Prague (Brussels Morning). The question of the Czech Republic’s monetary union with its European partners is as controversial an issue there as it is in Denmark, Sweden and Poland. This does not appear to be merely a matter of time, as in Bulgaria or Romania, but more substantially a matter of principle. And the principle is simple: the Czech electorate fears that monetary integration could come at the cost of economic convergence. That kind of scepticism is not against the project of European integration as such. It is a political objection. But unlike Warsaw, this objection is not articulated in anti-hegemonic terms.
This discussion is now relevant. The Czech Republic is heading to the polls this autumn and it’s important to note that the political spectrum is not divided neatly between liberals and conservatives or Eurosceptics and Europhiles. Elements of scepticism are dispersed and reservations about monetary union, as such, appear to be common on the left and right of the political spectrum. To understand this scepticism, we speak to Ms Milena Hrdinková, the Czech Republic’s State Secretary for European Affairs. She is very much at the heart of the Czech debate on monetary governance, having previously served at the Ministry of Finance and as a representative of her government at the ECOFIN. With previous work at the European Commission, she is very much a Brussels insider as well as a key adviser to the Prime Minister on EU governance.
Brussels Morning: Starting from the current state of the Czech economy, what do you feel will be the effect of the pandemic?
Ms Milena Hrdinková (MH): We don’t know. Everyone hopes that recovery will be speedy. Projections for the Eurozone suggest that we are heading towards recovery sometime in the first quarter of 2022.
Overall, we saw a 5.6% recession in 2020. For 2021, projections vary, with the Czech Central Bank projecting a 1.2% recession while the IMF expects a 4.2% recession. The Czech Koruna is expected to appreciate against the Euro. What happens matters, as it will determine the deficit and the external debt.
In GDP terms, most forecasts point to recovery to the levels of 2019 sometime in the first quarter of 2022. But with the current spread of the Delta variant, we need to be cautious as the forecasts may not be founded on solid ground. It may well be the case that the fundamentals prove to be worse, which will have an effect on the level of the external debt.
What we know for sure that that the standard of living measured in general terms – that is, GDP per capita in purchasing power standards – is 94% of the EU average. Over the last two years, the Czech Republic was getting relatively richer: our GDP per capita was higher than that of Greece, Spain, Portugal, and Italy.
Convergence is an important element. But current predictions suggest this trend might be disrupted and the convergence might be much slower in 2021-2022.
Brussels Morning: So, will the pandemic derail convergence?
MH. Nominal convergence leaves out qualitative details. In terms of infrastructure – roads, telecommunications, schools, or even productivity – the Czech Republic is nowhere near convergence. Furthermore, within the country there are vast regional disparities that give out a distorted picture of convergence as such. That was before the pandemic. The spending priorities dictated by the pandemic as well as the general policy context do threaten convergence.
You cannot judge Czech convergence by Prague’s economic performance, without taking into account the lack of connectivity in Moravia and Bohemia, or the general productivity disparities.
Brussels Morning; Yes, but the Czech Republic is treaty-bound to join the Eurozone. Successive governments endorsed the objective and in terms of economic fundamentals there is little doubt that Prague is well positioned to adopt the single currency. However, the prospect does not appear politically attractive and a transition to the common currency in the near future does not seem likely. Where does this scepticism stem from?
MH: Taking the Maastricht criteria at face value, the Czech Republic does not meet two criteria: inflation (in 2021, 3.3%) and the deficit (6.2%): both benchmarks are off the mark, while the public deficit has been in double-digits. Strictly speaking and without looking at the Czech economy in comparative perspective, we are not meeting the criteria. Of course, one could argue (that) we could.
So, you are right, the main challenge is political and the acceptance of the project is a political question. At the current political context, one could argue that parties lean towards a kind of euro-cautiousness or even Euroscepticism. It is true that over a long period of time we had rather Eurosceptic governments. The largest rightwing party in our governing coalition is quite Eurosceptic.
