Macroeconomic Environment

Slovenia

The year 2007 was a turning point for Slovenia, since the Slovenian Tolar was replaced by the Euro. Slovenia thus became the thirteenth country to enter the EMU. Favorable macroeconomic trends confirmed Slovenia’s readiness to enter the EMU, reinforcing its standing as the most developed of the new EU member states. The positive consequences of the adoption of the Euro are a stable economic environment, removal of trading and investment obstacles, simplifying business operations abroad, lowering costs, providing price transparency and political influence. With the adoption of the Euro and the monetary policies under the jurisdiction of ECB and reciprocal agreements, fiscal policy become the key means for absorbing potential asymmetric shocks and maintaining stable macroeconomic conditions in Slovenia.

In 2007, strong economic growth continued in Slovenia; yet again the prime generators were exports and investments, supported by more favorable economic conditions in the international environment and significantly stronger investment. In conjunction with the favorable trade cycle, the effects of the reform measures, particularly tax reform, and the positive consequences of EU membership, which facilitated trade exchange, also played a positive role on economic growth. Economic growth of 6.1% in 2007 was the highest since 1991. GDP per capita grew to €16,616. High economic growth had a positive effect on public finance, bringing the 2006 budget deficit of 1.2% GDP down to 0.1% of GDP in 2007. The deficit and the public debt in this past period were both primarily generated by the public sector. In recent years, the total consolidated public debt has steadily and constantly decreased. In 2006, it stood at 27.1% of GDP, dropping to 24.1% by the end of 2007.

The year 2007 was not only noteworthy for the successful adoption of the Euro, solid growth, and favorable conditions in public finance, but also for high inflation. The process of reducing the inflation rate that was in effect since 2000 was successfully completed in 2005, two years before the adoption of the Euro. This successful policy was the result of adjusting economic policies, especially by introducing a new fiscal framework whose primary focus was to stabilize prices. Inflation exceeded the 3% threshold in June 2007. By the end of 2007, the annual rate of inflation reached a high of 5.6%, while the mid-year inflation rate was 5.7%, measured by HICP. Steep price increases, the consequence of external factors, particularly the high prices of food and oil, had a more powerful impact on the Slovenian economy than on the rest of the EU. Important internal factors that contributed to the high rate of inflation were: rising cost of services; an insufficiently competitive market structure, particularly among retailers; soaring growth of investments and consumption; and not the least, the adoption of the Euro. The producer price index was on the rise as well, though the increase only affected the prices of these products on the domestic market. The annual domestic increase in producer prices reached 3.4% by the end of the 2007, while internationally the increase amounted to only 0.6% during the same period. Prices in manufacturing stabilized at a considerably higher level than in the past few years.

Last year’s labor market conditions were favorable and in step with the high economic growth. The unemployment rate dropped to its lowest point since Slovenia started following this indicator. The official unemployment rate stood at 7.7%, while the surveyed stood at 4.9%. Gross per capita wages grew at a nominal annual rate of 6.5%, or 0.9% in real terms.

SE Europe

In economic terms, the countries of this region achieved relatively high economic growth. From preliminary data it appears that Serbia achieved the highest growth at 7.5%. However steep increases in the price of food and fuel on international markets and rising costs of domestic services affected all the countries of the region. The inflation rate was highest in Bulgaria, where by the end of the year it reached 12.5%.

The countries of SE Europe still suffer from high unemployment rates, which along with low salaries, contribute significantly to their poverty. The highest level of registered unemployment was 40% in Bosnia and Herzegovina, Macedonia and Kosovo. In the other countries it ranged between 10 and 20%. Last year, the average per capita gross wage in the majority of these countries was €400. Kosovo was the exception on the low end, as the average wage did not reach this level, while Croatia averaged nearly €1,000.

Another common economic characteristic of these countries is imbalance in foreign trade and a significant deficit in their current account of balance of payments. These transitional economies, striving to attract as much foreign investment as possible, attempt to do so by privatizing national assets.