Seven reasons we love Slovenia's new Commissioner nominee Violeta Bulc

The first (and only) causality of the European Parliament hearings for Jean-Claude Juncker's new Commission so far, is Slovenia's Alenka Bratusek, who withdrew her candidacy for the post of Vice-President for Energy Union after a being effectively vetoed by MEPs.

She's been replaced by Violeta Bulc, Slovenia's Development Minister, who will face the music next Monday, when MEPs grill her on her suitability for the Transport portfolio (the Energy Union job will go to Slovakia's Maros Sefcovic).

But who is Violeta Bulc? Quite a colourful personality, if the internet is anything to go by. Europe is so often accused of being run by boring bureaucrats, even being accused of being as charismatic as "damp rags." Bulc is anything but. So we've picked out Bulc's best bits, mostly from her CV online for you to savour below.

1. Interesting ideas about energy generation:  "Natural environmental heat can transformed directly into electrical energy," says Bulc. A shame that she most likely won't have the Energy Union brief really as it could have made for an interesting discussion during her EP hearing.

2. She believes in 'Syntrophy' - which is apparently something to do with 'the creative power of nature.' And here's what she had to say about discovering it. (Note the CAPS.)

At various levels and in various dimensions, and every once in a while, something triggers excitement in each and every one of our cells. Love. Surprise. Achievement of a goal. A realisation along the way. A thought. Hope. Birth.

I felt this type of excitement when I was introduced to SYNTROPY. I can hardly express emotions that were flooding me while I was traveling through complex formulas that were mostly incomprehensible to me, yet so familiar that I felt as if they were a part of my life all along.

3.  Positive values: Her business, Vibacom, is run on the values of "the power of positive energy and pure thoughts." This "creates the conditions for prosperity and thrivability." Well, the EU could definitely do with an injection of positive energy...

4. Serious sporting prowess: Not only does she have a black belt in Tae Kwan Do, but she was also a professional basketball player in Yugoslavia, and won athletic championships in javelin. Eat your heart out Vladimir Putin.

5. She blogs: Violeta's blog is well worth a peruse. Here's a post from last month called, "The vibrations of the White Lions in the new Era."

6. She is a qualified Shaman and firewalker: She has a certificate from the Shamanic Academy in Scotland. No explanation offered - and is one needed? She has also received a certificate for "firewalk" and "breathwork" instructor at the recognised school of transpersonal education, Sundoor. Should come in handy during her grilling by MEPs...

7. She's got charisma: In 2010, she won the "Sunny Personality of the Year" prize. We're sure that a sunny disposition will help Bulc in Brussels which is hardly regarded as being among the most uplifting cities in Europe.

While we concede she may be a little out there, she certainly has the potential to shake up the dreary and self-regarding Brussels bubble.

Slovenia fights back - but maybe it's a few months too late?

Gone but not yet forgotten

The European Parliament and the political machines that dominate it were, according to many, not supposed to select the President of the European Commission - but they got their man. MEPs, led by Spitzenkandidaten Martin Schultz and Jean-Claude Juncker outplayed the member states through a clever use of ambiguous treaty wording and a political deal, which in turn was driven by pure German domestic politics.

Having installed Juncker as Commission President MEPs took the individual candidates, nominated by the member states, to task. According to the Treaties, the EP can accept or reject the entire Commission, but MEPs have turned this into de facto votes on individual Commissioners, with intra-EP politics meaning some nominees may be taken 'hostage'. Having called back the UK's Lord Hill for a second hearing - creating jitters in Downing Street - MEPs finally voted down Slovenian candidate Alenka Bratušek. She was today forced to resign - despite Juncker himself insisting on her candidacy. MEPs seemed to have made their point - it has voted down individual nominees in the past, and as we predicted, the EP was bound to claim a scalp. 

MEPs now seem to be pushing their luck further - attempting to tell the Slovenian Government who they should appoint as their new candidate, with both the EPP and S&D calling for the nomination to go to social-democrat MEP Tanja Fajon. Slovenia, however, is pushing back. The country's PM has issued a statement saying:

"The Slovenian Prime Minister expects political groups in the European Parliament to abide by EU law and the fundamental democratic principle in selecting candidates for commissioners" 

In other words, the Slovenians say, this is for their Government - not MEPs - to decide.

Will MEPs stand back? We will see. To be fair, Slovenia has a new government and we can't blame it for events over the least few months. But we can't help asking, isn't this exactly what member states were asking for when agreeing to the Spitzenkandidaten in the first place?

