Ritvik Sharma Slovakia Promoting Investment and Innovation Benefiting largely from a booming industry, as well as expanding trade routes between Euro Area countries, the gross domestic product, or GDP, of the Euro Zone continues to accelerate, quarter after quarter of 2017, although many regions and countries are encountering their own difficulties, post the financial crisis of 2007 and 2008. Despite the constant GDP growth of the Euro Area in total, countries such as Slovakia, are still slowly recovering from these crises economically, whether it be through unemployment, inflation, or lack of investment and innovation. The Euro Zone economy continued to perform robustly in the third quarter of 2017, according to the preliminary estimates which were released by Eurostat. GDP increased 0.6 percent in quarter three of 2017, from the previous quarter, which was a notch below quarter two’s 0.7 percent rise, and on a year on year basis was 2.6 percent higher.
The economic factors which mainly contributed to this rise in GDP remained constant throughout these years of growth, consisting of an accommodative monetary policy, a recovering labor market, and healthy external demand support activity. The Euro area is enjoying a strong growth spell in the recent quarters of 2017 and is on track to grow at the fastest pace in over a decade, this year, thanks largely to a booming domestic economy comprehensive mainly of the Euro Zone’s private consumption. Private consumption, the main engine of this region’s economy, is inclusive of all purchases made by consumers, such as food, housing (rents), energy, clothing, health, leisure, education, communication, transport as well as hotels and restaurant services. This year, it grew 0.3 percent in quarter three, supported by a tighter labor market, as well as a declining in government spending, in 2017, from 0.
3 percent in quarter two, to 0.2 percent in quarter three. Alongside this, fixed investment, or investment in physical assets such as machinery, land, buildings, installations, vehicles, or technology, expanded at a solid 1.1%, amid high business sentiment combined with strong bank lending to firms, throughout the Euro Zone. Investment spending has been a weak spot for the eurozone economy since it started its recovery in mid-2013, despite the European Central Bank’s efforts to stimulate growth by lowering borrowing costs. Eurozone investment spending only began to rise in 2014, and at a slower rate.
That shortfall has lowered the economy’s capacity to grow rapidly in the future without fueling inflation. European Investment Bank President Werner Hoyer stressed the importance of investment in infrastructure and for a particular focus on creating the right conditions for young and innovative firms to thrive in Europe. Through research at the European Investment Bank, it is suggested that investment in infrastructure has now stopped declining, but it has stabilised at 20% below pre-crisis levels. This is detrimental to Europe’s long-term growth potential, and it is also harmful to the process of economic convergence in the EU and the Eurozone and the countries that score worse in terms of infrastructure quality. In other words, convergence between richer and poorer countries has weakened in the Euro Area.
Firms expected to lastingly benefit the Euro Area’s economy. The European Investment Bank has provided over 80 billion euros of financing in 2016, which is around 0.6% of European Union GDP, that supported investments amounting to 1.8% of GDP. The main purpose of the implementation of European Structural and Investment Funds, or ESI Funds, is to foster lasting socio-economic convergence, resilience and territorial cohesion. The Funds deliver a critical mass of investments in priority areas of the EU. Inclusively, the implementation of the European Fund for Strategic Investment, demonstrates that the European Union budget can be used more effectively to have a greater impact on the real economy by crowding in financing. For various countries in the Euro Area, foreign direct investments, or FDI, is being attracted to, due to its respective labor costs as well as progress in privatization.
This promotion of investing in multiple firms throughout the Euro Area, will eventually provide for an increase in innovation and the creation of various business and firms throughout the region, benefiting the European Union infrastructure and economy, overall. Slovakia, having success, largely due to exports and foreign direct investment, was heavily clobbered, economically, by the financial crisis. The Gross Domestic Product of Slovakia will grow by 3.
3% in 2017 and 4.0% by 2019. Recently Britain announcing its exit from the European Union, will largely impact the European Union as a whole, but also be detrimental to Slovakia. Slovakian Experts at KPMG, a major auditing company state that, “Slovakia is among the EU countries, which may feel the negative impact of Brexit. Our export to the UK represents over 5% of GDP, only four other EU members have higher portion. We are also at slight risk in terms of labor mobility, therefore during negotiating new terms of cooperation the emphasis has to be put on ensuring the rights of our citizens who live and work in the UK.” Economic activity will be increasingly driven by private consumption with help from increased investments and a positive net exports.
The growth is helping boost tax revenues allowing for new policy measures, including higher social and healthcare contribution ceilings. Led by a healthy labor market, private consumption grew 3.6 percent in quarter two, however, fixed investment declined significantly, slumping a notable 6.7% as ongoing worker shortages derail the auto industry’s expansion. Strong labour demand in some regions and sectors of Slovakia is expected to put upward pressure on nominal wages, or wages not affected by inflation. With disregard to this demand, the Unemployment Rate in Slovakia averaged 12.94 percent from 1994 until 2017, reaching an all time high of 19.
79 percent in January of 2001 and a record low of 6 percent in November of 2017. Inflation is likely to increase further, supported by these favourable demand conditions. As the automotive industry plays a monumental role in the Slovakian economy, the slow down in this industry as well as inflation due to a lack of workers, has caused a shortage in net exports as well, a main factor in Slovakia’s economic expansion. Inflation is set to increase form 1.6% in 2017 to 2.8% in 2019, not only attributed to workers, but additionally due to increases in food and service prices.
Private investment projects in the automotive industry are essential in economic growth, alongside public infrastructure investment, such as the Bratislava ring road, which is projected to be completed in October of 2020. However, due to litigation, other major infrastructure projects are on hold and European Union investment funds are being used slowly. Without the use of the money in the investment funds set up in the country, Slovakia is restricted from expanding its economy as well as exporting products manufactured within the country, especially automotive commodities. Slovakia’s innovation and infrastructure this year consists of five approved projects financed by the European Investment Bank with backing from the European Fund for Strategic Investing. However these plans for infrastructural expansion will not be possible without the investment funds being used, quickly, efficiently, and to absolute full potential.