Transformational recession (1990-1993)

1Slovenia's economic picture in 1990 was very bleak. The greatest problem was inflation, which was around 550 percent. It decreased in 1991, but the macroeconomic picture worsened and the depressive situation continued. Economic developments in 1991 were marked by a double transition - to an independent state and a market economy, accompanied by a series of upheavals that even the strongest possible economy could not endure without negative consequences: direct and indirect economic damage due to the Yugoslav Army's ten-day aggression on Slovenia, closing of markets in the countries of the former Yugoslavia, interrupted transport and other infrastructural connections with the south, confiscation of assets of Slovenian companies in Serbia and, last but not least, indiscriminate measures of the European Community and the USA against Yugoslavia, which also applied to Slovenian exports. In addition, the harmony of the balance of payments, left behind by the federal government's anti-inflation programme at the end of 1990, was being eliminated.¹⁶⁰ Slovenia's sales to the former Yugoslav republics, which accounted for about 25 percent of total sales in the previous years, fell to just under 10 percent in the last quarter of 1991, while purchases fell from around 20 percent to just over 10 percent of all purchases. In 1992, the closing of markets continued. With the war situation in Bosnia and Herzegovina and the sanctions by the United Nations against Serbia and Montenegro (these three former Yugoslav republics still accounted for 3.5 percent of all sales of the Slovenian economy in the last quarter of 1991), only the Croatian and Macedonian markets remained accessible. In the short and long terms, Slovenia thus had no other alternative but to focus on real international trade. Rapid decline in economic activity and high inflation were the basic characteristics of economic trends in 1991 as well.¹⁶¹ After four consecutive years of declining economic activity, the Slovenian economy went into a real depression in 1991. In one year, the number of registered unemployed workers increased by 67.3 percent or 36,000 until November 1991.¹⁶² According to the estimates, the domestic product fell by 12 percent (gross domestic product by 15 percent). The general economic situation was still depressed in 1992, but there were signs of improvement in some economic activities. Between 1991 and mid-1992, the structural reforms and the legal bases for the transition to a market economy came halfway. The fiscal reform was carried out, the banking and foreign exchange systems were set up, the privatization of apartments was almost completed; the laws on denationalization and privatization of cooperatives were adopted as well as the legislation that regulated the operation of social activities and introduced the pluralism of ownership, management and financing. Restrictions on the functioning of the market mechanism were removed in a number of areas. The system of economic relations with foreign countries was liberalized, mainly through the abolition of quantitative import restrictions and the gradual reduction of customs protection.¹⁶³ The course of economic developments in Slovenia in 1992 was largely shaped by the consequences of the constant contraction of sales markets and the simultaneous establishment of the macroeconomic stability. The effects of the former are expressed by a 7.5 percent drop in the gross domestic product and an average unemployment rate of around 11 percent, while the consequences of the latter show as a decline in inflation from 247 percent in December 1991 to just over 90 percent in December 1992 and as an increase in foreign exchange reserves from $ 365 million at the end of 1991 to at least $ 1.3 billion at the end of 1992. The central aim of the economic policy in 1992 was macroeconomic stabilization. In the given situation, the only sensible (and as it turned out a relatively successful) approach was a gradual stabilization approach with a restrictive monetary policy and a system of a floating tolar exchange rate. Fiscal policy supported such an orientation by taking care of the global balance between public revenues and expenditures, so there was no danger that public sector deficits would be covered by printing money. In addition, the government pursued a restrictive pricing policy in monopolistic activities and gradually reduced the cost of imports by reducing import duty rates. The monthly inflation rate fell from 21.5 percent in October 1991 to 1.4 percent in August 1992. The stabilization policy had two inevitable consequences, which usually occur during the implementation of any successful stabilization programme - a fall in the real exchange rate of foreign currencies and a rise in market real interest rates, which reached an extremely high level in the critical financial situation of commercial banks and companies, as they also included a high default risk premium. At the end of June 1992, the Bank of Slovenia and the government therefore began to influence the developments in the foreign exchange and money markets through coordinated market-oriented measures; the result after three months was that the real exchange rate of the basket of foreign currencies rose by 11 percent, and the real interest rate on the interbank money market fell from about 30 percent to 18 percent. As an obstacle to the implementation of the stabilization and development policies, a sharp rise in real wages in the economy and consequently in the non-economy occurred in 1992. In the second half of the year, the government managed to maintain wages in the public sector at the same level and in the companies where it directly or indirectly participated in the restructuring.¹⁶⁴ It began the implementation of the existing collective agreements for the economy and individual economic activities, which were known to set minimum rights at a level that was difficult to achieve for the majority of the economy. In the non-economy, there were two collective agreements in force with unrealistically determined wages in relation to the available funds in the national budget. At the same time, an intervention law was in force which was to regulate wages until the end of March 1992.¹⁶⁵ Another serious problem was the general financial crisis, manifesting itself in high losses of all institutional sectors, non-payment of financial obligations and financial indiscipline. These phenomena were interrelated and partly the result of delays in the privatization of socially-owned companies and, last but not least, a moratorium on bankruptcies. Part of the losses was thus certainly inflated, which, given the large dimension of the problem, did not diminish the weight of the fact that at that time the state was actually living off the sale of its property. In July 1992, the government began implementing the project of restructuring the Slovenian economy, but otherwise there were virtually no laws passed in the economic field that would reduce the already obvious lag behind its own goals. The Agency for the Rehabilitation of Banks began the initial phase of the bank rehabilitation process in mid-1992.¹⁶⁶ Some significant economic developments in the last quarter of 1992 could be understood as first signs of improvement. However, as the economy was just entering a crucial period of transition to a modern market economy, this, of course, could not be a cause for joy, especially because the essential economic and political gaps were widening. What we have in mind are the collective agreements and the relevant law, as they were completely uncoordinated and, above all, calibrated at significantly more favourable economic performance than the actual one, thus preventing the stabilization of a key national economic cost in the short term. The state's conduct was also a problem, as the social part of the public sector became too “inflated”, while the “budding” of new funds rapidly reduced the control of economic policy and parliament over revenues and spending of the relevant part of the public sector. The task of economic policy-makers at that time was mainly to significantly tighten the monetary, fiscal and income policies and financially control the public sector operations.¹⁶⁷ At the end of 1992, Dr. Jože Mencinger wrote the following about the work of Drnovšek's government: “The government has little to do with reducing inflation, nothing to do with stopping production and neither with the export surplus”. He also said that “for most of what has been happening in the economy in the past eight months, the economic policy of Drnovšek's government is neither to blame nor deserving a praise”. Mencinger also touched on the privatization law, which, according to him, was not something to be proud of, and he believed that it had been adopted “completely unexpectedly by a completely unpredictable parliament”.¹⁶⁸ The first period of the independent state or the period of recession demanded a high economic price. Higher than expected by those who had hoped for some miracle effects from the introduction of the market economy and independence from Belgrade, and perhaps somewhat more modest than some experts on the economy feared. Jože Mencinger said about the transition from a socialist to a market economy that it began with the illusion that the introduction of the market would immediately or at least quickly transform the former socialist economies into welfare states. These illusions were shared by new political elites on the one hand and international financial institutions and Western experts on the other. Three years after the beginning of the transformation, the illusions turned out to truly be illusions, and the excessive optimism turned into excessive pessimism and hopelessness.¹⁶⁹

