Mojmir Mrak, an eminent economist, believes Slovenia will have to take at least some of the announced structural reforms this year, criticising the government for raising excessive expectations as he discussed the country's economic policies and future outlook in an interview with the Slovenian Press Agency (STA).

Speaking about the deteriorating global political situation in the past two years, Mrak, a professor at the Ljubljana School of Economics and Business, says a lot will depend on whether the Middle East crisis is contained.

The crisis spreading to the wider region would entail more inflation and thus tighter monetary policy. "Expectations about the course of monetary policy can thus change overnight," he warns.

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

Pressure to take reforms

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

The government is entering the second half of its term, meaning elections will start to loom and "the appetite for reforms is likely to wane", says the economist, who participated in Slovenia's EU accession negotiations.

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

Mrak believes the government unnecessarily raised excessive expectations at home both regarding the scope and speed of reforms. Reforms need to be well designed as well as coordinated time-wise, he says.

While acknowledging reforms are more urgent now, with Slovenia being "simultaneously forced and stimulated to get something done", he is reserved about the quality of planned reforms.

The government announcing it will a draw up comprehensive tax reform in just three months cannot be based on serious analysis, he believes. "It will be a correction, which may be useful, but it will not be a reform."

Recovery plan too ambitious

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

As a member of the government's Strategic Council on Macroeconomic Issues he proposed a longer timeline with fewer burdens on what he feels are already excessively strained businesses, but the government took a different route. "We will see who was right," he says.

Slovenia has traditionally been slow in taking structural reforms, but the international financial community still perceives the country as capable of eventually doing what needed to be done. "Slovenia used to be considered a fairly rational country in international financial circles," Mrak says.

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

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

Changed situation calls for different rules

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

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

"To simply pull frozen rules out of a drawer now would be completely implausible. Those rules are unworkable because the macroeconomic situation has changed completely."

Moreover, a unipolar world order is being replaced by a multipolar world in which there are several major players with conflicting interests.

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

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