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Slovakian political crisis highlights fragility of Eurozone debt solution

Slovakian Prime Minister Iveta Radikova’s government was a political victim of the continuing Euro debt crisis. AAP

The Central European country of Slovakia has finally ratified the EU bailout fund – but not before its initial refusal caused a spill of the Slovakian government and highlighted the deep political divisions as well as economic imbalances in the region.

The formerly communist Slovakia, which joined the Eurozone and adopted the euro in 2009, was the last of the 17-member bloc to pass the 440 billion euro expansion to the European Financial Stability Facility (EFSF) .

As one of the poorest Eurozone countries, Slovakia believes it is being asked to shoulder a heavy burden to shore up more prolifigate members, an issue that will only become more critical, explains Stefan Auer, Senior Lecturer and Jean Monnet Chair in EU Interdisciplinary Studies at Latrobe University.

So what happened?

The expansion of the rescue fund agreed to in July has to be ratified by all 17 members of the Eurozone. The Slovakian parliament initially didn’t endorse the package because the junior member of the four-party coalition government, the Freedom and Solidarity party, led by economist Richard Sulik, opposed it.

Slovakia’s main opposition party, Smer, (which voted to support the rescue package in the end) abstained from the vote because it felt it shouldn’t be supporting a government that is so deeply split on a fundamental issue like that.

The Prime Minister, Iveta Radicova, decided to bind her vote with a no confidence motion, hoping she would force the junior coalition party members to support it. That gamble didn’t work for her and she was forced to step down.

What has been agreed so far is that there will be early elections. It’s a tragic outcome for Slovakia in that this is a government that I think is pretty good for the country.

From my perspective, the government became a victim of EU policies that are not working and are not going to work to rescue the Eurozone.

This highlights a situation where taxpayers in countries where the fiscal situation appears to be healthier are being asked to support countries that are in no position to repay their debt – such as Greece.

Major leaders in Western Europe stubbornly claim that Greece will repay its debt when we all know that’s not going to happen.

The argument by the Freedom and Solidarity Party in Slovakia is that they have been penalised for having complied with the rules. You can imagine that argument sounds very plausible to many Slovak voters because it was quite a painful process for Slovakia to comply with the Maastricht Treaty criteria that created the common currency – no more than 60% debt to GDP and no more than a 3% deficit of GDP in a year.

Greece has consistently violated these conditions – the Greek government hasn’t even lived up to the conditions it accepted a year ago. Greece is a complete mess.

Who believes these policies have worked when Greece is in a worse state now than it was a year ago?

Is this going to be the story we see again and again in the Eurozone?

I very much suspect so. That is why this strategy is politically suicidal. Nobody is happy with it.

The conditions attached to the bailout have met with great resistance by the Greek people, as we know. And we also know that there is a growing disquiet in Germany and in the more prosperous Eurozone countries where taxpayers are asked to take on potential obligations for debts in the south. To me this is just a massive Ponzi scheme.

The more prosperous countries themselves are in a tricky position – even Germany has debt of approximately 80% of its GDP.

Then there is the political legitimacy of the EFSF – the German Bundestag voted on the same package, and against expectations Angela Merkel received very strong backing from her coalition members and despite some disquiet it was endorsed with a massive majority.

But that result tends to overshadow the fact that 80% of Germans are opposed to the rescue package. In terms of the democratic accountability of this policy, I think this is disastrous. Also a lot of these commitments have not turned into real payments yet. But when Greece is forced to default on its debts – as everyone knows sooner or later it will – then some of these guarantees will be turned into very real costs.

What does this mean for poorer countries like Slovakia?

If these policies fail to deliver, then Slovakia will become poorer still. While the Slovak contribution constitutes a tiny proportion in relation to the total EFSF, the burden on Slovak taxpayers is disproportionate to the country’s per capita GDP. That was another powerful argument that Sulik presented against the package. In relative terms, Slovaks were actually asked to pay more than taxpayers in wealthier countries like Belgium and Germany.

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