Transformational recovery (1993-1995)

1After the initial phase of the transition to a social market economy, which was characterized by the declining economic growth and standard of living, rapid reduction in investment and employment along with significant macroeconomic instability, the Slovenian economy entered a period of transformational recovery. This period, which began in Slovenia in 1993, was marked by intensive restructuring in production and consumption (primary and final division) and dynamic economic growth. Gross domestic product increased by 1.9 percent in 1993, by 4.9 percent in 1994 and by a further 3.5 percent in 1995. Economic strength reached its pre-independence level. Economic developments in 1994 also confirmed the transition to economic growth. Positive trends in industrial production continued and its annual growth was 6.5 percent. In 1994, there was also a revival of construction, which had been declining for a long time. The growth in market services continued. For the first time in two years, we could also observe an increase in agricultural production. Gross domestic product increased by about 5 percent in that year.¹⁷⁰ Undoubtedly, the grey economy also played a certain role in the transition from recession to recovery as an unregistered economic profit-making activity, operating outside the regulations and evading taxes, with some covert activities also taking place within the units of the “official sector”. All this was mainly due to poorly developed tax control mechanisms, relatively low fines, inadequate organization and remuneration in companies, which did not particularly restrict grey areas, and the unsatisfactory functioning of the legal system. According to some estimates, the share of the grey economy represented 15 to 20 percent of economic activity in Slovenia.¹⁷¹ Just as the main cause of the economic depression in 1991-1992 was a dramatic drop in total demand, the onset of economic recovery in mid-1993 was also associated with a strengthening of overall demand. The latter was made possible by the fact that, in the economic sense, Slovenia had completed one of the phases of transformation, namely from a regional to a national economy.¹⁷² The focus of economic policy in 1993 was on institutional and real restructuring of the economy. The decline in production continued in early 1993, while a significant positive turnaround in a number of industries was recorded in the second half of the year. The turning point was achieved with a relentless monetary policy that continued to reduce current inflation, with balanced government finances and without net external borrowing. Production, especially industrial one, continued to adapt to the effects of reduced demand from the markets of the countries of the former Yugoslavia for the most part of 1993. From 1990 to 1993, the sale of goods and services to this area decreased from 31 percent to about 5 percent of all sales of the Slovenian economy. In 1995, the former Yugoslav market was characterized by the fact that the economies and former markets of Yugoslavia achieved only 10 of the 65 percent of the maximum activity already achieved in the past. Peace agreements and their stabilization efforts promised better times.¹⁷³ With the initial mistrust, foreign direct investments gradually began to flow more strongly into the young Slovenian economy. The total balance of inward direct investments in Slovenia almost doubled between 1993 and 1995 (an increase from 954 to 1,763 million dollars).¹⁷⁴ In 1993, the average net wage after taxes, but before deducting the advance payment of personal income tax, amounted to 46,826 tolars or 414 US dollars (USD).¹⁷⁵ The Agreement on Wage Policy in the Economy for 1994¹⁷⁶ provided that wages were paid in accordance with collective agreements and the terms of the Agreement. With this Agreement, the Economic and Social Council was established, a tripartite body composed of the representatives of employers, employees and the government. The Economic and Social Council was a place where representatives of the social partners discussed the most important economic, social and other issues concerning their common or individual interests. Negotiations for the conclusion of the annual social agreement also took place within the Economic and Social Council. The fact that despite the agreement on wage policy a law was required to implement it was not exactly in favour of the negotiators, but this practice continued in the following years. The Act on the Implementation of the Agreement on Wage Policy in the Economy¹⁷⁷ summarized the provisions of the agreement and additionally limited the payment of wages to managers by employers who paid their workers wages below the level determined in the collective agreement.¹⁷⁸ For the first time in several years, employment was declining faster than production in 1993, which signified an increase in productivity. Nevertheless, the number of the registered unemployed further increased in 1993.¹⁷⁹ In 1994, however, the number of unemployed people, which peaked in December 1993, was declining throughout the year. The growth in the number of job vacancies slowed down, which was to be expected, as it reached the level of the years when the labour force in the Slovenian economy was almost fully employed. In 1994, there were 10 unemployed people per one vacancy, while there were more than 14 in 1993.¹⁸⁰ The phenomenon of unemployment was one of the most extensive and most difficult to solve social problems in Slovenia, as well as in other post-socialist countries. In Slovenia, the unemployment rate rose from 1.4 percent in 1987 to 14.4 percent in 1993. Less than half of those registered received social assistance. Despite mass unemployment, employers were relatively unsuccessful in finding a suitable workforce, especially if the employment was for a fixed term - particularly in agriculture. Thousands of foreign seasonal workers had to be sought annually in such cases. The domestic unemployed workforce rejected seasonal work due to more difficult conditions, low valuation of agricultural work and poorer earnings.¹⁸¹ However, the decline in total employment finally stopped in 1994 due to new hiring in the small private and state sectors, while employment in the group of large and mediumsized companies decreased by a further 5.1 percent. The number of the registered unemployed decreased by 1.6 percent; the unemployment rate was 9 percent in May 1994. Labour productivity in industry rose by 13.7 percent.¹⁸² Slovenia thus overcame the lowest point of the economic crisis in 1993. The independence and stabilization phases of the Slovenian transition were successfully carried out and their positive effects gradually began to prevail over short-term costs. The trend of moderating inflation also continued. The growth of retail prices was about 19 percent in 1994. Despite the decline, such a level of inflation did not yet ensure the stable conditions for economic growth, however.¹⁸³ With the 1995 budget memorandum, the government committed itself to pursuing a balanced economic policy with the following key objectives:

