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Macroeconomist Mrak says high time for structural reforms (interview)

Ljubljana, 30 January (STA) - Reflecting on the government's economic policies and future outlook, Ljubljana School of Economics and Business professor Mojmir Mrak told the STA that at least some of the announced structural reforms in Slovenia will have to be executed this year. Mrak meanwhile hopes the global tensions will not escalate further.

Speaking about the deteriorating global political situation in the past two years, the respected macroeconomist said a lot will depend on whether the Middle East crisis is contained. It spreading to the wider region would entail more inflation and thus tighter monetary policy. "Expectations about the course of monetary policy can thus change overnight," he warned.

These developments will affect European institutions as well, while Mrak also fears radical parties could gain a lot in the upcoming EU elections, "which can present a serious issue for the European project as a whole".

As for Slovenia, 2024 will have to be the year where at least some of the announced structural reforms materialise, even if expectations will have to be lowered compared to what had already been announced for 2023.

Mrak pointed out that the government is entering the second half of its term, meaning elections will start to loom and "the appetite for reforms is likely to wane".

On the positive side, he highlighted the commitments made to the EU, in particular in the context of the Recovery and Resilience Mechanism following the Covid-19 crisis, noting they will force the government to actually implement much of what has been promised, or risk losing the EU funds conditional on reforms.

The economist, who participated in Slovenia's EU accession negotiations, argued the government had unnecessarily raised excessive expectations at home both regarding the number and speed of reforms. Reforms need to be well designed as well as coordinated time-wise, he pointed out.

While acknowledging reforms are more urgent now, with Slovenia being "simultaneously forced and stimulated to get something done", he is reserved about the quality of planned reforms. Announcing the drawing up of a comprehensive tax reform in just three months cannot be based on serious analysis, he believes. "It will be a correction, which may be useful, but it will not be a reform", he added.

Mrak also feels the government opted for a too ambitions timeline regarding post-flood reconstruction, arguing the measures adopted will "place additional tax on business, making it even more difficult for it to compete internationally".

At the government's Strategic Council on Macroeconomic Issues he proposed a longer timeline with fewer burdens on what he feels is already excessively strained business, but the government took a different route. "We will see who was right," he said.

Mrak argued that Slovenia had traditionally been slow when it comes to structural reforms, but the international financial community still perceived it as capable of eventually doing what needed to be done. "Slovenia used to be considered a fairly rational country in international financial circles," he said.

Mrak feels attitudes changed at the start of the 2010s, during the referendums of the Borut Pahor government, which was reflected in a deteriorating of the country's credit rating.

The experience of a decade ago, when Slovenia came under great pressure from financial markets, also shows that small countries need to be more fiscally cautious than large ones, according to Mrak. "It's not fair, but that's the way it is," he said.

While he considers the freezing of the EU's fiscal rules in the face of the Covid-19 crisis to have been the right decision, he also believes it is right to now end the regime that was prolonged further by the outbreak of the war in Ukraine and then by the sharp rise in inflation.

Time will tell whether the new rules are really much better than the previous ones, with Mrak arguing they indeed need to be different from the original ones.

"To simply pull frozen rules out of a drawer now would be completely implausible. Those rules are unworkable because the macroeconomic situation has changed completely," he noted, while also pointing out that a unipolar world order is being replaced by a multipolar world in which there are several major players with conflicting interests.

"This world is much less stable than the one we have known in the past decades, and it is also less suited to the interests of smaller countries," said Mrak, noting Slovenia's additional vulnerability in the face of its export-oriented economy.

This magnifies the needed for the EU to respond to changes in much more united way and as one of the global players. While the bloc's institutional architecture and history make this hard at least in the mid-run, awareness about this is much bigger in the EU than for instance five years ago, Mrak asserted.

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