SLOVENIAN FINANCIAL INTEGRATION: EVIDENCE DURING THE CRISIS Текст научной статьи по специальности «Экономика и бизнес»

SLOVENIAN FINANCIAL INTEGRATION: evidence during the crisis

Dr Farzad Mirmahboub Académie internationale CONCORDE mirmahboub@hotmail.com

Domestic financial conditions of a country are related to foreign financial situation and this relation can be measured by the level of financial integration of the country. Furthermore, the relation between budget deficit and current account deficit can also reflect the relation between domestic and foreign financial activities of a country. Therefore, the effect of an external crisis on internal financial situation can be studied through these relations. In this paper, we analyzed these relations for the case of Slovenia which was affected by the global crisis, however, not as much as some other countries. We first studied the level of financial integration using the framework of the Feldstein-Horioka thesis and then, considered this level together with the linkage between the two deficits by a simultaneous analysis of double deficits and financial integration. For the first model, we found a medium or relatively low financial integration, and for the second model, a medium or relatively high financial integration with no linkage between the two deficits. As a result, the economic crisis in Slovenia was not entirely related to the foreign crisis; it seems that it was mostly due to internal problems and in particular the financial structure of the country.

Keywords: Financial integration, Feldstein-Horioka thesis, double deficits, crisis, ARDL model with error correction

1. Introduction

The financial integration level of a country could be considered as an indicator to measure its attachment to international financial markets. The higher this attachment is, the more the country has access to foreign financial resources as well as it welcomes foreign investment which would be used for financing domestic economic projects. The level of this integration and also its variations due to factors like regional or global crises could have determining impacts on a country's economic plans. Besides, the linkage between budget deficit and current account deficit as internal and external deficits respectively is another mean to study international relations of a country; at the same time, the situation of the two deficits and their linkage could reflect internal and external problems of a country as well as the impacts of these problems on each other. In other words, the "double deficits" hypothesis may refer the relation between domestic and foreign financial activities.

The objective of this research is to provide a measure for Slovenian financial integration using two hypotheses, Feldstein-Horioka thesis and double deficits, in order to verify the financial integration level of this country in the early years of the present century, a period affected by the global and European crises. The results and their interpretation would depend on specific economic conditions and problems of the country. Along with this analysis, we also aim at verifying the reliability of the Feldstein-Horioka thesis as a known but also paradoxical method to measure international financial integration. The case of Slovenia is interesting in that it was affected by the global crisis, but perhaps with a somewhat different nature from other countries; after the onset of the crisis, Slovenia suffered some financial problems which could be related to both internal and external reasons. This study tries to find out if and to what extent these problems were related to external crisis and transferred to Slovenian economy through its international financial integration.

The global economic crisis that started in 2007 from the United States first affected European countries in 2008 and followed by a public debt crisis in Europe. In this research, we chose a period covering these crises in order to verify their relation with Slovenian financial integration. The study carries out on a period of 14 years from 2000 to 2013. Choosing this period, we have an almost equal and balanced period before and after the onset of the crisis. This helps to more efficiently consider the conditions before and after this event; the probable origins and causes of the crisis as well as its consequences. For this period, quarterly data are used in order to consider possible quarterly variations and effects that might play an important role in the results of the analysis.

2. Literature review

Since the methodology of this research includes two models or hypotheses, we review the literature for both; first for financial integration measurement regarding Feldstein-Horioka hypothesis and its "puzzle", then for double deficits and the linkage between the two deficits and finally for a combined model including both.