Heads begin to roll in aftermath of European election shock

As might be expected after some shocking showings in the European Parliament (EP) elections, the heads have begun to roll – and rightly so, some would say.

The most high profile resignation so far is that of the Spanish opposition Socialist leader Alfredo Pérez Rubalcaba (pictured) who stepped down yesterday after his party’s vote share dropped to 23% from 39% in the previous EP election. His decision is not exactly a surprise as many have been scratching their heads over the opposition’s lack of penetration despite numerous opportunities including (but not limited to) the Spanish economic malaise, austerity and Partido Popular’s top level corruption scandal. Where the party goes from here remains to be seen but with the rise of regional (particularly Catalan) parties and the new Podemos movement (see our profile here) the party needs to reassert itself as the primary opposition.

Similarly, a poor showing by the Romanian opposition party saw its leader Crin Antonescu resign along with all the party’s executive bureau. Interestingly, the party has also voted to switch from the liberal ALDE grouping in the EP to the centre-right EPP.

Meanwhile, in Ireland, Labour leader Eamon Gilmore jumped before he was pushed after his party secured barely 7% of the vote – likely paying the price for being the junior coalition partner during a difficult period of government (similar to Lib Dems in the UK or PASOK in Greece). This paves the way for a cabinet reshuffle, but again his replacement is also still unclear.

Other scalps include Igor Lukšič, President of the Slovenian Social Democrats, who has bitten the bullet and stepped down, as well as the leader of the Hungarian Socialists, Tibor Szanyi, who offered his resignation (subsequently accepted) after his party was comfortably beaten by the neo-fascist Jobbik.

There could still be more to follow as the dust settles. But more importantly than those who have lost their heads is for those that just clung on to theirs to get the message and begin pushing for some serious reform across Europe and offering a clear alternative to those who still do not.

Slovenia dodges bailout as it swallows cost of bank overhaul alone

The Slovenian Central Bank this morning released the long anticipated results of the stress test of Slovenian banks. The full results can be found here, while the press release is available here and a reader-friendly Q&A here.

The release did not begin well, with the English feed of the conference proving slow and laggy – similarly to the tests themselves, whose results have been delayed a couple of times. Beyond that, though, things went much as expected, with the tests showing a €4.8bn hole which needs to be filled, around the expectations of €4bn to €5bn. Below, we lay out our key thoughts:

The macroeconomic scenarios include some optimistic export numbers. As we have said before for Slovenia, and others, relying on exports alone to prop up GDP can be a risky game.

The tests are based on data from the end of 2012. This is a problem with these tests in general, but has been exacerbated by delays in the case of Slovenia. The data are one year out of date – a year where the Slovenian economy has struggled, and non-performing loans held by banks have increased steadily.

The €4.8bn figure is taken from the adverse scenario, and it's not exactly clear why this is done when the figures shown under the base scenario are normally used in these tests. This could be seen as an attempt to be 'extra conservative', or a sign that the base case is a bit outdated in terms of projections or data.

 

€3bn of the money will come from the government and be injected into the three largest state-owned banks (NLB, NKBM and Abanka). €2bn will be in the form of cash, with the rest in the form of government securities. A further €441m will come from a 100% write-down of subordinated debt.

The largest banks will also transfer €1.7bn in non-performing loans to the country’s bad bank – exactly what price this will be at remains unclear. It is also unclear if the bad bank will require further state support. Overall, this is a huge amount of support for the largest banks in the sector. The remaining small banks will be forced to raise around €1.1bn through private sources before June 2014. If they fail, then the government may step in once again (although this will certainly involve further bail-ins).

As a result of this bank recapitalisation, Slovenia's government debt will rise to 75.6% of GDP. Not massive by standards of the eurozone crisis, but high enough that we could see upward pressure on borrowing costs, especially given the poor growth outlook for the economy. It also means that both the public and private sector in Slovenia is heavily indebted. This risks weighing on the economy, and could potentially create a downward spiral as domestic demand, investment and government spending falls.

One of the more astonishing figures (to us) is that the stress tests cost €21 million (around 0.06% of GDP) to conduct, due to fees for the consulting firms such as Oliver Wyman, Roland Berger, Ernst & Young, and Deloitte.

So far, then, Slovenia has managed to avoid the need for external aid, despite a significant overhaul of its banking sector. However, the economy remains in a fragile state, and any shocks to the system over the next six months, as the overhaul takes place, could push the economy into a wider and deeper crisis.

