Bloomberg News

Slovaks Elect Government Backing Merkel’s Euro-Crisis Plans

March 12, 2012

Slovakia’s next Prime Minister Robert Fico told reporters in Bratislava, “The European Union can lean on Smer in Slovakia.” Photographer: Samuel Kubani/AFP/Getty Images

Slovakia’s next Prime Minister Robert Fico told reporters in Bratislava, “The European Union can lean on Smer in Slovakia.” Photographer: Samuel Kubani/AFP/Getty Images

Robert Fico, Slovakia’s next prime minister, pledged to bring the country in line with European Union efforts to fight the sovereign-debt crisis after toppling a government that held up the euro region’s rescue mechanism.

The Smer party that Fico, 47, created 13 years ago won 44.4 percent in snap elections on March 10, taking 83 of parliament’s 150 seats. Fico wants to raise taxes for higher earners and the most-profitable companies, such as banks owned by Erste Bank (EBS) Group AG and Intesa Sanpaolo SpA (ISP), to cut the budget gap without raising the cost of living for the least wealthy.

Slovakia, the second-poorest euro-area member, unsettled investors in October when it held up the approval of the euro area’s enhanced rescue fund. Fico helped push through the aid mechanism after the previous administration collapsed and supports German Chancellor Angela Merkel’s plan for closer fiscal ties. During the campaign, he also pledged to back measures such as a financial-transactions tax.

“This election result is good news for Brussels,” Ales Michl, an analyst at Raiffeisenbank AS in Prague said by phone. “Fico’s government will act more in line with the thinking in the EU mainstream than the previous administration.”

European leaders are trying to shore up faith in their budgetary discipline after the debt crisis forced Greece into the largest restructuring in history. A fiscal compact agreed on Jan. 30 requires balanced-budget rules and speeds up sanctions on nations exceeding deficit limits.

Protecting the Euro

Smer’s majority in parliament will probably help Slovakia ratify the fiscal agreement as Fico said his party supports all steps aimed at protecting the euro.

Fico as prime minister from 2006 to 2010 oversaw Slovakia’s switch to the common currency three years ago and signed for the country’s participation in the bailout mechanism after the debt crisis escalated.

“The European Union can lean on Smer in Slovakia,” Fico told reporters in Bratislava after the election results were published yesterday. “Slovakia wants to preserve the euro zone, it wants the euro to be a strong currency.”

Plans for stricter fiscal rules, combined with the European Central Bank lending more than 1 trillion euros ($1.3 trillion) to financial institutions, have curbed yields on government debt in Europe and boosted the euro. The currency traded at 1.3126 to the dollar at 4:10 p.m. in Bratislava, 3.6 percent stronger than the 2012 low of 1.2667 reached on Jan. 16.

Bond Yields

The extra yield investors demand to hold Spanish 10-year debt rather than German bunds has dropped to 331 basis points, from the euro-era record of 469 basis points on Nov. 22. The yield premium Italy pays to Germany is at a six-month low of 244 basis points, or 2.44 percentage points, according to generic yield indexes compiled by Bloomberg.

Slovakia was the last country to ratify the enhancement of the European Financial Stability Facility, the temporary bailout fund, in October after one of the parties in Premier Iveta Radicova’s government, Freedom and Solidarity, opposed the move. The nation also refused to contribute to the first loan to Greece after Radicova assumed power in July 2010.

Fico will rule in a different environment compared with his first government term six years ago, when the economy expanded a record 10.5 percent in 2007.

Growth (SKGDLYOY) is set to slow to 1.6 percent this year, half the 3.3 percent pace of the previous year, the Finance Ministry estimates. The economy is set to outpace the euro-region as a whole, where GDP is forecast by the European Commission to increase 0.5 percent.

Weakening Growth

With growth prospects fading, Smer proposes to cut the budget deficit with measures that won’t hurt poorer citizens. The party pledged to dismantle the 19 percent flat-tax system by introducing tax brackets of 25 percent for top earning citizens and 22 percent for companies with taxable income of more than 30 million euros.

While celebrating his victory at party’s headquarters in the capital Bratislava, Fico said he “realized how important it is to have healthy public finances” and to honor the country’s commitment to trimming the public-finance deficit to less than 3 percent of GDP in 2013 from 4.6 percent in 2011.

Smer also supports a Europe-wide tax on financial transactions. Nine European leaders, including German Finance Minister Wolfgang Schaeuble and Italian Premier Mario Monti in a joint letter to the EU leadership called for a speedy introduction of the levy, Der Spiegel reported yesterday.

“EU plans and measures seem to be in line with Fico’s agenda and interests,” Jaromir Sindel, Citigroup Inc. (C) chief economist for Czech Republic and Slovakia, said by phone from Prague. “The relations with the EU may get less in sync if Brussels employed tougher stance on Slovakia because of the fiscal developments.”

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

Slovakia’s next Prime Minister Robert Fico told reporters in Bratislava, “The European Union can lean on Smer in Slovakia.” Photographer: Samuel Kubani/AFP/Getty Images

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