2.1. Financial integration in the theory of Feldstein and Horioka

There are some approaches to measure international financial integration. Regarding them, Feldstein and Horioka (1980) proposed a synthetic approach for this measurement. This approach is based on the correlation between domestic savings and domestic investment. According to their hypothesis, in a world with perfect capital mobility, there should not be any relation between domestic investment and domestic savings; investment in each country is financed by global capital, while savings in that country answer to global demand for investment. Therefore, a low correlation between domestic savings and domestic investment can signify high level of financial integration. Feldstein and Horioka used the following regression to examine their hypothesis:

I=a+ps.+

Si and Ii are respectively the averages of savings rate and investment rate of country i during a given period, and ft the coefficient of domestic savings retention which shows the proportion of savings retained within national borders by domestic investment. If ft is close to 1, domestic investment is essentially financed by domestic savings, and thus, there is low international capital mobility. On the contrary, when ft is close to zero, domestic investment is financed by domestic savings at a low level; it is mostly financed by foreign capitals, hence, there is high capital mobility and high financial integration. A ft too close to zero may seem an extreme case, because even with perfect capital mobility, some part of domestic investment is still financed by domestic savings; but a little ft can reflect a high level of international financial integration anyway.

Feldstein and Horioka examined their hypothesis on sixteen OECD countries for the period 1960-1974. This study as well as many later studies on other samples and other periods using the same hypothesis led to a high estimation for the level of domestic savings retention by domestic investment. This result was in contrast to the reduction of exchange control since the 1960s that suggested higher integration within capital markets. This contradictory result is known as the "Feldstein-Horioka puzzle". The later studies using different methodologies have tried to explain and/or solve this puzzle.

2.2. Double deficits

Although our theoretical objective in this research is to verify the influence of the two deficits on each other, most of works in this domain have been interested in studying the influence of a budget deficit on commercial or current account deficit. Taking into account this relation, theories of "double deficits" or, as it is usually called, "twin deficits" propose different modalities for financing a budget deficit. According to the literature, there are three possible linkages between the two deficits: a full linkage between budget deficit and current account deficit, absence of such a linkage, and existence of a partial linkage. Take into consideration the following equality:

In this equality, I is domestic investment and Sp, Sg and Sf are private savings, public savings and foreign savings respectively. In the case of an expansionary budget policy, if private savings and local investment do not vary or vary to the same extent, the internal and external deficits are related. In this case, the budget deficit must be entirely financed by foreign savings and domestic savings entirely go towards investment. However, if the same budget policy affects only private savings, there will be no linkage between the two deficits. Again with an expansionary budget policy, if investment decreases while foreign and private savings increase, the internal and external deficits are partially linked. In this case, the budget deficit may be financed by

I=Sp+Sa + S

p

a

(2)

foreign or private savings. These three possibilities are explained more precisely in Neo-Keynesian and neoclassical theories.

For Neo-Keynesian theories, Branson (1985) explains, in his model, the existence of linkage between the two deficits in short term but the absence of such relation in long term, while in the Mundell-Fleming model, we find explanations about strong twin deficits as well as partial linkage between the two deficits.

Among Neoclassical theories, a famous theory is the Ricardian equivalence according to which, bonds and savings can be transferred between generations; thus, for economic actors, increase in taxes and sale of bonds by the government are similar. Therefore, a decrease in public savings (budget deficit increase) does not change the consumption style of economic actors; they increase private savings which is equal to decrease in public savings and so, there will be no need for foreign savings and the current account deficit will not change. Blanchard (1985) presented a general neoclassical model according to which, the economic agents may have finite or infinite horizons. Thus, the Ricardian equivalence supposing infinite horizon is a particular case of this general model. This model, in which the current generation's decisions are independent of the future generations' decisions, can include all three possible linkages between budget deficit and current account deficit.

Many empirical works have studied the issue of "double deficits" with different samples and periods and using different methods. Regarding these differences, results are different as well: some studies found a relation between the two deficits, from budget deficit towards trade deficit and/or in the opposite direction, like the works of Tarawalie (2014) for Sierra Leone, and Paparas, Richter and Mu (2016) for Greece. Some other works found no linkage between the two deficits, like those of Winner (1993) for Australia, and Kulkarni and Erickson (2001) for Mexico. Ratha (2011) concluded that for the case of India there are twin deficits in long-run but no linkage between the two deficits in short-run. Afonso et al. (2018) in their study for a sample of 193 countries over the period 1980-2016, found that when there is no fiscal rules, the twin deficit hypothesis is confirmed, but when some fiscal rules such as rules with monitoring of compliance, budget balance rules and debt rules in emerging market economies and lowest income countries, and in the post-crisis period exist, the effect of budget deficit on current account deficit severely decreases. The study of Furceri and Zdzienicka (2018) for 114 developing countries over the period 1990-2015 showed that the linkage between the two deficits could be stronger during recessions; in countries that have less flexible exchange rate regimes, that are more open to trade and that have lower initial public debt-to-GDP ratios.