Spotlight on Slovenia

Back in the spring, we looked at who might be next in the line of eurozone bailout requests. It's now looking increasingly likely that one of our predictions, Portugal, will require some form of further assistance to fully exit its current bailout. Now, suspicions are rising that our other tip, Slovenia, may need external aid in a not-too-distant future.

Today and yesterday, eurozone finance ministers have been meeting in Lithuania with aid for Slovenia (as well as Greece, Portugal and Ireland) top of the eurozone’s agenda.

Recap – What problems is Slovenia facing?

• The banking sector is nursing a possible €7.5bn (21% of GDP) capital shortfall. Although Slovenia’s government debt remains very manageable (at 54% of GDP) it could increase quickly due to a toxic combination of collapsing economic growth and spiralling costs of bailing out banks.

• As we noted back in the spring, provisions against this capital shortfall are far below the levels needed and covered at best half of the problematic loans. Since then, the level of bad loans has increased, while little progress has been made on recapitalising banks. The recent bailout of two small banks cost a combined €900m+, and included a bail-in of subordinated debtors. This could set the tone for the approach to the rest of the sector. Worryingly, this is also around the total amount previously estimated for the capital needs of the whole banking sector.

• The European Commission has pushed the independent bank stress test to be expanded to cover the whole banking sector. The results are expected at the start of next month, and could well reveal deeper holes in Slovenia banks. Filling these without external aid will be tricky.

• Non-financial corporations also continue to struggle under a mountain of debt, with a debt-to-equity ratio of around 200%. This will be a significant drag on the economy for some time as firms shrink and deleverage while many could well shutter for good. This of course has further knock on impacts for the level of bad loans at the banks and the level of unemployment.

• Austerity has been limited so far with the government deficit at around 8% of GDP (and possibly set to increase this year). Significant cuts will still have to happen and, as we have been at pains to point out before, the combination of bank deleveraging, fiscal consolidation and struggling domestic demand can create a very painful downward spiral.

• The privatisation programme has failed to get off the ground, with the only sizeable move so far being the €240m sale of retailer Mercator.

• Concerns also remain surrounding the significant amount of cronyism and corruption at play, particularly within state owned firms and within the financial sector. The government has recently moved to crack down on the shadow economy with wider taxes, although whether this will prove successful remains to be seen.

Despite these issues, German Finance Minister Wolfgang Schaüble struck a positive tone today, saying,

“I think if they stay strictly on course -- and they’ve said that want to do that; they’ve supplied two small banks with capital over the weekend -- then they’ll manage without it…So as long as Slovenia itself says they can manage it, we should encourage them in that.”

EU Economic and Monetary Affairs Commissioner Olli Rehn voiced similar sentiments. So far then, Slovenia seems to be happy to go it alone and (possibly with other things on their minds) Germany and others are happy to acquiesce. But with the ECB reportedly increasingly concerned about the state of the banking sector, the upcoming stress test results could be a turning point – assuming of course they are judged credible (far from a given). 

If any aid is eventually forthcoming, as we’ve argued before, it seems much more likely to take a similar form to that in Spain than in Cyprus or elsewhere.

Despite much fanfare, the European Commission recommends much of the same for the eurozone

The Commission has today released its country-specific recommendations on economic policy. Below, we highlight the most important suggestions made to some of the key eurozone countries.

SPAIN

• According to the European Commission, Spain should “improve the efficiency and quality of public expenditure at all levels of government”. Clearly, this is easier said than done, given the well-known problems the Spanish government is having in trying to rein in regional spending.
• The European Commission also seems to suggest that the 2012 labour market reform – one of the flagship measures adopted by Mariano Rajoy’s government – may need tweaks. In particular, Spain should reform its active labour market policies.
• Spain should also push ahead with the liberalisation of closed professions and improve the business environment in general – for instance by cutting the amount of paperwork, a notorious issue in the country.
• Spain should “further limit the application of VAT rates”. This might be controversial, as the Spanish government has said several times it is opposed to further VAT hikes.
• According to the Commission, the reform of Spain’s pension system should be finalised by the end of the year.

FRANCE

The recommendations for France include quite a few suggestions which may be hard to digest for François Hollande’s socialist government.

• France should do more to cut labour costs, in particular by reducing social security contributions for employers.
• The European Commission says France should adopt new measures by the end of the year to “bring its pension system into balance in a sustainable manner no later than 2020.” The Commission suggests various ways of doing this, including “adapting indexation rules” (remove/reform the link between inflation and pensions increases, in plain English) and raise the retirement age. This is unlikely to go down well in Paris.
• France should improve the business environment and help its firms become more competitive;
• France’s unemployment benefit system should be “urgently” reformed, so that it is sustainable but also “provides adequate incentives to return to work”.
• France should do more to tackle labour market segmentation, and remove “unjustified restrictions in the access to and exercise of professional services.”