• significant reduction in the inflation rate compared to 1994,
• 4 to 5 percent growth of gross domestic product based on exports and investments,
• increased labour productivity by 3 to 4 percent,
• increased employment by at least 1 percent,
• growth of gross wages in the framework of labour productivity,
• reduction of the share of general government expenditure in gross domestic product by 0.7 percentage point and general government revenue by 0.4 percentage point.¹⁸⁴

Balanced development (1995-1999)

1The second half of the 1990s was as a period of balanced development. The period 1996-1999 was characterized by moderate inflation with a downward trend in balanced economic growth, which was moving around 4% on average per year. The slowdown in 1995-1996 was due to a slowdown in gross domestic product in the European Union, while the slowdown in 1998 was due to the Russian crisis and the recession in Croatia. In 1999, Slovenia recorded the highest economic growth among all candidates for accession to the European Union.¹⁸⁵ When preparing Slovenia's economic development strategy for the period 1996-2000, entitled “Slovenia's Approach to the EU”, the analysts noted that Slovenian exporters should replace at least half of their then export-oriented products. Manufacturing, which had consistently accounted for almost all merchandise exports, achieved below-average export efficiency in the European market in global competition. In the markets of important European partners, the prices of Slovenian exported products were below the average import prices for the same or similar imported products. The structure of Slovenian exports did not change enough and was too concentrated in those product groups where demand was below average. The Slovenian economy was thus sensitive to economic fluctuations in the European markets. In the second half of the 1990s, foreign direct investments in the Slovenian economy were growing in a fluctuating manner year by year. The stock of foreign direct investments rose from about $ 2 billion in 1996 to close to $ 2.8 billion in 2000.¹⁸⁶

2In 1996-1999, Slovenia recorded a downward trend in inflation. In 1998, the consumer price index became an official and internationally comparable general measure of inflation, replacing the related retail price index. Free prices increased by only 5.7 percent in 1998, while controlled prices by 10.1 percent.¹⁸⁷ The growth of personal income during 1996 was even faster than the average growth compared to 1995, which meant that income policy continued to be the central problem of Slovenian macroeconomic regulation. In the past years, a close link between wage and employment trends had been established in Slovenia. In the industry, where wage growth was above average, nominal labour cost growth outpaced large savings from increased productivity. Wage growth in 1996 originated mainly from the public sector (real average wages rose by 5.6 percent in the state administration, by 5.5 percent in education and by 6.3 percent in health care), construction (6 percent) and agriculture (5.7 percent), that is, mostly from the fields the conduct of which was only loosely related to the monetary policy and which were not affected by the constraints dictated by exchange rate movements.¹⁸⁸ The Social Agreement,¹⁸⁹ finally concluded at the end of May 1996, stipulated that wages were paid in accordance with the collective agreement, but that, according to the escalation scale, only starting wages increase by tariff and pay grades, while basic wages grow only by a difference of identified increases in starting wages. Such a solution, which was not supposed to encourage an automatic increase in wages, was advocated by employers in particular. The final decision on the minimum wage, which was a compromise between the demands of the unions and the proposals of the employers, was decisively influenced by the move of the government, which reduced the contributions of employers by 4 percent. At the same time, it introduced a payroll tax, which triggered disapproval among employers.¹⁹⁰ The moderate wage developments of 1997 continued in 1998, which was greatly influenced by the legalized agreement on wage developments.¹⁹¹ Despite the agreement of the social partners on wage policy for the period 1999-2001, wages were growing much faster in 1999 than in the previous year and at the same time faster than the planned 2% real growth. Real growth in average gross wages was 3.2 percent and almost reached labour productivity growth. Wages in manufacturing rose by 2.8 percent in real terms.¹⁹²