2.3. Simultaneous study of financial integration and double deficits

In a non-Ricardian world with perfect capital mobility, an increase in budget deficit leads to a decrease in domestic savings. For a given amount of investment and taking into account the Feldstein-Horioka initial hypothesis, this domestic savings reduction causes the reduction of foreign investment and the augmentation of current

account deficit. Thus, double deficits occur. On the contrary, if we encounter the "Feldstein-Horioka puzzle", the decrease in domestic savings does not lead to an increase in current account deficit, and there will be no linkage between the two deficits.

Using national income identity, Fidrmuc (2003) introduces a regression to explain a long run relation between trade balance, budget deficit and investment. He divides savings into private savings (Sp) and public savings (Sg). Sp is equal to the taxable income (Y - T) minus private consumption (C), and Sg, which corresponds to the budget balance, is equal to the difference between taxes (T) and government expenditure (G). Thus:

Xt - M=(Yt-T-Ct )+(T-Gt)-1= SP + Sg-It (3)

Representing the variables as GDP proportions, Fidrmuc finally proposes the following regression model:

*t-mt=Y i+Y 2 (t~ gt )-Y 3 inrtt+£t (4)

In which (x - m) is the current account balance, (t - g) is the budget balance and invt is investment. In this regression, the coefficient j2 represents the validity of the twin deficits hypothesis, and the coefficient j3 represents the validity of the Feldstein-Horioka hypothesis.

There are however some criticisms of this regression. Marinheiro (2008) indicates that, on the one hand, (t - g) is government gross savings or current budget balance and not total budget balance, because the latter also includes public investment and public transfer payment. Therefore, in the regression (4), public investment variations do not change public savings and consequently, they do not have any influences on budget deficit. On the other hand, (x - m) is the trade balance and not current account balance, because the latter also includes net transfers. Marinheiro concludes that by using trade balance and current budget balance in the regression, the constant ji will be equal to the average of private savings, and the coefficients j2 and j3 will be biased towards unity; so, by eliminating the variable of private savings, we will in fact estimate an identity. To remove these problems, Marinheiro proposes to use total budget balance and current account balance.

Some other empirical have also worked on simultaneous studies of financial integration and twin deficits. Halicioglu and Eren (2017) using cointegration tests in their research on Turkey, found the existence of the twin deficits and the Feldstein-Horioka puzzle and so, the low level of the integration of this country into the world capital market. But, using causality tests, they found no relation between the two deficits. In another work, Litsios and Pilbeam (2017) studied the cases of Greece, Portugal and Spain, and observed no long-run stable relationship between savings and investment, but a strong significant negative relationship between domestic investment and current account deficit. The results of this study also revealed the influence of fiscal balance on current account balance in the studied economies.

3. Methodology

In the present research, we first measure the financial integration level of Slovenia, and then, we study this level together with double deficits hypothesis for this country. We can then compare the results of the two approaches and also use them to consider the causes of financial problems.

For both approaches, the analysis is carried out over a 14-year period from 2000 to 2013 in order to have a balanced period before and after the onset of the crisis. Furthermore, we use quarterly data to be able to consider the quarterly effects of variables on each other; this also help to have more observations when we have a relatively short period of 14 years. Data is collected from the Eurostat (2020) database.

