SMER LACKS DIRECTION ON ECONOMY

C O N F I D E N T I A L SECTION 01 OF 03 BRATISLAVA 000457

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/09/2021
TAGS: ECON PGOV PINR PREL LO KDEM
SUBJECT: SMER LACKS DIRECTION ON ECONOMY

REF: A) BRATISLAVA 438 B) BRATISLAVA 287

Classified By: Ambassador Rodolphe M. Vallee for Reasons 1.4 (B) and (D
)


1. (C) SUMMARY - The recent release of Smer's official
election program sheds little light on what the economic
policy would actually look like in a Smer-led coalition
government. The party platform is essentially a critique of
the reforms instituted over the past eight years, and calls
for an overhaul of key tax, healthcare and other reforms that
Smer claims have damaged Slovakia's "social character."
Despite the strong campaign rhetoric, it is clear that Smer
lacks the analytical capacity to institute the reforms, let
alone costing out the budgetary implications. The party
would likely turn to former HZDS and SDL officials to fill
key economic positions in a new government. In addition,
many suspect that the top Smer financial backers, most of
whom have ties to Meciar-era business deals, would not
support the introduction of new taxes on individuals and
corporations. End Summary.

-- ECONOMIC PROGRAM, AS PRESENTED TO VOTERS --


2. (SBU) Smer's election program is primarily a critique of
the current ruling coalition's economic reforms, arguing that
these reforms have benefited the rich but have not improved
conditions for the majority of the population in Slovakia.
Fico has stated that the combination of tax cuts, increased
labor market flexibility and reduction in social benefits
(welfare, health care and pensions) has had a negative impact
on the average Slovak worker and goes against "the social
character of Slovakia." After having "floated" a number of
possible economic reforms since last fall, Smer came out with
an official election program in mid-May that would reverse
several of the reforms instituted by the current government.


3. (SBU) Smer's top priority is also the most controversial -
reforming the tax regime. Smer proposes introducing a
progressive income tax with a top rate of 25 percent for
those earning more than 600,000 SKK (USD 20,500),with a
standard rate of 19 percent and a lower rate for those at the
bottom of the economic ladder. The program calls for a
two-tiered value-added tax (VAT) which would introduce a
lower rate on basic foodstuffs, medicines, social services,
books, energy, water and internet services. Although the
corporate rate would remain a flat 19 percent, Smer plans to
create a special, higher rate, tax regime for "natural
monopolies, dominant firms, and financial and banking
institutions." It would also like to reintroduce both a tax
on dividends and a "gift tax." Given the fame of the
Dzurinda governnment incentives for new investment, the
combination of such measures by Smer would discourage some
new investors from coming to Slovakia.


4. (SBU) After taxes, Smer's top priority is undoing several
of the healthcare reforms by eliminating user fees for health
services and re-establishing public health insurance for all
(Reftel A). Additional "social" proposals include loans for
newly married couples, an increase in the allowance for
newborns, introduction of a "Christmas allowance" to
pensioners, and a promise to not introduce tuition for
university students. Smer vice-chairman Pavol Paska told us
that Smer would also overturn the recently-approved
healthcare legislation that increases patent protection by
providing a linkage between the drug authority and the patent
office. Smer would ask the namebrand pharmaceutical
companies, the generics and the government to reach a new
compromise. In addition, Smer would review all privatization
decisions made by the current government and would not
hesitate to cancel contracts that have breached the law.


5. (C) Fico officially supports the current plan for Slovakia
to adopt the Euro by January 1, 2009. Privately, however,
his advisors say that fulfilling Smer's spending priorities
on important social programs is of greater importance than
maintaining this deadline. Peter Mihok, who is considered a
top candidate for an economic ministerial post (see para 8.),
noted that Fico would likely delay Euro introduction until
after the 2010 parliamentary elections to avoid any negative
associations with voters.

-- THE PERSONALITIES BEHIND THE POLICIES - GOING BACK IN TIME
TO FILL TOP POSTS --


6. (SBU) Determining what economic policies a Smer-led
government would focus on is complicated by the party's lack
of depth and expertise on economic issues. Smer MP Igor
Sulaj authored the party's first economic program back in
November, and had initially been mentioned as the top
candidate for Finance Minister. Although he was heavily
criticized from both within and outside of the party for

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putting forward "populist" proposals that "did not add up,"
Smer's final election program is remarkably similar to
Sulaj's original proposals. Nevertheless, Sulaj is still
considered more likely to end up as Chairman of the Tax
Directorate instead of in a top ministerial position. Fico
has appeared reluctant to use Sulaj as a regular spokesman on
economic issues. In addition, Sulaj has some background in
tax issues and comes from Banska Bystrica, where the Tax
Directorate is located.