3In the second half of the 1990s, major institutional changes occurred in the area of public finances. The Accounting Act¹⁹³ was adopted in April, the Value Added Tax Act¹⁹⁴ and the Excise Duty Act¹⁹⁵ entered into force in July, the Public Finance Act¹⁹⁶ was adopted in September, and the Pension and Disability Insurance Act¹⁹⁷ at the end of the year. As expected, the introduction of value added tax had an impact on price growth due to changes in relative price ratios and a higher effective tax rate.¹⁹⁸ In the second half of the 1990s, public finances were one of the most problematic areas of Slovenia's development. During this time, the gradual modernization of the tax system continued and some changes were implemented quite successfully, such as the long-planned introduction of a value added tax to replace the previous sales tax, which was important for adapting to the public finances of the EU.¹⁹⁹ At the end of the 1990s, administrative changes were also implemented in the register of employees. As of January 1999, the persons involved in public works also had the status of employees, while they had been statistically considered unemployed until then. The number of employees increased the most among those employed by entrepreneurs and in independent professions (the number of them decreased, however), while the number of employees in companies and organizations also grew.²⁰⁰

At the turn of the millennium (2000-2003)

1At the beginning of the new millennium, Slovenia remained one of the few transition countries that exceeded the pre-transition level of economic activity. In 2000, only Poland, Hungary, Slovakia, Albania and Slovenia exceeded the level of real gross domestic product of 1989. Slovenia had been steadily reducing the lag behind the developed European countries. In 1996, it reached 64 percent of gross domestic product per capita in purchasing power standards in the European Union, and in 2001, it reached 70 percent. Already in 1997, Slovenia achieved the level of development of the least developed member of the European Union - Greece, and was nearing that of Portugal. Among the candidates for the accession to the European Union, only Cyprus was more developed than Slovenia, reaching 74% of the average gross domestic product per capita in purchasing power standards in the European Union in 2001. At the turn of the millennium, in 2000, an inflationary shock occurred. Inflation rose to almost 9 percent. The period of moderate inflation with a slow declining trend was interrupted in 1999 with the introduction of value added tax and rising commodity prices on world markets. With increasing fluctuations in monthly price growth rates, their level was increasing until the second half of 2001, after which inflation began to decline and stood at 7% at the end of 2001.

Inflation trends in 2002 were strongly characterized by fiscal changes (increase in the rate of value added tax, excise duties and environmental taxes), which, together with controlled prices and petroleum products, halted the downward trend in inflation in early 2002. The downward trend in inflation resumed in the middle of the second quarter, but the inflation at the end of 2002 nevertheless exceeded the inflation at the end of 2001. The gradual rise in prices in 2000 and in the first half of 2001 was largely due to continued rising of oil prices in the global market, which also partly contributed to the slow moderation of price growth in 2001. Among the internal factors that enabled inflation to remain relatively high, it is necessary to point out the comparatively fast rise in regulated prices, frequent changes in the tax area and the focus of monetary policy on regulating exchange rate movements, which, together with increased financial inflows, resulted in increased growth of monetary aggregates. Regarding the inflation problem at that time, the director of the Office for Macroeconomic Analysis and Development said that he “does not understand why the central bank would not at least conditionally define the inflation target, and if it did not achieve it, it could explain exactly which government actions had gotten in the way”.²⁰¹ In 1996, inflation in Slovenia was the lowest among the countries of the Luxembourg group of candidates for the membership in the European Union, with the exception of the Czech Republic. However, at the end of 2002, inflation was the highest in Slovenia among the mentioned countries and was at the same time about three times higher than the level determined by the Union's convergence criterion on price stability. With high inflation, economic growth fell in 2000 compared to 1999. It declined even further the following year, reaching only 2.3 percent in 2003. With the decrease in economic growth, employment growth also slowed down. In 2002 in particular, employment growth slowed sharply and the decline in unemployment almost came to a halt. Due to retirements and other deletions from unemployment registers, the share of the long-term unemployed decreased slightly in 2001, from 63% in 2000 to 59 %. With a more intensive focus of the employment policy on the problems of the people at a disadvantage in the labour market and the retirement of older people who met the criteria for retirement, the share was also falling in 2002. The problem of employing uneducated unemployed people persisted, as their share remained at about 47 percent.²⁰²

2In 2000, 11.2 percent real growth in exports of goods and 3.6 percent real growth in imports of goods were recorded. The terms of trade had a significant impact on the current account deficit. The lowest shares of consumer goods in exports and imports were recorded thus far. The shares of trade with the countries of the European Union were similar to those before the Russian and Kosovo crises. Trade with the countries of the former Yugoslavia, the former Soviet Union and the CEFTA countries had increased.²⁰³ The terms of trade slightly improved in 2001 after two years of successive deterioration. The market share of Slovenian exporters in the European Union markets increased. Changes also occurred in the regional structure of trade in both exports and imports. Trade with the countries of the former Yugoslavia was also strengthening at an above average rate.²⁰⁴ The year 2002 was characterized by faster growth in exports of goods than imports. There was a decline in the US dollar on both the import and export side. The market share of Slovenian exporters in the markets of the most important trading partners increased in 2002. On the export side, the regional composition of trade changed in favour of the countries of the former Yugoslavia and the CEFTA countries. A large surplus was recorded in trade with the countries of the former Yugoslavia.²⁰⁵ In 2003, the growth in imports was twice as fast as the growth in exports. Both exports and imports were affected by inter-currency relations. The market share of Slovenian exporters in the EU markets was 0.28 percent. In 2003, the share of exports to the countries of the former Yugoslavia decreased to 17.4 percent compared to 2002. The growth of exports to the CEFTA countries was three times higher than the growth of imports. The growth in trade in services with foreign countries was slower than the growth of commodity exchange.²⁰⁶