We chose the econometric technique of autoregressive distributed lags (ARDL) with error correction in order to take into consideration probable lags which may accompany the effects of variables particularly in this analysis where we use quarterly data; since we do not know in advance the exact number of such lags, the ARDL model can identify and include them in the model. Furthermore, using this model, if we have time series integrated of orders zero or one, we will not need to test the co-integration between variables. In addition, we suppose that a cause of the appearance of Feldstein-Horioka puzzle in previous empirical works might be related to the lags of the effects of domestic savings on domestic investment. Finally, as the period of analysis is relatively short, the events and the short-run variations could affect the analysis results; so, adding an error correction term to the model could mitigate this problem by integrating short-run behaviors with long-run trends into the same regression.

3.1. Financial integration

For measuring the level of financial integration, we take inspiration from the Feldstein-Horioka thesis. However, in addition to the relation between domestic savings and domestic investment, we also aim to consider the relation between domestic savings and foreign direct investment outflows. That is, while a low level of domestic investment response to domestic savings can be considered as an indicator for high level of financial integration, a high level of foreign direct investment outflows by residents (who use domestic savings) can be evaluated as a similar signal.

Taking into consideration the regression (1) presented by Feldstein and Horioka, we introduce the following regressions:

m p

Mnvt=a0 + Z ai,iMnvt_i + Z a2Jkgdst_+p ECMt- + £u (5)

i= 1 i=0

mp

A fdit=Yo+Z Yi,i^fdit-,+ Z Y2,iAndst_+8ECMt- + £21 (6)

i=1 i =0

In these regressions, the variable inv represents domestic investment, gds is gross domestic savings, nds is net domestic savings, and fdi is foreign direct

investment net outflows by residents of the country. All data used for these variables are calculated as a percentage of the gross domestic production (GDP). A represents the "difference" operator and ECM is the error correction term. The parameters a's and y's are the short-run coefficients, the parameters ft and ô represent the long-run coefficients of the lagged error correction terms, and e's are the error terms postulated to be not serially correlated. The estimation of these regressions gives the tests for the equality of coefficients a2 and j2 to zero or 1. If the coefficient a2 tends towards unity and the coefficient j2 tends towards zero, domestic savings are mostly oriented towards domestic investment; hence, the country's financial integration level is not so high. But if a2 is close to zero and j2 close to 1, the country's domestic savings mostly go towards investment abroad, and as a result, the country is highly integrated within international financial markets.

3.2. Double deficits and financial integration

This model provides us with a combined analysis of the relation between two deficits as well as financial resources of investment; this could reveal the financial sources of domestic investment and its relation with domestic and foreign savings, and therefore, determine the financial integration level of a country. We could also understand how the integration level can affect a foreign crisis transfer towards domestic finance through a relation between external and internal deficits.

Inspiring from the works of Fidrmuc (2003) and Marinheiro (2008) explained in section 2.3 and using a different and extended methodology, we introduce the following two regressions based on ARDL model. We have two regressions because we aim at analyzing the effects of each deficit on another; in the first one, budget deficit is regressed on current account deficit and investment, and in the second one, current account deficit is regressed on budget deficit and investment:

a 3iAlinvt p 1 MCEt-1 +e 1t

m p q

Albdt=a0+Z a uAlbdt-i + Z a2iAlccdt-i+Z L

i = 1 i = 0 i =0

y3ii^linvt-i+iSi MCE-1 +s2t

m p q

A lccdt= yo+ Z y 1iiA lbdt-i+Z y2,iA lccdt- + Z i

i = 0 i = 1 i = 0

(7)

(8)

In these regressions, Ibd is the logarithm of budget deficit, Iccd the logarithm of current account deficit and linv represents the logarithm of domestic investment, A is a "difference" operator, a's and y's represent the short-run coefficients, ( and S are long-term coefficients related to lagged error correction terms, MCE is the correction error term, and e's are the error terms which are taken to be not serially correlated. Coefficients a2's explain the effects of different lags of the current account deficit on the budget deficit; coefficients y/s reflect the effects of different lags of the budget deficit on the current account deficit, and the coefficients a/s and y/s explain the effects of different lags of investment on two deficits.

