared to other countries, the aid for companies and their employees is coming very gradually and not very swiftly,” said Lasz. “At first, the state did not provide assistance to all those in need, but divided companies and their employees into those who are entitled to assistance and those who are not. For many, these were weeks of uncertainty.”

While APZ, along with other organisations and companies, welcome the implementation of the kurzarbeit (short-time work) scheme, it criticises its capping at eur880 per employee. But in the industry, depending on the sector, the average wage ranges between eur1171 and eur1836. The average wage in sectors working in shifts, which is machine engineering, electrotechnics and automotive, is eur1500 and thus the wage subsidy accounts for only something over 50 percent.

The Slovak Automotive Industry Association (ZAP) joins this criticism.

“For the sector providing above-average wages, the cap set at the average wage is inappropriate and discriminatory for our employees,” said Ján Pribula, secretary general of the ZAP.

Moreover, this kind of assistance is only temporary while the APZ, the National Union of Employers (RÚZ) as well as ZAP, call for the incorporation of this support scheme into Slovak legislation so this instrument can be activated in the future if needed.

“We should take a lecture and prepare for a similar situation,” said Lasz, adding that the short-term work scheme may become part of the more flexible Labour Code, which the cabinet mentions in its programme statement. “In times of economic downturn and non-standard situations, entrepreneurs need the simplest and quickest possible solutions that work and will primarily help maintain employment until the situation in companies returns to normal.”

The ZAP considers measures to maintain employment as the biggest priority, while it perceives the adopted measures as insufficient and restricted by many conditions. This makes their use by companies even more complicated and confusing. Moreover, receiving concrete assistance is becoming protracted.

The association of self-employed trade and craft workers (SŽZ) would prefer a flat monthly contribution of eur500 for each business that was forced to close or report a drop in revenues, instead of the adopted subsidy scheme ranging from eur180 to eur540. Also, it would prefer the forgiving of social insurance payments instead of their deferral. Moreover, it lacks measures for businesses active in tourism, private kindergartens as well as municipal companies, like public transport companies, which do not qualify for any of the adopted assistance.

The steel industry points out that the coronavirus crisis has only exposed even more of the problems these sectors suffered from, even before the outbreak of the pandemic. These are, apart from high wage costs, the very high prices of electricity due to various fees. Steel maker US Steel Košice (USSK) further warns of another wave of cheap imports from Asia, which will affect not only USSK but also other steelmakers in EU member countries.

“Europe should finally learn to defend its domestic market against unfair practices,” said Ján Bača, spokesperson of USSK.

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