ITALY

As we noted several times, Mario Monti’s technocratic government did a good job in cutting Italy’s deficit – less so in implementing structural reforms. Here is what the European Commission would like Italy to do:

• Make sure that the reforms initiated by Monti's government are properly implemented (some of them require enacting legislation).
• Push ahead with labour market reform. Wages should be better aligned to productivity, and more should be done to bring young people and women into work.
• The tax burden should move from labour and capital to consumption, property and the environment. Sure enough, this is going to be controversial, given that the new Italian government is trying to avoid a VAT increase scheduled by its predecessor for 1 July 2013 and is also considering scrapping a property tax on first homes.
• Continue with liberalisation of the services market and opening up of closed professions – which seems to be an issue affecting all the Mediterranean eurozone countries.
• Needless to say, all this has to happen without breaching the EU’s deficit limit of 3% of GDP and in parallel to a reduction of Italy’s gigantic public debt (forecast to be over 132% of GDP in 2014).

SLOVENIA

• As we have previously warned, the Commission flags up the risk of the heavily indebted corporate sector and how this in closely intertwined with the fate of shaky banks.
• Of the largest domestic banks the Commission warns, “Their dependence on the state for capital is a substantial threat to the economy” and that “Further recapitalisations are foreseen in the stability programme”. The Commission does not give an estimate of the recap needs but it’s clear there is concern that it could impact the Slovenian economic situation. To this end it also called for an independent review of the Slovenian banking sector.
• Government growth forecasts are seen to be overly optimistic, particularly next year's, this could be further hampered by the banking sector.
• Significant push needed on cutting wages and increasing productivity, true in most places but especially on Slovenia when costs have been on a rapid rise in recent years.
• Need to push on with privatisations and come up with a clear policy framework to do so. More structure needed, particularly if investors are to be convinced.
• “Further reform efforts are required to improve the sustainability of pension expenditure in the long-term, including through aligning the statutory retirement age with gains in life expectancy and by further restricting early retirement.” – numerous concerns expressed about long term liabilities of the state.

GERMANY

• “Germany should do more to open up their services sector by removing unjustified restrictions and barriers to entry, thereby leading to lower price levels, making services more affordable for lower income groups.” – particularly calls for the opening up of public procurement, professional services and retail services.
• “Sustain conditions that enable wage growth to support domestic demand.” – although it sounds innocuous this could be very controversial in Germany. It essentially seems to endorse the calls for Germany to spend more and allow inflation to help rebalance the eurozone. Germans fear of inflation is well known but they also fear a decrease in the competitiveness.

BELGIUM

Some press reports were (perhaps a bit hurriedly, given how the EU works) suggesting that Belgium could today become the first eurozone country to face sanctions for missing its deficit targets. But EU Economic and Monetary Affairs Commissioner Olli Rehn just told journalists in Brussels that “it would be neither fair or legally sound to apply fines retroactively”, so Elio Di Rupo & co. have been let off the hook for now. These are the key recommendations:

• Transpose the ‘balanced budget rule’ enshrined in the fiscal treaty into national law; 
•  Step up efforts to “close the gap between the effective and statutory retirement age”. In other words, the European Commission thinks there are too many early retirements in Belgium at the moment. On pensions, Belgium should also “accelerate the adoption of a decision to link the statutory retirement age to life expectancy” – which could mean further retirement age increases in future; 
•  Less taxes on labour and better alignment of wages to productivity to restore competitiveness; 
• Remove barriers in the services sector. 

So, for all the talk of this being the ‘end of austerity’ or ‘austerity in retreat’, is much really changing? Sure, there is some tinkering with timelines for deficit reduction (Spain, France and others have been given more time to cut public deficit), but ultimately the eurozone is still going along the same policy path - just slightly more slowly. Cases in point are the countries above, since the clear themes running through all of them are the need for structural reform, welfare reform, fiscal consolidation and liberalising the economy. These are things which have long been advocated and are clearly necessary. The question remains whether they can all be done at the same time by a group of countries which are closely interlinked, and many of which are currently in recession.

Who’s next in line in the eurozone crisis? Portugal and Slovenia are the prime candidates

In anticipation of tomorrow's eurozone finance ministers meeting (which will discuss finalising the Cypriot bailout and potentially extending the bailout loans given to Portugal and Ireland) Open Europe has published a new briefing looking at who might be next in the eurozone - our prime candidates are Portugal (for the second time) and Slovenia.