Investment data are put as a percentage of GDP, the data related to budget deficit are calculated by dividing the government expenditures into their incomes and the data related to current account deficit are calculated by dividing current account debit into its credit. By using this calculation, values greater than unity for bd and ccd imply the existence of budget deficit and current account deficit respectively. On the contrary, values less than unity imply the existence of budget surplus and current account surplus. Therefore, variation of the values of these two variables in the same direction can be evidence of existence of double deficits.

By using this way, we do not need to choose a price index for deflating variables in order to obtain real values, because the proportions are themselves expressed in real terms. Moreover, the variables are not negative; so, we can process the model using logarithmic form of variables.

On the one hand, when the coefficients related to current account deficit in regression (7) and the coefficients related to budget deficit in regression (8) tend towards zero, there is no linkage between the two deficits. On the other hand, when these coefficients are statistically significant, we can conclude the existence of a linkage between the two deficits and its direction. Moreover, when the coefficients related to investment in the regressions (7) or (8) are significant, the investment is probably financed by internal or external resources respectively; we also need to take into consideration that financing investment by these resources could impact their balance towards deficit.

4. Analysis results

Before estimating the regression equations, augmented Dickey-Fuller unit root tests showed that all time series to be used, namely gross domestic savings, net domestic savings, domestic investment, foreign direct investment, budget deficit and current account deficit, are stationary; they are all integrated of order 1 (I(1) at 99%). Therefore, we can use them in our ARDL models with error correction.

The regressions (5) and (6) are to estimate the effects of domestic savings on domestic investment and foreign direct investment. In fact, they will show the levels of domestic savings retention by two sorts of investment. The results of estimations are summarized in the table 1.

Table 1 Levels of savings retention by investment and FDI (period 2000.Q1-2013.Q4)

Effect of: No. of lag Coefficient T-ratio (probability) R2

Domestic savings on domestic investment First lag 0.43 2.60 (0.01) 0.45

Domestic savings on FDI First lag -0.22 -2.40 (0.02) 0.61

Second lag 0.19 2.05 (0.045)

Significance level: 5% Source: Author estimations

In the first regression, the effect of independent variable is with one lag, while for the second regression, the independent variable affect the dependent variable with its first and second lags.

According to the result of the first regression, the coefficient of domestic savings is significant (0.43). It shows a medium level of savings retention by investment and from that, we can consider a medium level of financial integration. Taking into account the high level of trade openness for Slovenia, this result may somehow be in the favor of the Feldstein-Horioka initial hypothesis. But, regarding the coefficient of R2 of this regression (0.45) that is relatively low, we must be careful in trusting its results.

The second regression estimation gives somewhat different results; both coefficients related to the first and second lags of savings are significant (-0.22 and 0.19 respectively), however, the first one is negative and cannot explain a linkage between savings and FDI. The second one shows a low relation between the two variables and hence, a low level of savings retention by FDI. It means a low level of financial integration which is contrary to the result of the first regression and also to the high level of trade openness of Slovenia. It can lead to a Feldstein-Horioka puzzle. We need take into consideration that for this estimation, the coefficient of R2 (0.61) is higher than that of the first estimation.

For our second model that is to analyze the financial integration level together with double deficits issue, we estimate the regressions (7) and (8). The results are presented in the table 2.

Table 2 Relation between two deficits and financial integration level (Period 2000.Q1-2013.Q4)

Effect of: No. of lag Coefficie nt T-ratio (probability) R2

Current account deficit on budget deficit First lag -0.55 -1.11 (0.27) 0.38

Domestic investment on budget deficit First lag -0.05 -0.35 (0.73)

Budget deficit on current account deficit First lag -0.03 -0.63 (0.53) 0.57

Domestic investment on current First lag 0.17 8.92 (0.00)

account deficit

Significance level: 5%

Source: Author estimations

In both regressions, independent variables affect the dependent variables only with their first lags. In the first regression, the coefficients related to investment and current account deficit are not significant and hence, these two variables do not impact budget deficit. Therefore, on the one hand, there is no evidence for double deficits and, on the other hand, since domestic investment has no relation with internal deficit, so we can conclude that it is not generally financed by internal resources but mostly by external resources. Financing domestic investment by foreign resources is an evidence for high level of financial integration and could confirm the Feldstein-Horioka hypothesis, but this result somewhat contradicts the absence of linkage between the two deficits.