7. (C) Those mentioned as "top advisors" to Fico and
potential ministerial candidates generally come from outside
of the party and are former Movement for a Democratic
Slovakia (HZDS) and Slovak Democratic Left (SDL) members. We
have also heard that Fico has borrowed advisors from the
Czech Social Democratic party (CSSD) to help develop his
economic program. The lack of internal experts who could
speak on behalf of the party was evident from the American
Chamber of Commerce's unsuccessful efforts to get Smer to
participate in its series of breakfast meetings with top
economic advisors from each of the main political parties.
Smer was the only party that did not participate, in large
part because Fico was out on the campaign trail and the party
lacks experts who could competently discuss and defend their
program.


8. (C) Some of the names who are most frequently mentioned as
playing an important role in the Smer-led government include:

- Peter Mihok is the Chairman of the Slovak Chamber of
Commerce and was formerly associated with SDL. Mihok has
been mentioned as a "hot candidate" for Minister of Economy,
and in a conversation with Econoffs made it very clear that
he had been in regular touch with Fico throughout the
campaign. Mihok is outwardly supportive of "social
democratic" policies, but noted that many of Fico's campaign
proposals would need to be moderated if Fico forms the next
government.

- Jozef Brhel was Deputy Economy Minister under Meciar from
1995 to 1998, and later served as an MP for HZDS. He left
Meciar's party and became an independent MP in 2002 during
the last parliamentary session, and left parliament
altogether in 2004. Brhel is one of the main financiers of
Smer (see Para 9 below),and is close to Smer's shadow
economic minister, Maros Kondrot. Reliable contacts in the
banking sector with connections to Smer tell us that Brhel is
currently Fico's top choice to be finance minister. (Note:
Kondrot is generally considered a more likely candidate for
Deputy Secretary, especially if Brhel is Minister).

- Peter Stanek is a researcher at the Prognostic Institute at
the Slovak Academy of Science. He worked in the early
1990's as Meciar's top economic advisor and later as deputy
finance minister under Meciar from 1994 to 1998. Stanek has
been rumored as a likely candidate for Finance Minister, but
he recently told us that he is no longer advising Fico and
has decided to stop working with any of the political parties
in the election campaign. Stanek noted that he does not
support many of the policies outlined in Smer's economic
program, especially the tax proposals, and thinks that Fico
will have a difficult time finding competent candidates to
fill key ministerial roles.

- Dusan Munko, a Smer MP from Bratislava, is a possible
candidate for Minister of Economy. A former agent of StB,
the communist secret police, Munko privatized the largest
Slovak travel agency, Satur, and has interests in several
other businesses in Bratislava. His daughter, Norika
Federova, is the CEO of Satur and is married to the head of
the investment banking division of J&T Associates, the
controversial private equity company.

- Slavomir Hatina was behind the Meciar era privatization of
the Slovnaft refinery, which he later sold to the Hungarian
oil company MOL. He is not currently connected with any
political parties.

-- SMER INC.: BUSINESS INTERESTS TO HAVE A VOICE IN
POLICYMAKING --


9. (C) Many political observers consider Smer's economic
program to be nothing more than election promises, believing
that economic policy will be dictated more by business
interests who are alleged to be the main supporters of the
party. The Ambassador has heard from more than one credible
source such extreme comments as "If Fico doesn't form the
next government, his life will be in danger, because the
shady money behind him will not be pleased." Several
newsmagazines, including Tyzden and the Slovak Spectator,
have run articles describing Smer as a joint-stock company,
in which the "shareholders" will have significant influence

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on policy decisions. These supporters are primarily made up
of businessmen who got rich from their government connections
during the Meciar-era. These include several former HZDS MPs
who split from the party in 2002 such as Ivan Kino (Director
of Slovenska Sporitelna under Meciar),Jan Gabriel (former
Director of VUB in the 1990s),Vladimir Poor (who privatized
Nafta Gbely) and Jozef Brhel (see Para. 8). Fedor Flasik, who
was head of the Donar advertising agency during the Meciar
governments, has lost some influence in recent months due to
a dispute with Fico.


10. (C) COMMENT - The business community is taking a wait and
see approach towards the economic program of a Smer-led
government. The general view is that Fico will say anything
to appeal to voters and will have to be much more pragmatic
if he is able to form a government and controls several of
the key economic ministries. He will also have to work with
coalition partners who will be less willing to turn back the
clock. The bigger concern is the lack of sound,
forward-looking economic advisors who understand the economic
issues as well as the importance of maintaining the
business-friendly approach that has been a key element of
Slovakia's success in recent years. If investors invest "on
the margin", i.e., comparing today to what they had yesterday
and can expect tomorrow, they may see even a marginally less
business-friendly government as reason to look elsewhere in
the region.


VALLEE