3After eleven years of transition, the reform lags remained especially in the restructuring of the financial sector, the restructuring of the corporate sector and the reform of public administration or the functioning of the public sector. Although the total corporate profits exceeded the total losses in the economy, about a third of the companies were still operating at a loss. The state was still strongly and directly present in the economy - the share of the private sector in gross domestic product increased from 30 percent in 1992 to 65 percent in 2000 with the privatization of socially-owned property, but still lagged behind other transition countries. In 2000, the process of privatization also started in the financial sector, where, after a long discussion on the national interest, the state sold a 39% share of Nova ljubljanska banka bank to foreigners. The implementation of the public administration reform was slow, with public sector operating costs rising mainly due to rapid wage and employment growth in the public sector.²⁰⁷ In July 2001, the Government of the Republic of Slovenia adopted a strategy of the economic development for the medium term until 2006 entitled “Slovenia in the European Union”. The title speaks for itself. It stemmed from the realization that the previous development concept of transition adaptation had been largely exhausted and that it would henceforth take place in a significantly changed environment. It was characterized mainly by globalization, the information society and the knowledge society as a development challenge and the expected integration of Slovenia into the EU.²⁰⁸

Achieving strategic goals and improving the macroeconomic picture (2004)

1In 2004, the macroeconomic picture improved. Economic growth was the highest and inflation the lowest in the new millennium. Economic activity was relatively high in 2004 after several years of rather low growth rates. The average growth rate of gross domestic product was 4.4 percent. Domestic demand also strengthened and industrial production grew by 4.8%. There was a moderate wage growth, mainly due to low wage growth in the public sector. Employment trends were in line with the economic activity, and the number of unemployed was 5% lower than in 2003. The growth in the number of employees in the service sector again outpaced the growth in the industry. The trend of disinflation continued and the average annual inflation rate in 2004 was 3.6 percent. The Bank of Slovenia pursued the goal of achieving price stability. Imports of goods grew faster than exports in 2004. Real growth in exports of goods doubled while real growth in imports increased by half. Slovenia became a member of the European Union on 1 May 2004. Slovenia's accession to the EU and the revival of economic activity in the EU had a favourable effect on trade. On the export side, the exports of reproductive material increased the most, while on the import side, the imports of reproductive material and consumer goods were prevailing. The commodity exchange deficit increased by EUR 337 million. There was also an above-average increase in exports to the countries of the former Soviet Union and Yugoslavia. The share of exports to the countries of the former Yugoslavia rose to 17.9 percent in 2004, and the share of imports to 5.8 percent. Germany, Italy, Austria and France remained the most important trading partners. There was an increase or acceleration of exports to Greece, Belgium, Denmark and Spain. The exports of services increased in general by 13 percent in 2004 and the imports by 10 percent. The revenues from tourism were also growing faster than expenditures. After 1996, transport services were the fastest growing service activity in 2004. The financial outflows of the private sector also increased. The share of investments in foreign securities doubled in the structure of financial outflows. Slovenia's accession to the EU also resulted in higher foreign direct investment. One of the negative consequences, however, was the increased volume of foreign borrowing by the Slovenian banks and companies. The gross external debt also increased. By joining the EU, Slovenia became a member of the Economic and Monetary Union (EMU) with a derogation regarding the introduction of the euro. This means that it did not adopt the euro immediately after joining the EU, but it did so on 1 January 2007. With Slovenia's accession to the EU, the Bank of Slovenia became a member of the European System of Central Banks (ESCB), which consists of the European Central Bank (ECB) and the national central banks of the EU Member States. The representatives of the Bank of Slovenia thus acquired the status of members of the General Council of the ECB, committees and working groups of the ESCB. Due to the planned adoption of the euro, the Bank of Slovenia continued to adjust its monetary policy instruments. The integration into the EU and the planned introduction of the euro also required adjustments in the area of payment systems. In any case, after Slovenia's accession to the EU, the Bank of Slovenia still had to implement quite a few necessary measures and adjustments before the euro was adopted. The Bank of Slovenia therefore played an extremely important role in this regard.²⁰⁹

Towards new challenges and crises (from 2004 to the present day)

1After 2004, the period of the so-called fat cows began - the time of the boom.

2In 2006, Slovenia's economic growth amounted to 5.2 percent, while in the second half of the year even to 5.5 percent. Growth during this period was mainly driven by strong exports, tied to the favourable European economy. In the second half of the year, this picture changed somewhat, as higher domestic consumption, especially investments, was the thing that contributed to the high aggregate growth, when a strong new wave in infrastructure joined the already intensive construction of housing. In construction, real value added increased by over 20 percent and employment by almost 10 percent in the last quarter compared to 2005. High economic growth was also significantly influenced by typical “convergence” factors, such as credit expansion based on external borrowing, etc. As pointed out in the annual report by the Bank of Slovenia for 2006, the growth generated in this manner also included risks.²¹⁰ The economic growth in 2006 was the highest since 1999. Higher domestic demand crucially contributed to high economic activity, which was accelerating in the last quarter of 2005 and gradually increasing during 2006. In the structure of investments, high investments in residential and non-residential buildings stood out the most, and after a negative growth in 2005, investments in transport equipment also increased sharply. On average, household consumption remained almost unchanged in 2006 compared to the previous year, despite improved labour market conditions, growing consumer optimism and more favourable lending conditions. The spending of private non-profit institutions increased in 2006 after two years of negative growth, while state spending also accelerated by 1 percentage point to 3.2 percent compared to the previous year. The interim growth in exports of goods and services slowed slightly in 2006 compared to the previous two years, while the growth in imports of goods and services somewhat accelerated, contributing, among other things, to the increase in the negative balance of payment position in 2006. In line with the high growth of value added in manufacturing in 2006 (7.1 percent), the growth of industrial production was also high (7.6 percent), which slowed down slightly only at the end of the year.²¹¹