The second regression gives the similar results. The coefficient related to budget deficit is not significant and therefore, there is no relation between the two deficits. But, the significant coefficient of domestic investment (0.17) indicates its effect on external deficit; although this effect in not high, but it can show that domestic investment is financed by foreign resources.

From both regressions, we can conclude that there is no linkage between the two deficits neither from current account deficit to budget deficit nor in the opposite direction. Moreover, domestic investment is majorly financed by foreign resources. This second result is an evidence for medium or relatively high level of financial integration in the case of Slovenia and could be in favor of the Feldstein-Horioka hypothesis, but the absence of a linkage between the two deficits which can show no relation between internal and external financial affairs leads to an opposite conclusion. These two contradictory results might be seen as a sort of puzzle in the framework of the Feldstein-Horioka hypothesis.

5. Conclusion and discussion

We studied, for the case of Slovenia, the international financial integration level based on the Feldstein-Horioka thesis as well as the linkage between the internal and external deficits (double deficits phenomenon) during the period 2000-2013, the second half of which was suffered by financial problems related to the crisis. Our objective was to study the financial conditions of Slovenia in times of crisis and the probable impacts of the crisis on these conditions. Through this, we also verified the reliability of the Feldstein-Horioka hypothesis.

We first measured the level of financial integration and then, simultaneously studied this level with the possibility of the existence of double deficits. Although the

results of these analyses are somewhat contradictory, we can conclude, in general, a medium level of financial integration for Slovenia. The results of the first model showed both medium and relatively low levels of financial integration; the first one, taking into account the openness of the country, can be in favor of the Feldstein-Horioka initial hypothesis. The results of the second model showed a medium or relatively high level of financial integration, but since no linkage between the two deficits was found, the results can lead us to a kind of puzzle which is somewhat different from the known Feldstein-Horioka puzzle.

According to neo-Keynesian theories, for the case of Slovenia as a small country with flexible exchange rate and perfect or relatively high capital mobility, we must expect a strong or partial linkage between its two deficits which is not observed in our results for the first fourteen years of the current century. Taking into consideration the absence of a linkage between the two deficits, we cannot explain the transfer of the external crisis to the country's economy through a relation between the external and internal deficits. We should then look for other channels through which the global crisis has been transferred to the financial activities of Slovenia. It seems that the financial problem of Slovenia during the crisis was more related to its domestic affairs, and less to its foreign financial relations and trade.

Slovenia experienced in 1990s the transition from a centralized economy to a market-based economy. It joined the European Union in 2004 and the euro zone in 2007. Moreover, in 2012, it became a member of OECD. Although Slovenia has good infrastructures as well as high GDP per capita and an advanced economy comparing to other eastern and central European economies, its economy encounters some problems partly remained from its communist heritage. For example, many sectors are under public control, there are some problems regarding the regulation of labor market, and foreign investment is at a low level comparing with other European Union members.

Motoh (2019) considers the advantages of the Slovenian economy to be a decent economic growth, significantly low unemployment rates and growing household income; in 2019, household consumption increased which led to the augmentation of household savings due to moderation in spending and growing wages. Besides, Motoh also indicates some problems of the economy such as lowering consumer confidence, stagnation in destination economies for Slovenian exports, unclear strategies for the tax reform, and the problem of managing state-owned companies. There are also some external factors which rise insecurity: Brexit and its potential effect for the euro area, implementation of protectionist measures in big economies, geopolitical tensions, and a global slowing of economy.

In Slovenia, the economy depends on exports, but the high level of life can reduce this competitive advantage. The large part of Slovenian trade is with the European Union and the euro zone. During the crisis, the economic problems of the European trade partners affected Slovenian exports and economy. Despite this, the trade was generally in a good situation and the trade balance became again positive after 2009.