Key points

Both Portugal and Slovenia could need external assistance of some sort.

Portugal 

• Domestic demand, government spending and investment are contracting sharply, leaving the country heavily reliant on uncertain export growth to drive the economy. 
• By cutting wages and costs at home (internal devaluation), Portugal has in recent years improved its level of competitiveness in the eurozone relative to Germany. However, this trend actually started to reverse sharply in 2012, meaning that the divergence between countries such as Portugal and Germany has begun growing again – exactly the sort of imbalance the eurozone is seeking to close. 

• In its austerity efforts, Portugal is now coming up against serious political and constitutional limits. For the second time, the country’s constitutional court has ruled against public sector wage cuts – a key plank in the country’s EU-mandated austerity plan – while the previous political consensus in the parliament for austerity has evaporated.
• In combination, it will be increasingly difficult for Portugal to sell austerity at home and consequently to negotiate its bailout terms with creditor countries abroad.
• Portugal may well need some further financial assistance before long. It is unlikely to take the form of a full second bailout, but could involve use of the ECB’s OMT bond-buying programme, assuming Portugal can return to the markets fully beforehand (even briefly). 

Slovenia

• Slovenia is not Cyprus – in fact it is much more like Spain. Its banks are significantly undercapitalised with toxic loans now standing at 18% of GDP. Banks only have provisions to cover less than half the potential losses resulting from these loans.

• At the same time, a heavily indebted private sector is now desperately trying to get debt off its books, which alongside continued austerity and lack of investment, have caused growth to plummet.
• Though a full bailout is unlikely, the country could soon need an EU rescue package worth between €1 billion and €4 billion (between 3% and 11% of GDP) to help restructure the country’s bust and mismanaged banks.
• Such a plan is likely to include losses for shareholder (bail-ins) but, unlike in Cyprus, it may not hit large (uninsured) depositors and there will be no attempt whatsoever at taxing smaller (insured) depositors.

To read the full briefing, click here.

Collateral damage

This week saw another twist in the ongoing soap opera which is the eurozone bailouts. The Finnish government - no doubt feeling the anti-bailout True Finns (currently the largest party in the polls) breathing down its neck - has for some time demanded that Greece puts up some sort of collateral in return for coughing up the cash for the fresh rescue package.

On Tuesday, the Finnish media reported that a deal had been reached between the two countries, which would see Greece provide €1bn in cash as collateral, deposited with the Finnish government in the eventuality that Athens is unable to pay back the loans. Bizarrely, the amount would effectively cancel out the Finnish share of the bailout. In other words, Helsinki lends €1bn to Athens, while Athens sends €1bn to Helsinki, begging the question: who guarantees the collateral?

The Greek and Finnish governments have since said that it's a bit more complicated than that. As reported today by Ekathimerini:

"Greece will deposit cash equivalent to a large chunk of the money it is to receive from Helsinki in a state account that Finland will use to invest in AAA-rated bonds. The interest generated will raise the amount to match the required collateral. Finland will return the money, plus interest, once the bailout loan is repaid"

The problem is that others countries now want this too, with Slovakia, Slovenia, Austria and the Netherlands all demanding collateral in return for their participation in a second Greek bailout.

“If there is a model for collateral, Austria would also make a claim,” said Austrian Finance Ministry spokesman Harald Waiglein. Slovakian Finance Minister Ivan Miklos chimed in,“I consider it unacceptable for any country to not have the collateral if other countries have it.Because if this is a loan, and that is what everyone is calling it, the debtor should have no problem offering collateral for the loan.”

Eurozone leaders are already balancing on a knife's edge over the second Greek bailout deal with approval from increasingly restless national parliaments still pending (expected in the autumn). The original target of having the new deal in place before the next bailout installment (from the first deal) due in September, could now potentially be at risk. Not to mention the continuing problems in raising the targeted amounts from private sector involvement.

Also, Greece doesn't exactly have cash to spare (and they're reluctant to put up state assets as collateral). The demands - while fully understandable from the creditors' point of view - could put further strains on Greek public finances.

Fundamentally, this shows how complex - and unsustainable - the politics of cross-border bailouts are. And how, at the end of the day, eurozone leaders are politicians who are elected by voters (taxpayers) and who answer to national parliaments. They're acting within a democratically defined mandate. While you can stretch that mandate when it comes to complex EU treaties, regulations or the role of obscure EU judges, for example - taxpayers' cash is too close to home for this to work.