3On 1 January 2007, Slovenia adopted the euro as its national currency. The transition and change of currency went smoothly, but in some cases, prices were “rounded” up, especially in services and catering. The impact of the introduction of the euro on inflation was, according to most estimates, around 0.3 percentage points. The positive effects of Slovenia's accession to the European Union continued in 2007. The favourable European and international economic conditions and the consequent high growth of foreign trade enabled 6.1% aggregate real economic growth, which was the highest growth in the post-independence period. The result of high economic growth was a high increase in total employment by 2.7 percent and a decrease in the unemployment rate to 4.6 percent. In addition to exports, high growth in domestic consumption also contributed to high GDP and employment growth. It was driven by a very high growth of investments, especially investments in construction works. After entering the European Exchange Rate Mechanism (ERM II) in July 2004, the efficiency of the Bank of Slovenia's monetary control gradually began to decline due to the convergence of domestic interest rates to the level of the European ones, which stimulated strong credit growth. As written by Marko Kranjec, the Governor of the Bank of Slovenia, in the editorial of the Annual Report for 2007, the central bank estimated that economic growth in the second half of 2006 and even more so in 2007 was above the production potentials that ensure macroeconomic balance. With the accession to the European Union, there was a large increase in imports, which, with increasing domestic consumption, began to outpace exports, leading to a large increase in the external deficit. Imports from the countries of the former Yugoslavia were growing faster than exports since Slovenia's accession to the European Union. Trade with Serbia was growing the fastest in 2007. The deficit of the current account of the balance of payments amounted to 4.9 percent of GDP in 2007, which was already a clear and serious sign of macroeconomic imbalances. Wage growth was also increasing throughout 2007, while inflation slowed somewhat in the first months of 2007 but started rising in the middle and especially towards the end of the year and was well above the euro area average. At the end of the year, the Harmonized Index of Consumer Prices (HICP) increased by 5.7 percent, with the largest part of the increase being caused by external supply shocks, especially increases in food, raw material and energy prices. With the general government surplus, net deleveraging occurred. At the end of 2007, the debt of the Republic of Slovenia amounted to 22 percent of GDP and the net external debt amounted to EUR 6.4 billion. The largest financial inflows came through loans to banks.²¹²

4The financial crisis that erupted in the United States in 2007 spread throughout the world through national and international banking relations. The first consequences of the crisis were the loss of confidence among banks and the tightening of lending conditions: interbank lending shrank and banks severely curtailed consumer lending. This is how the phenomenon called the credit crunch came about. In many countries, the effects of the credit crunch first manifested in the real estate market, and there were also serious consequences in global banking systems and global economies in general. Richard Sendi believes the financial crisis led to the collapse of large financial institutions and forced governments to take emergency safeguard measures to stop and prevent the worsening of economic recession.²¹³ The global crisis hit Slovenia at the end of 2008. After high economic growth in 2006 and 2007, the latter still stood at 5.6 percent in the first half of 2008. Economic growth in 2008 was 2.8 percentage points higher than the growth of the euro area. Due to the economic situation in the industries related to domestic consumption, employment growth was also high. In 2008, it still averaged 2.2 percent, even 12 percent in construction. Already at the end of 2006, high employment growth led to increased wage growth. For most of 2008, the annual growth rate of average gross wages was around 8.5 percent. The majority of problems occurred in companies due to the declining domestic and foreign demand. At the end of the year, the slowdown in economic activity in industry also began to spread to services and construction. The large decrease in investment demand was mainly due to the slowdown in construction activity. In 2008, for instance, the value added in construction accounted for 9 percent of all value added. Industrial companies were the most affected. In the last two months of 2008, the year-on-year growth rate of exports of goods was -14 percent and of the production in manufacturing -16 percent.²¹⁴ The financial crisis in 2008, especially its reflection in a mistrust and a sharp decline in lending between banks, greatly affected our banks. The former Governor of the Bank of Slovenia, Marko Kranjec, believes that the reason is not “that they had a significant part of investments in securities whose market value was annihilated or almost annihilated, but that our economy is extremely bank-oriented”.²¹⁵ “Companies are almost entirely financed by bank loans, while domestic savings, such as that of households, only partly go into banks. Domestic savings cannot be put into companies in any other way than by banks borrowing from other banks and financial markets abroad. Savings that do not go into banks go abroad through non-bank financial intermediaries and then return by foreign bank borrowing. The economy will not change and become less bank-oriented in order for domestic savings to go directly into our companies and not through foreign countries. The banking and financial system must adapt to this characteristic of the economy”, Kranjec said.²¹⁶ However, given the abundance of cheap money in the world, domestic saving was not the only thing that increased with foreign bank borrowing. Our net external debt also increased. The total gross external debt, which stood at € 15 billion at the end of 2004, that is 56 percent of GDP, rose to 40 billion or 108 percent of GDP in the four years until autumn 2008.²¹⁷ It is interesting to look at household borrowing during this period. In 2008, Slovenian households were still among the least indebted in the EU, despite relatively fast borrowing in the past years. Between 2001 and 2008, the average indebtedness (measured as a share of liabilities in GDP) of an EU Member State increased significantly (the most in Eastern European countries, where the households of some countries, e.g. Latvia and Slovakia, became the most indebted in the EU). The reasons for Slovenia's relatively lower indebtedness could be found in the lower share of housing loans (the latter was among the lowest in the EU - it was lower only in Romania and Bulgaria; in Slovenia, it amounted to 45.9 percent at the end of 2008, while the average share of EU countries was 66 percent), which were repaid over a longer period of time in higher values. After 2004 (the data have been available since then), we also have not seen such a strong increase in loans (the so-called credit boom) as it occurred in the Baltic States for instance. There, the volume of loans increased from 5 to 8 times from 2004 to 2008, while in Slovenia by more than 2 times. In terms of GDP per capita, these countries also lagged further behind the EU average in terms of purchasing power than Slovenia, so their spending was also related to the acquisition of goods that Slovenian households could already afford before.²¹⁸