However, the Slovenian economy has not always been dependent on exports; as Podvrsic and Schmidt (2018) mention, Slovenian post-war industrialization was dependent on imports and foreign credits. In 1990s, the policy was in favor of exportled industrialization, a smaller reliance on FDI and a state-managerial control of domestic production. But after 2000, the availability of cheap credits on the European markets, an accelerated transfer of state polices on the European level and also the weakening of labor bargaining power changed conditions towards a dependent financialization of the economy. Podvrsic and Schmidt believe that the vulnerability of the Slovenian economy after the crisis was not related to the inefficient and insufficient privatization program; but it was rather the implementation of the European regulations, especially those associated with the euro zone, which intensified the weaknesses of the Slovenian pre-crisis accumulation regime.

As Godin (2013) mentions, according to the IMF, the initial problems of Slovenia came from its banking sector, budget consolidation and bad situation of private societies. Also, according to S&P, one of the problems is low transparency of the economy. An important reason of the crisis in Slovenia was related to the problem of banking sector. Godin explains that in the wake of the crisis, Slovenia had a highly state-run banking sector with low present of foreign banks. The sector had a lot of wrongly credits, especially at the beginning of 2000s; in 2001, non-financial private societies' loans were at the rate of 64.4% which reached 128% in 2011. The onset of the external crisis strengthened economic problems which had in turn a negative impact on banking sector in the next stage and increased doubtful debts; in 2011, three principal banks of Slovenia possessed 15.6% of doubtful debts which increased to 20.5% in 2012. This led banks to be principally depended on ECB for financing. To deal with this situation, politicians had different choices: financing the banks by public money (classical way) or collecting doubtful assets in a Bad Bank or budget consolidation.

At the beginning of 2000s, high economic growth led to high volume of loans to private sector especially since 2007, and at the same time, the European debt crisis arrived and complicated the situation.

The analysis results of the present study show a relatively medium level of financial integration for Slovenia. We also found no relation between budget and current account deficits. This contradiction can be considered as a sort of puzzle in the framework of the Feldstein-Horioka hypothesis and may be due to especial conditions of the crisis or to state-owned banking sector and low presence of foreign banks in this system. Taking into account the absence of the linkage between the two deficits as well as a medium level of financial integration, we can conclude that problems are majorly internal and related to some financial structures such as banking sector; external problems can be of secondary importance. Investment does not have significant effect on two deficits, so, it might not be an efficient tool to deal with the crisis, and Slovenian authorities needed to consider other solutions such as market reform and access to finance in the market as well as ECB supervision on banking system as Godin (2013) points out. Exports and trade balance as an important section of the

Slovenian economy that was not very affected by the crisis could also be given special attention.

After the wake of the crisis, there were numerous recommendations in order to face it; a major part of them referred to the country's fiscal situation. According to Neck, Blueschke and Weyerstrass (2011), to have optimal policies, the economy needed only some few active countercyclical roles of fiscal policies. Furthermore, as Setnikar Cankar and Petkovsek (2014) indicate, the priority of the Slovenian government to encounter difficult fiscal situation was to ensure sustainable public finance and stable economic growth. Indeed, to have a sustainable macroeconomic environment and meet the requirements of the European Union, Slovenia needed to balance its public finances. Therefore, the country must apply adjustments to its legislation in order to affect the size and structure of public expenditure. The objective of Slovenia for maintaining its public finance deficit below 3% of GDP could be seen as a factor that would give the country opportunity to finance on international markets.

To deal with the crisis, the Slovenian government implemented some measures in 2012 under the austerity policies which included salary reduction, reform in labor market and liberalization of the reform system. The government had however no tendency to request for European financial aid. Before the economic crisis between 2005 and 2008, Slovenia had implemented expansionary fiscal policy, while after the crisis, particularly in 2011 and 2012, because of fiscal consolidation, the fiscal policy of the country was more restrictive (Mencinger and Aristovnik, 2014). Financial regulation in Slovenia including its adaptation to the EU regulation has not always followed the same trend; before the crisis, Slovenia experienced authentic regulation, and while regulatory reactions of Slovenian authorities during the crisis was often chaotic, the most drastic reform of Slovenian banking took place in 2013 and 2014 (Mencinger, Juuse and Kattel, 2014).

