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Slovakia: A Catching Up Euro Area Member In and Out of the Crisis

Author Info

  • Jarko Fidrmuc
  • Caroline Klein
  • Robert W. R. Price
  • Andreas Wörgötter

Abstract

The Slovak economy experienced a strong but short recession in 2009. The recovery afterwards was driven by exports and investment. While GDP growth was one of the strongest in OECD, employment did not reach the pre-crisis level and unemployment remains stubbornly high. This paper argues that Slovakia joined the euro area after a period of unprecedented real appreciation, which generated a threat for competitiveness of its export-oriented manufacturing industry. The response combined internal devaluation with productivity increasing measures, including capital deepening and laying off low productivity workers. While this strategy was successfully restoring an external equilibrium, its consequences for domestic demand and employment are less positive. This development is compared with Estonia and Slovenia, two other small and very open economies, recently entering the euro area. Slovaquie : Un membre de la zone euro en rattrapage pendant et après la crise En 2009, l'économie slovaque a connu une récession forte mais de courte durée. Par la suite, la reprise a été tirée par les exportations et l'investissement. Alors que la croissance du PIB a été l'une des plus fortes de l'OCDE, l'emploi n'a pas atteint le niveau d'avant la crise et le chômage reste durablement élevé. Cet article soutient que la Slovaquie a rejoint la zone euro après une période d'appréciation réelle sans précédent qui a généré une menace pour la compétitivité de son industrie exportatrice. La réponse a consisté en une dévaluation interne combinée à des mesures augmentant la productivité, comprenant entre autres l'accroissement de l’intensité capitalistique et le licenciement des travailleurs à faible productivité. Bien que cette stratégie ait permis la restauration d'un équilibre extérieur, ses conséquences sur la demande intérieure et l'emploi sont moins positives. Ce processus est comparé avec ceux observés en Estonie et Slovénie, deux autres petites économies très ouvertes, récemment entrées dans la zone euro.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 1019.

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Date of creation: 05 Feb 2013
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Handle: RePEc:oec:ecoaaa:1019-en
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Keywords: Slovakia; Estonia; job-less recovery; domestic demand; Slovenia; crisis; crise; Slovénie; Slovaquie; Estonie; reprise sans l'emploi; demande intérieure;

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Find related papers by JEL classification:
  • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
  • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
  • G01 - Financial Economics - - General - - - Financial Crises

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  1. Oomes, Nienke, 2005. "Maintaining competitiveness under equilibrium real appreciation: The case of Slovakia," Economic Systems, Elsevier, vol. 29(2), pages 187-204, June.
  2. Martin Berka & Michael B. Devereux & Charles Engel, 2012. "Real Exchange Rate Adjustment in and out of the Eurozone," American Economic Review, American Economic Association, vol. 102(3), pages 179-85, May.
  3. Jarko Fidrmuc & Christa Hainz & Anton Malesich, 2006. "Default Rates in the Loan Market for SMEs: Evidence from Slovakia," William Davidson Institute Working Papers Series wp854, William Davidson Institute at the University of Michigan.
  4. Frankel, Jeffrey & Rose, Andrew K., 2001. "An Estimate of the Effect of Common Currencies on Trade and Income," Working Paper Series rwp01-013, Harvard University, John F. Kennedy School of Government.
  5. Brixiova, Zuzana & Égert, Balázs, 2012. "Labour Market Reforms and Outcomes in Estonia," IZA Discussion Papers 6336, Institute for the Study of Labor (IZA).
  6. Fidrmuc, Jarko & Senaj, Matus, 2012. "Human Capital, Consumption, and Housing Wealth in Transition," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62058, Verein für Socialpolitik / German Economic Association.
  7. Felix Hüfner, 2011. "Increasing Public Sector Efficiency in Slovakia," OECD Economics Department Working Papers 839, OECD Publishing.
  8. Isabell Koske, 2009. "Achieving Fiscal Flexibility and Safeguarding Sustainability: The Case of Slovakia," OECD Economics Department Working Papers 681, OECD Publishing.
  9. Égert, Balázs, 2011. "Catching-up and inflation in Europe: Balassa-Samuelson, Engel's Law and other culprits," Economic Systems, Elsevier, vol. 35(2), pages 208-229, June.
  10. Brixiova, Zuzana & Vartia, Laura & Wörgötter, Andreas, 2010. "Capital flows and the boom-bust cycle: The case of Estonia," Economic Systems, Elsevier, vol. 34(1), pages 55-72, March.
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  13. Matthieu Bussière & Jarko Fidrmuc & Bernd Schnatz, 2008. "EU Enlargement and Trade Integration: Lessons from a Gravity Model," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 562-576, 08.
  14. repec:wdi:papers:2011-1027 is not listed on IDEAS
  15. Manfred Fluch & Helmut Stix, 2005. "Perceived Inflation in Austria – Extent, Explanations, Effects," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 22–47.
  16. Zuzana Brixiova & Margaret Morgan & Andreas Wörgötter, 2009. "Estonia and Euro Adoption: Small Country Challenges of Joining EMU," OECD Economics Department Working Papers 728, OECD Publishing.
  17. Guillermo A. Calvo & Fabrizio Coricelli & Pablo Ottonello, 2012. "Labor Market, Financial Crises and Inflation: Jobless and Wageless Recoveries," NBER Working Papers 18480, National Bureau of Economic Research, Inc.
  18. Brachinger, Hans Wolfgang, 2008. "A new index of perceived inflation: Assumptions, method, and application to Germany," Journal of Economic Psychology, Elsevier, vol. 29(4), pages 433-457, August.
  19. Felix Hüfner, 2009. "Adjusting Housing Policies in Slovakia in Light of Euro Adoption," OECD Economics Department Working Papers 682, OECD Publishing.
  20. Andrés Fuentes, 2007. "Improving Employment Prospects in the Slovak Republic: Building on Past Reforms," OECD Economics Department Working Papers 579, OECD Publishing.
  21. Karsten Staehr, 2010. "The global financial crisis and public finances in the New EU Countries from Central and Eastern Europe," Bank of Estonia Working Papers wp2010-02, Bank of Estonia, revised 04 Feb 2010.
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Cited by:

  1. Oliver Polyak, 2014. "The Impact of Euro Adoption on Export Performance: Comparison of the Czech Republic and Slovakia," Working Papers IES 2014/04, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2014.
  2. Michal Tvrdoň, 2015. "Decomposition of Unemployment: The Case of the Visegrad group countries," Working Papers 0005, Silesian University, School of Business Administration.
  3. Jarko Fidrmuc & Andreas Wörgötter, 2013. "Slovakia: The Consequences of Joining the Euro Aea before the Crisis for a Small Catching-up Economy," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(1), pages 57-63, 05.

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