But the heart of Czech scepticism can be traced to the experience of the 2008-2009 financial crisis, where it became apparent that membership in the Eurozone without substantial economic convergence is a trap. Public opinion saw what happened to Greece.
We will need to prioritise fast recovery and we will be keenly observing how the Eurozone bounces back, because it is clear that some of the Maastricht criteria do not work for every member of the Eurozone. Public opinion registers these structural weaknesses.
Brussels Morning: Your neighbouring Slovakia did enter the Eurozone even while the financial crisis was unfolding. Did this have an effect on the popularity of the Euro in the Czech Republic?
MH: I would say that the development we saw in Slovakia was comparable to other countries. Public opinion can be initially hesitant – think of Germany, for instance – and then countries are often reluctant in the beginning to leave behind national currencies, yet eventually endorse the common currency.
In Slovakia, we see that, after entrance, there is an increase in convergence in terms of GDP per capita, but this is not permanent. After some time, in most countries you see a drop again.
This, in my view, proves that countries need to reach “real convergence”, that we cannot simply leap forward. We all need to work on real economic convergence and cohesion, for the sake of both converging economies and net contributors to the EU budget.
Brussels Morning: In 2005, the Czech Republic was signalled out by the OECD as the country with the fewest poor people in Europe, commending the success of a post-Communist state that made a swift transition to a market economy while creating an effective welfare system. From a fiscal perspective, how would you assess the resilience of the system that has undergone the 2008 financial crisis and the pandemic?
MH: 2019 Eurostat data affirms that very few people in the Czech Republic are at risk of poverty and social exclusion, comparatively speaking. For instance, the Czech Republic appears to have half the ratio to Italy.
In terms of sustaining this outlook in the long run, we have to be a little bit careful. We have few people in risk of poverty but we have quite high figures in the low-income zone, compared even to countries with smaller GDP.
No matter what happens in the forthcoming elections, there is no avoiding a notoriously difficult pension reform. The Czech Republic is ageing, as much as nearly every EU member state, and it is clear that we cannot continue to kick the can down the road.
I have high expectations from the next government. The crucial cutting off date is 2050.
We need to focus on infrastructure as well as upskilling and re-skilling for the older workforce, because it is clear that we do not have the reserves to replace them.
Finally, we need to encourage more female participation in the labour force. The Czech Republic has very low participation, as women that leave the labour market to care for children often find it hard to return. We need to motivate women and employers to facilitate their return, making the work-life balance easier.
BM: When you are thinking of work-life balance do you think of any models?
MH: Scandinavia and Benelux are the usual countries of reference when discussing successful life-work balance.
Sometimes, small traditions make a big difference. Take for instance “Free Wednesdays” in France, when women are able to leave Wednesday out. Everyone is managing somehow. It’s a small tradition that makes a big difference.
Brussels Morning: The Czech Republic’s economy has surged to the level of Spain this year, with a wide, sophisticated and diversified industrial base. Is the Czech Republic’s infrastructure and industry ready to make a leap towards electrification and decarbonisation? And is the cost of this transition seen as a threat to convergence, just like the Euro?
MH: The Czech Republic is getting rich in terms of GDP per capita, which is key for redistribution. We see convergence as a key EU objective.
We all know that an internal market requires convergence. But despite the Czech Republic being rich “on average,” our infrastructure is not comparable to Spain or Portugal.
Of course, we share common objectives of low emissions, but we cannot forget the objective of convergence.
If you look at the “Fit for 55 package” in terms of estimated cost of investment for carbon neutrality, there are now common assessments of the cost it will entail. From Commission “leaks”, we know that it would require investment in infrastructure to the tune of 3.8% of GDP per year, on average. For the Czech Republic it would be double that.
So, when you talk about distribution of funds for convergence, you need to look not only at infrastructure, but also on the level of investment. In some places, investment requirements will be just 2.5% of GDP.