Macroeconomic indicators showed that after the implementation of these policies, the situation of external balance improved a little, but budget deficit, investment, public debt and unemployment rate were still in trouble and had improved a little later in recent years. In the table 3, the changes of some selected indicators of Slovenian economy from the beginning of the present century are represented which can demonstrate the situation before the onset of the crisis, during it and afterwards. The crisis reached Slovenia in 2008 and affected some macroeconomics indicators, especially in 2008 and 2009 with the slowdown in economic growth. Although the investment was high before the crisis and at the highest level in 2008, it fell from 2009 to 2012, majorly because of rising private sector debt; investment increased again majorly since 2017. Budget balance deteriorated from 2009 and with the help of fiscal consolidation has resumed its positive situation only since 2018. Unemployment rate increased from 2009 and has begun to decrease since 2014 apparently due to high exports and increase in consumption. Moreover, public debt was affected by the crisis, although in the early years after the crisis it was less than the limit set in the Maastricht Treaty. Current account balance experienced large decreases in 2007 and 2008, but

improved again after 2009. Generally, the Slovenian problem was not as deep as some other countries.

Table 3 Macroeconomic indicators of Slovenia (Period 2000 - 2019)

Groffth rate s £ â S II £ = U i4- « e 2l§ ~ u = p_ tB ^—^ 5 « ■s 'J Iii? «ne Ei "P u ü S JJ U 5 H a £ J s S3 - 11 — = E 1 _ w G over nui eut yross lieht (Pcrccntiige of GDP) L n employment rtite

2000 3.7 5994.9 -0.8 -2.8 -804.1 25.9 6.8

2001 32 6126.4 -1 0 -242 26.1 62

2002 3.5 6136.4 -2.5 0.9 247.5 27.4 6.3

2003 3 6570.1 -1.1 -0.8 -83.3 26.8 6.1

2004 4.4 7204.2 -12 -2.7 -400.7 26.9 6.3

2005 3.8 7744.5 -1.3 -1.8 -186.4 26.4 6.5

2006 5.1 8733.2 -0.7 -1.8 -15.1 26.1 6

2007 1 10049 0.1 -4.1 -466.1 22.8 4.9

2 00S 3.5 11166.5 0.2 -5.3 -798.3 21.8 4.4

2009 -1.5 8748.5 -4.8 -1.1 510 34.5 5.9

2010 13 7666.1 -4.8 -0.7 384.8 38.3 7.3

2011 0.9 7391.1 -4.1 -0.8 450.8 46.5 82

2012 -2.6 6899.6 -3.1 1.3 12322 53.6 8.9

2013 -1 7157.3 -42 3.3 1704.8 70 10.1

2014 2.8 7191 -32 5.1 2541.7 80.3 9.7

2015 22 7247.8 -3.3 3.8 3108.8 82.6 9

2016 3.1 7019.4 -1.7 4.8 34502 78.7 8

2017 4.8 7874.7 -0.8 6.3 3868.4 74.1 6.6

2 01S 4.1 8771 1.2 6.1 3992.9 70.4 5.1

2019 2.4 9266.7 0.5 6.6 4386.7 66.1 4.5

Source: Eurostat and World Bank databases

To summarize, Slovenia already had some structural and financial problems before the global and European crises began. Although the results of the present study could not explain the transmission of the effects of the external crises to the domestic economy through a linkage between the two deficits, regarding the medium level of country's financial integration, it seems that the crises transferred to the Slovenian economy through other ways and exacerbated domestic problems, which were reflected in economic indicators. To deal with this situation, some policies were adopted and implemented, especially in the domain of public finance and financial regulation. By implementing these policies, most macroeconomic indicators have improved, and the economy is apparently out of crisis. However, it seems necessary to continue some reforms for example in the banking sector.

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