Authorial text of the Minister of Finance, Milorad Katnić, "2011 Economic Challenges", published in Bulletin 22

At the beginning of 2011, the global economy experienced unpredictable shocks, from political turbulences on the Middle East and North Africa to the earthquake and tsunami in Japan. The oil price is about to hit its maximum historical level, additionally affecting the upward trend of food prices and putting the pressure on inflation to increase. The global instability is entailing internal weaknesses and problems of the national economies. The largest economies, including the world economy as a whole, are facing major challenges.

In the United States of America, the delay on the budget deal and measures to stabilize the public finances means greater uncertainty and risks for the US. A high budget deficit and growing public debt make the largest world’s economy less safe. For the first time since it publishes data, Standard & Poor’s, the credit rating agency, downgraded its outlook for the U.S. bonds to negative. China is also causing increasing fears. Inflation is growing, and its restraint by Yuan appreciation, could affect the reduction of economic growth rate and cause not only economic, but also political problems. If the fastest growing world’s economy is suddenly slowed down, it will cause a new shock to fragile recovery of the global economy.

The most worrying issue for the economists, analysts and decision makers is the debt crisis in the Eurozone. A special Economic Intelligence Unit Report estimates that the probability of imminent bankruptcy of one of the Eurozone countries is 50%, whereas the chances of only 10% are given to the recovery of the public finances and the overall euro zone economy with no shocks. The largest European banks have problems with lacking capital, and at the same time they are major lenders to Greece, Ireland, Portugal and Spain. The weakened banking system may easily become insolvent, thus increasing the overall systemic risk of the Eurozone, and challenging its future. There is a question whether it is more certain that some of the weaker countries would be the first to leave the Eurozone or whether Germany would be the first country to do it.

The problems in the Eurozone are creating additional pressure to other European countries, especially small and open ones, susceptible to exogenous shocks. Montenegro is even in a more specific situation, since it uses the Euro as its legal tender. In order to minimize negative consequences of the Eurozone debt crisis, it is necessary to persevere in applying the policies bringing the stability of the fiscal and financial system and improving the competitiveness. For its initial steps on the path to establishing the stability and sustainable growth, Montenegro is awarded with a lower interest rate on the Eurobond international market. The trust in the economic system of Montenegro was shown by 67 investors from 21 different countries of Europe, Asia and the Unites States of America. At the same time, Moody’s, the credit rating agency, improved the estimates for the Montenegrin economy and stabilized the credit rating. The International Monetary Fund has also recognized the positive steps in its Article IV Report.

The Eurozone crisis additionally emphasizes the need to continue with the fiscal consolidation and strengthening of the banking sector in Montenegro. The reduction of deficit and public debt represents the priority of the public finances policy in the following midterm. The budget framework envisages the primary budget surplus already next year and significant surplus in the midterm. The basic scenario of the Public Debt Strategy envisages that the Debt/GDP ratio would be around 45% at the end of 2011, 43% in 2012, and then it would have a gradual fall up to 35% at the end of 2015. The realization of these ambitious fiscal goals is necessary to increase the trust in the economic system and foster private investments that would create new jobs and new employment.

The reduction of the public spending, debt and deficit represents a special challenge under the circumstances when the prices of the basic provisions are growing and social pressures are increasing. From the beginning of the year, the Government increased the minimum wage and social provisions, and it took extraordinary measures for those needing the State assistance the most. Increased social provisions will mean the need to have stronger consolidation of other budget expenditures. Mere allocations from one to another current issue do not create additional value, and the reduction of discretionary capital expenditures is not a desirable solution. Physical infrastructure and human resources development is the precondition for the sustainable long-term economic development, and together with appropriate improvements of the institutional framework, they represent the basis for competitiveness of the economy.

Within that context, it is especially important to limit the current spending and continue with the policies that will make the labor market more competitive and more mobile. The state administration reform must make the administration more efficient and more cost effective for the society. The social policy should be structured in a way that it is focused on an individual in a social need and not in a way that produces negative incentives. The State should assist those who cannot work and make a living. The others should be encouraged to look for a job and earn enough to support themselves, and not to be dependent on the welfare.

The Labor Law does not prescribe only the relationship between the employer and the employee. It is a framework for new employment and for reduction or increase in social provisions. If it is difficult and expensive to fire an employee, less people will get employed. If the Law prescribes in details and in a more rigid way the mutual relationship between the employer and the employee, then employment will be agreed unofficially, most often to the detriment of the employee. If the labor market is more rigid in Montenegro than in other countries, then there will be no new investments. All of the aforementioned would mean less possibilities and opportunities for the unemployed to find a job, to work and earn their living, and not to be supported by taxpayers. Otherwise, we will have faster fiscal consolidation, and primarily more competitive economy and faster economic progress.

Fiscal consolidation and strengthening of the banking system will not mean a lot unless we have competitive economy. Competitiveness depends on rules, and the State is responsible for creating such rules that would bring opportunities and prosperity for as many citizens as possible. Structural reforms in the area of the labor market, social policy, health and education, as well as improvement of the business environment, together with the stable public finances and financial system, are the only response to the internal crises and the global crisis.