In 2004 Slovenia was riding high on the wave of an economic boom. Unfortunately, the 2004-2006 economic expansion and five percent growth in one year was fueled by borrowing and debt that would come back to haunt the country’s economy. In 2007 Slovenia joined the growing list of euro zone countries in economic trouble and by 2009 the country was in a deep recession because of bank debt and the collapse of the real estate sector. The bad economic news was further complicated by another downturn in 2011. Economists are now concerned that Slovenia will be the next euro zone country in need of a bailout.
While there are several systemic problems that have created Slovenia’s economic crisis, one of the major issues behind the country’s heavy debt is the government’s heavy involvement in the country’s banking system and in the ownership of many of Slovenia’s largest businesses. The lack of extensive business and manufacturing privatization has discouraged foreign investors that Slovenia desperately needs. Because the country is governed by a five party coalition there has been sharp disagreement among members of the coalition as to how to effectively turn the economy around through austerity measures. There have been some reforms introduced to increase privatization in the hope of attracting foreign investment and also reduce unemployment.
Slovenia’s economic woes are exacerbated by what is seen as an inflexible labor market caused, in part, by a lack of diversity in the country’s manufacturing sector. There are only two major manufacturing resources and the absence of a range of manufactured products has made it difficult to compete with other countries in sales and exports. In 2009 alone, exports were down and industrial production was reduced by eight percent. At the same time, unemployment remains high. In 2011, the unemployment rate was reported at 11.8 percent because of the economy’s downturn.
Bloomberg Business Week predicts that the Slovenian economy will be the only central European economy to contract in 2013 by as much as two percent. Many economic prognosticators expect that Slovenia will require a bailout to revive the economy. Surprisingly, the government has stated that it can avoid the need for an infusion of funds. However, the government has had problems deciding how to stem its economic problems in spite of the fact that long term bonds have been as high as seven percent and the country’s rating has been downgraded by three different rating firms. These indicators have been accurate predictors of a bailout in other countries.
Slovenia’s economy accounts for .4 percent of the euro zone’s GDP. A bailout is certainly workable and maybe the best short term answer. There is still the troublesome long term matter of the government’s inability to agree on how to stabilize the economy for the long run. Increasing foreign development investment (FDI) will require more privatization of companies and a greater willingness to create a business environment that is attractive to international firms. All of this is possible with discipline and a shared vision for Slovenia’s future.