'Europe's Detroit' skids

BRATISLAVA, Slovakia — When Slovakia had the fastest growing economy in the European Union, it boasted that it had become Europe’s Detroit. But now it is facing similar problems to its American namesake as the continent’s auto industry plunges, taking the Slovak economy along for the ride.

Slovakia, independent only since 1993 following the breakup of Czechoslovakia, spent much of the 1990s as the continent’s basket case. Under the authoritarian governments of Vladimir Meciar, a former prime minister, Slovakia cuddled up to Moscow while most foreign investors, with the exception of Germany’s Volkswagen, steered clear. Much of its industrial base was dedicated to manufacturing weapons for the defunct Warsaw Pact.

But following the election of a reformist government in 1997, which brought in a 19-percent flat tax and other measures to encourage investment, Slovakia became a darling of foreign investors, especially big car makers. Germany’s Volkswagen was first, opening a plant in 1991 just north of the capital, Bratislava. But after the country’s opening to the world others followed — France’s PSA Peugeot Citroen opened a 700 million euro plant in the city of Trnava in mid-2006 and a few months later Korea’s Kia opened its 1 billion euro factory in the northern city of Zilina.

The big carmakers attracted a dense web of parts suppliers to set up shop in Slovakia.

By 2007 Slovakia was making 570,000 cars a year, which turned it into the highest per capita car producer in Europe, churning out 106 cars for every 1,000 Slovaks. Triumphant government officials proclaimed that the central European country of 5.5 million had become Europe’s Detroit, and the car industry’s biggest problem was finding enough workers to staff its production lines.

As car plants ramped up production — the VW factory alone accounts for about 15 percent of Slovakia’s exports — the country’s economic growth took off. In 2007 gross domestic product growth clocked in at 10.4 percent.

But, just as in Detroit, the wheels came off that economic model in the last three months of 2008, when the economic crisis hit Europe and car buyers in Slovakia’s biggest market, Germany, shut their wallets.

In numbers released on Thursday, Slovakia's economy contracted by an annual 5.3 percent in the second quarter of this year. That sounds awful but is slightly less than in the first three months of the year and may be a sign of the economy beginning to twitch back to life, especially as Germany showed an unexpected return to growth.

Estimates had called for Slovakian production to reach 800,000 cars last year and to top 1 million in 2009. Instead, production last year stayed at 2007 levels, and some analysts expect production to fall by a fifth this year.

“I estimate car producers are running at about 60 percent below capacity,” said Jan Toth, chief economist of UniCredit Bank in Slovakia.

As the car industry has slowed, the economy has gone into free-fall. Initial predictions called for the economy to grow by 6.5 percent, but now the government thinks the economy will contract by 6.2 percent — one of the steepest declines in the European Union.

The slump has made the government very aware of the dangers of being over-reliant on a single sector.

“About 85 percent of our GDP comes from exports, and we are almost solely dependent on foreign demand. If Germany has difficulties then we will have difficulties,” said Jan Pociatek, Slovakia’s finance minister. “No economy should be this focused on a small amount of sectors — there should be a wider range of products. We have to learn the lesson from this, being as dependent on the auto sector as we are is not good.”

The gloom from the car sector is steadily seeping through to the rest of the country. For much of the 1990s Slovakia felt like a backwater as it watched the rest of the countries in its region join NATO and make strides toward being admitted to the EU. The economic revolution of 1997 finally allowed Slovakia to begin to catch up to the rest of central Europe, and particularly the Czechs, for whom Slovaks feel a mix of affection and rivalry. Then Slovakia’s rapid development and its economic reforms in the past decade made it a model for the rest of the region, and its front runner status was confirmed on Jan. 1, 2009, when it became the first former Soviet satellite to adopt the euro as its currency.

Now the country is worried about again falling behind the other countries of central Europe — especially those like the Czech Republic and particularly Poland, which are coming through the downturn without too much damage.

The government is mulling increasing some taxes, which economists warn could undermine the country's hitherto successful flat tax model. Doing nothing also carries dangers as voters are becoming more irate at the frequent corruption scandals affecting senior government officials.

Despite the unexpected raft of problems, Slovakia, with its well-manicured Austro-Hungarian capital, new highways and relatively solid real estate market is a world away from the crisis besetting Detroit.

While Europe’s carmakers have been hit by the downturn, none of the manufacturers present in Slovakia are having the problems experienced by Chrysler and GM, and they have no intention of backing away from their investments in Slovakia.

“We are in the middle of a crisis but we have brilliant future here,” said Andreas Tostmann, president of Volkswagen Slovakia.