5The labour market situation began to deteriorate in the last quarter of 2008 under the influence of the crisis. In the period 2000-2008, the number of persons in employment increased and unemployment decreased, which also affected the decline in the number of recipients of unemployment benefits and cash social assistance for the unemployed. The crisis interrupted these favourable trends. The number of employed people decreased and the number of unemployed increased, with the number of recipients of benefits and cash social assistance consequently growing. The state responded to the crisis with two intervention laws to preserve jobs and increase the number of unemployed people included in active employment policy programmes, thus preventing an even greater increase in unemployment.²¹⁹ In 2004, the decline in the number of unemployed was accelerated as a result of economic growth and increased employment. Although the number of registered unemployed started to increase in October 2008, the average annual number of registered unemployed in 2008 was 11.4 percent lower than in 2007. Under the influence of the economic crisis, the number of registered unemployed began to grow in the last quarter of 2008 and it rose to 95,446 by November 2009, which was 50.6 percent more than in November 2008.²²⁰ As already mentioned, the state responded to the deteriorating situation in the labour market with labour market policy measures. In January 2009, the Partially Subsidizing of Full-Time Work Act was adopted, which provided for subsidies in the event of a reduction in working hours to 36 or 32 hours per week, respectively. At the end of May, the Partial Reimbursement of Payment Compensation Act was adopted, regulating the partial reimbursement of paid compensation to employees “temporarily waiting for work”.²²¹

6The existing and expected demographic changes require systematic action in population, employment and public finance policies. The number of all pensioners in Slovenia is constantly growing faster than the number of insured persons who pay into the pension fund, so in 2008 there were only 1.71 insured persons per one pensioner. In 2008, there were 527,933 recipients of all types of pensions from compulsory insurance (old-age, disability, family and widow's), and 904,667 insured persons. In the period 2000-2008, the number of pensioners grew at an average annual growth rate of 1.5 percent, while the number of insured persons at an average annual growth rate of 1 percent.²²² The development of the pension system in Slovenia was “evolutionary”, which means that the legislation and reforms never meant a significant shift in the “philosophy” of the system itself, which, however, retained the characteristics of the Bismarck system in terms of its basic features. One of the fundamental objectives of the pension reform, which came into force in 2000, was to halt the negative trends that were reflected in the increase in the pension “burden” on employees.²²³ This is also evidenced by the fact that the number of old-age pensioners increased by 62 percent from 1991 to 2010 or by an average of 2.6 percent each year.²²⁴ Aware of the need for a reform, the government of Borut Pahor prepared a proposal for the Pension and Disability Insurance Act, but on 5 June 2011, the citizens rejected it in a referendum with more than 70 per- cent.²²⁵ Social cohesion in Slovenia is relatively high, judging by the so-called Laeken indicators. Based on these, we ranked among the very top of the EU countries before or at the beginning of the crisis. Thus, in 2008 we had the lowest income inequality, the lowest share of households with children with no employed persons and the lowest share of young people who dropped out of school. The relatively efficient system of social transfers made a significant contribution to reducing income inequality, as poverty would have been almost twice as high without this assistance from the welfare state.²²⁶ As mentioned, the ongoing crisis is worsening the situation year by year. In addition to the economic and financial crisis, we are also witnessing a social, psychological, moral and political crisis.

7GDP fell by 7.8 percent in 2009. After a short strengthening in 2010 and 2011, there was another decline in 2012 and 2013, after which we recorded a recovery of a few percentage points on the annual basis, as well as a strong connection between our economy and foreign markets. High economic growth continued in 2018, which affected the consolidation of public finances, and we also witnessed record employment and continuation of positive trends in construction, etc. In 2019, Slovenia also recorded 3.2% real GDP growth. However, like a bolt from the blue, Covid-19 struck. The structure of the economy has changed dramatically since 1991. The share of value added from agricultural activities in total value added of GDP decreased by more than half: from 5.7 percent (1991) to 2.2 percent (2018). The share of value added from industry and construction also fell sharply: from 44 percent (1991) to 33.2 percent (2018). However, the share of value added from services increased significantly: from 50.3 percent (1991) to 64.6 percent (2018).²²⁷

8From 2016 onwards, Slovenia was again reducing the lag in the economic development behind the EU average, the social inclusion of the population remained relatively high, and the efficiency of resource and energy use slightly improved. These were the key findings of the Development Report 2019, prepared by the Institute of the Republic of Slovenia for Macroeconomic Analysis and Development (IMAD).²²⁸

9The Institute also stated the development policy recommendations, namely:

• accelerating productivity growth for economic progress and raising the standard of living of the population;
• adapting to demographic changes to ensure a dignified life for all;
• the transition to a low-carbon circular economy in order to reduce the burden on the environment and increase the competitiveness of the economy;
• strengthening the development role of the state and its institutions.²²⁹

10The IMAD forecast, which is also the basis of Slovenia's fiscal policy, states that GDP will fall by 6.7 percent in 2020. The main reason for the negative economic growth, as in the rest of the world, is, of course, the pandemic of the new coronavirus, which, according to the International Monetary Fund (IMF), will put at least 90 million people in severe crisis. Unfortunately, Slovenia will not be an exception, which is already evident at this moment.

