search:

Ladies and gentlemen,

It is my great pleasure to have the opportunity to speak to this distinguished community of business people on economic performance and perspectives of the Czech Republic within the European Union.

The Czech Republic is the western part of what used to be Czechoslovakia until 1992.

As it is apparent from its geographical position, the Czech Republic belongs to Europe, and joining the EU in 2004 was partly a symbolic step of returning back to the democratic nations and partly a pragmatic contract of giving up some powers and gaining better access to the EU markets and a share in European decision making.

Not surprisingly, the geographical position corresponds also with the main economic indicators. The level of GDP is lower than in Western Europe but higher than in countries to the East. On the other hand, the GDP growth rate is higher than in the West but slower than in Eastern Europe. Tax rates are lower than in the West and higher than to the East.

Chart No. 1 - Czech Republic in the European union

The flat rate of corporate income tax is set to 26 %, but the overall tax quota is at about 35 % of GDP. The ratio of government expenditures to GDP is 10 percentage points higher, at about 45 %.

Regarding the tax quota, and the government expenditures to GDP ratio, we can distinguish two periods:

Until 1998 there were right-wing governments cutting taxes and expenditures. Since 1998 there have been left-wing governments increasing taxes and increasing expenditures even more. The difference, of course, is not only privatisation proceeds but also the budget deficit.

Speaking about the consequences of joining the EU, a part of this increase in taxes, expenditures, and the deficit is due to our membership in the European Union. As you know, about 1 % of GDP has to be sent to Brussels for redistribution while the subsidies received back are not necessarily funds that simply replace former expenditures.

Chart No. 2 - Czech government increases its share of GDP

According to the latest report by the European Commission, the Czechs received 26 euro per head in 2004 above what they have paid to the EU, becoming thus moderate net recipients of EU funds.

As you can see, the biggest winner of EU funds is Ireland again, with net profit over 400 euro per head while the biggest contributors were the Dutch, as in previous years.

However these official numbers don’t sum up all contributions to the EU. Taking into account the import tariffs paid to the EU, and capital payments to the EIB and ECB that we had to pay to the EU last year, the Czech Republic ended up as a net contributor to the EU budget in the first year of its membership in the EU.

Chart No. 3 - Are we net contributors to the EU budget?

Definitely I don’t think that the fiscal balance is the main benefit (or the main cost) of the EU membership.

Joining the EU might have helped our exports. For example, this year is the first year in the Czech Republic’s history with positive trade balance. On the other hand, the other side of a trade surplus is always a deficit on the financial account of the balance of payments. In the first quarter of this year the outflows of capital outnumbered inflows for the first time in our 12-year history.

However, there are also some question marks. Should we believe the statistics when the Czech Statistical Office reports increase in exports with Germany by 20 % and in the same period the German Statistical Office reports decline by 4 % in imports from the Czech Republic? Should investors buy, or sell Czech currency in response to the Czech numbers or to the German numbers? Rather I think they should not respond to trade statistics at all.

Definitely there are better indicators for investors, such as GDP growth rate.

Chart No. 4 - Exports are good but capital leaves too

In 2004 the growth rate of the Czech economy was 4 per cent. The average growth rate for the first half of this decade was 3.1 (blue bar) which was twice as high as in the EU-15.

Yet it is no miracle to grow faster than EU-15 countries which experience the slowest growth in history, with ever slower growth for each decade since the World War II.

Some of us in the Czech Republic are afraid that it is some of the EU’s rigid legislation that has translated into this sluggish growth rate of Western European economies. Of course we see benefits of our EU membership in opening up markets and in trade and business opportunities, however we see the main costs in our obligation to accept all the rigid regulations and directives that have hindered economic growth in the old EU.

Chart No. 5 - Growing faster than EU-15 is not very difficult

Upon application to join the EU, the Czech Republic had to adopt the entire body of European legislation (Acquis Communautaire), which is about 80,000 pages long. As a result, the number of pages of legislation produced each year by the Czech government has increased by more than 1000 percent since membership negotiations began in the mid-1990s. Some of the legislation is very costly for businesses and citizens.

However I see there a chance that the Czech Republic, together with other new members from Central and Eastern Europe, will help change the trends. I believe that these new members will have a positive impact on the volume and the quality of the future EU legislation.

Chart No. 6 - We rapidly adapt to EU over - regulation

Of course that despite of the mass production of the EU legislation there is still significant room for national law making, we cannot blame everything on Brussels!

General elections in the Czech Republic will be held in June next year. There are four parties supposed to win seats in Parliament: Civic Democrats and Christian Democrats on the right, and Social Democrats and Communists on the left.

According to the polls, the right-wing parties (Civic Democrats and Christian Democrats) have chance to win majority as they lead the left by 5 per cent.

The biggest right wing party (the Civic Democrats founded in 1991 by Vaclav Klaus, the current President of the Czech Republic) is supposed to win and is determined to introduce a package of pro-market reforms including a flat tax of 15 % for both corporate and personal income tax, down from 26 and 32 %, respectively.

Chart No. 7 - Czech right - wings parties lead by 5% margin

To sum it up, I believe that the Czech Republic is a nice country with lots of business opportunities. There is a chance that the rejected EU constitution will not be revived and so that some tax and regulatory competition will be preserved in Europe, and I believe that the new members of the EU will have positive impact on EU’s future legislation. Furthermore, political parties who are friendly to free markets and low taxes are supposed to win general elections in my country next year.

Even if everything does not go well in the Czech Republic, you can always relax visiting the streets and pubs of the beautiful city of Prague. If I were a Belgian entrepreneur I would at least think of investing in the Czech Republic.

Thank you.

Petr Mach