GDP per capita in a broader international perspective

1According to the data of the European Statistical Office for 2007, there were large deviations within the EU in terms of GDP per capita. In Luxembourg, the latter was 2.5 times higher, while in Bulgaria it was more than 60 percent lower than the average. In Slovenia, GDP per capita was eleven percent below the EU average. Luxembourg, which was well above the EU average in terms of GDP per capita (167 percent), was followed by Ireland and the Netherlands with 50 and 30 percent above the average, respectively. Austria, Sweden, Denmark, the United Kingdom, Belgium, Finland and Germany exceeded the EU average by 15 to 25 percent, while France, Spain and Italy by up to ten percent. Greece and Cyprus were up to ten percent above average, while Slovenia, along with the Czech Republic, Malta and Portugal, was in a group with GDP per capita 10 to 25 percent lower than the EU average. Half of the new members - Estonia, Slovakia, Hungary, Lithuania, Latvia and Poland - were 30 to 50 percent below the average, with the lowest GDP per capita recorded in Romania at 59 percent and Bulgaria at 63 percent below the average of the union of 27 countries.²³⁰ According to the Eurostat data for 2006, the richest European region was inner London, which reached as much as 336 percent of the European average, followed by Luxembourg with 267 percent of the EU average and Brussels with 233 percent with regards to GDP per capita in terms of purchasing power. Surprisingly high, twelfth among the richest regions, was Prague with 162 percent of the EU average, while Bratislava was in the nineteenth place with 149 percent of the EU average. Their GDP per capita in terms of purchasing power in 2006 was 38,400 euros (Prague) and 35,100 euros (Bratislava). Let us add that in terms of purchasing power, GDP in the Central Slovenia Statistical Region, home to more than a quarter the Slovenian population, reached 28,069 euros in 2005, while the Slovenian average was 19,462 euros. In 2005, the CoastalKarst Statistical Region also had an above-average GDP relative to the total GDP with EUR 20,141. The remaining ten statistical regions were below average. The poorest are the Central Sava and the Mura Statistical Regions with 13,736 euros and 12,944 euros of GDP, respectively.²³¹ In November 2009, twenty years after the fall of the Iron Curtain, The Economist also touched on GDP per capita in the countries of the former Yugoslavia. According to this criterion, Croatia ($ 13,220) was behind Slovenia, the Czech Republic, Slovakia and Estonia, and ahead of Serbia, Montenegro and Bosnia and Herzegovina. In Slovenia, GDP per capita was $ 24,180, in the Czech Republic and Slovakia $ 16,000, and in Estonia $ 14,000. Montenegro produced $ 6,510 GDP per capita, Serbia 5,480 and Bosnia and Herzegovina around 4,080 dollars. In Bulgaria and Romania, which were already members of the EU at the time, GDP per capita was about $ 5,000. The commentator emphasized that the reasons for poor development in this area were connected with the war, while in Croatia it was problematic that the cause of poor development was attributed only to the war and not so much to the state politics, which also had a great impact on the economy.²³²

2As far as this indicator is concerned, according to the Eurostat data, there were no major changes in 2019 either. In the Member States, GDP per capita ranged from 53% to 261% of the EU average. In 2019, among 37 European countries, the value of this indicator was the highest in Luxembourg (161 percent above the EU average), followed by Ireland (+91 percent), Switzerland (+53 percent), Norway (+44 percent) and Iceland (+30 percent). Albania (69 percent below the EU average) and Bosnia and Herzegovina (-68 percent) had the lowest GDP per capita. In Slovenia, GDP per capita is increasing. In 2019, it reached 88 percent of the EU average, which is one percentage point more than in 2018. This was the fourth annual increase in a row. According to the value of this indicator, Cyprus (89 percent of the EU average) and Spain (91 percent) were the closest to our country.²³³

Some statistical data and comparisons²³⁴

• Since Slovenia gained independence until today, gross domestic product (GDP) has increased by 91.4 percent in real terms and amounted to EUR 46.3 billion in 2020.
• According to the Statistical Office of the Republic of Slovenia (SORS), prices were rising more slowly than wages, and the inflation rate in the period from January 1991 to January 2020 amounted to 2,437.2 percent.
• In the years following independence, with the exception of 2018 and 2019, the state was creating a current account deficit. Immediately after independence, the public debt began to grow and the gross debt of the general government sector at the end of 2020 amounted to 80.8% of GDP.
• In 2018 in Slovenia, one had to work almost a third less time for a kilogram of bread than in 1991, three times less for a kilogram of sugar and four times less for a kilogram of coffee, according to national statistics.
• The structure of the economy has changed significantly since 1991, according to SORS. The share of value added from agricultural activities in the total value added of GDP decreased by more than half, from 5.7 percent (1991) to 2.2 percent (2018).
• The share of value added from industry and construction also fell sharply, from 44 percent (1991) to 33.2 percent (2018). However, the share of value added from services increased significantly, from 50.3 percent (1991) to 64.6 percent (2018).
• In terms of GDP per capita in 2018, Slovenia ranked 16^th among the 28 countries of the European Union. Luxembourg had the highest GDP (€ 96,700) and Bulgaria the lowest (€ 7,800).
• Slovenia's most important trading partner was Germany.
• In trade with other EU members, Slovenia's trade with Austria increased the most.
• In the years after gaining independence, Slovenia's exports to the Russian Federation increased slightly, while in the years after the economic and financial crisis, exports to this country increased the most. Trade with China strengthened significantly and imports from China increased markedly. Imports from this country amounted to 0.3 percent in 1992 and in 2018 to 3.3 percent of Slovenia's total imports.
• In 1991, there were less than 400,000 pensioners in Slovenia (the latter include those who were receiving old-age, disability, family or widow's pension); in 2018, there were 617,000. In 1991, the ratio between the number of pensioners and insured persons was 2.0, while in 2018, it was 1.52.
• In 1991, we counted 1.4 million tourist arrivals in Slovenia, and they spent the night in Slovenia 3.4 times on average. In 2018, almost 5.7 million tourists visited Slovenia, and they spent an average of 2.6 nights in Slovenia.

• 1991: € 5,000
• 2019: € 23,165

• 1991: 46 minutes
• 2019: 13 minutes

• 1992: 784,550
• 2019: 1,607,854