Category Archives: Czech Republic

Czech Republic, Slovakia

Why is the Slovak economy doing so much better than the Czech economy?

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Former Czechoslovakia is very much in the news this month, with January 1 marking the 20-year anniversary of the split into the Czech Republic and Slovakia, and with the upcoming Czech presidential election.slovakia flagczech

But one of the more interesting questions in 2012 and in 2013 has been the variance between the Czech economy and the Slovak economy.

Given that the Czech Republic, which still uses the koruna as its currency, retains full monetary policy independence, and that Slovakia has been a member of the eurozone since 2009, you might expect the Czech economy to be in a better position, given that Greece, Spain, Italy and other countries in Europe have suffered greatly from being shackled through their membership in the eurozone.  That seems especially true considering that the eurozone’s one-size-fits-all monetary policy was too loose for the eurozone periphery before the 2008 financial crisis and now seems, despite European Central Bank president Mario Draghi’s best efforts, too tight today.

Yet the result is exactly the opposition — the Czech economy, growing at a relatively weak 1.7% in 2011, fell into a shallow contraction in 2013, while the Slovak economy continues to grow — 3.3% GDP growth in 2011 and around 2.5% growth in 2012.

So what explains the difference?  I see three dynamics in particular:

First, given that Slovakia was always less developed than what’s now the Czech Republic, there’s simply more low-hanging fruit.  The Czech economy (in PPP terms) is $286 billion, while Slovakia’s economy is just $132 billion.  On a per capita basis, Czechs, with a GDP per capita of just over $27,000, are still better off than Slovaks, with a GDP per capital of just over $24,000.  But that’s not such an incredible gap, and so I’m not sure that necessarily explains the disparity in GDP growth.

Secondly, and this is probably related to the first point, the relatively recent entry into the eurozone has likely boosted the Slovak economy in the short term, reducing the transactions costs of trade with the rest of western Europe, upon which both Slovakia and the Czech Republic depend for much of their export growth.  The Slovakian automobile industry, in particular, continues to fuel the country’s export strength.

Finally, we can look to economy policymaking — while the center-right Czech government has been focused on budget austerity, the social democratic Slovak government has been much more liberal with respect to using government as a tool to boost growth, despite the fact that both countries carry a public debt of a bit over 40% of their respective GDPs.    Petr Nečas, the Czech prime minister since 2010, and the leader of the Občanská demokratická strana (ODS, Civic Democratic Party) that dominates the center-right governing coalition, has faced massive protests in the face of an austerity program that’s features not only tax increases, but painful spending cuts and reductions in government services.

Conversely, although Slovakian prime minister Robert Fico, the leader of the Smer – sociálna demokracia (Smer-SD, Direction — Social Democracy), has pursued tax increases since taking power in March 2012 on a wave of discontent over austerity.  A previously flat tax of 19% will become a little more progressive, with an upper limit of 25% for the wealthiest taxpayers.  Meanwhile, his government has attempted to shield the poorest Slovakians from additional spending cuts (and conceivably, they are the economic actors most likely to benefit from — and spend — each marginal euro of support from the government, thereby boosting aggregate demand).  Fico has furthermore boosted budgetary funds for transport infrastructure and for equalizing educational opportunities throughout all regions of Slovakia.

It’s also worth keeping in mind that unemployment remains much higher in Slovakia — around 14%, nearly doubling the rate of between 7% and 8% in the Czech Republic, and it’s even worse among the poorer eastern parts of the country and among the disadvantaged Roma minority group.

GDP growth is not the only factor that determines the economic health of a country, and the Slovak government has not been successful in eliminating what appears to be a longstanding structural unemployment problem — at its lowest just before the 2008 financial crisis, the Slovak rate was 8.8%.

Photo credit to Kevin Lees — photo taken in Prague in December 2005.

Czech Republic

Czech prepare for first direct presidential elections

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Unlike most countries with a parliamentary-based prime minister as head of government, the Czech Republic’s president holds more than ceremonial powers — and that makes this weekend’s Czech presidential election, the first direct election by voters of the Czech president in the post-Soviet era, a bit more important than a ceremonial formality. czech

Two candidates, Jan Fischer (pictured above, right) and Miloš Zeman (pictured above, left) are largely seen leading the nine-candidate field.  Following the first round, to be held Friday and Saturday, the top two candidate will compete in a runoff to be held on January 25 and 26.

The Czech president has the power to veto bills passed by the Czech parliament as well as the power to appoint judges to the supreme court and the constitutional court, as well as members of the Czech national bank and members of the office that implements the national budget.  In many instances, the Czech president and the Czech prime minister act as co-executives, especially with regard to matters of foreign relations.

In addition to the unique Czech constitutional framework, however, it’s worth noting that since the emergence of Czechoslovakia from behind the Soviet-dominated Iron Curtain and the peaceful dissolution of Czechoslovakia on January 1, 1993, two incredibly forceful personalities have held the office of the Czech presidency:

  • Václav Havel, president until 2003, a former playwright and author and public intellectual whose dissident efforts began with the Prague Spring in 1968 and who was jailed several times in the 1970s and 1980s by the Soviet-controlled communist Czech government.  His moral authority and his widespread international respect gave him an incredibly broad platform as president.
  • Václav Klaus, who succeeded Havel and who will leave office this year (amid a bit of scandal over presidential clemency), is an outspoken conservative who founded the Czech Republic’s main center-right party, the Občanská demokratická strana (ODS, Civic Democratic Party), and who served as prime minister from 1992 to 1997.  As president, he’s taken strong stands in favor of limiting European Union power as one of the loudest critics of the EU’s 2007 Lisbon treaty (though he ultimately signed the treaty, allowing it to go into effect in 2009).

So as voters head to the polls in the first presidential election of its kind in the Czech Republic (Havel and Klaus were selected indirectly by the Czech parliament), it’s worth noting that the next Czech president will likely play an important role in Czech and European affairs alike.

Fischer, who until recently led many polls throughout the muted campaign, would be the Czech Republic’s first Jewish president (and, indeed, the world’s first Jewish head of state outside of Israel).  A soft-spoken statistician, he headed the Czech Statistical Office from 2003 to 2009, when he was selected as a technocratic, caretaker prime minister after prime minister Mirek Topolánek’s center-right government fell in March 2009 through the 2010 elections.  He is widely admired for his performance as prime minister, which included measures to protect the Roma, a minority group persecuted by Czech right-wing extremists.  In the presidential race, he has been criticized mostly for his membership in the Czech Communist Party during the Soviet era, and Fischer has apologized for that, despite claiming that he became a member only in order to keep his job in government.

Zeman, who until 2009 belonged to — and once led — the Czech Republic’s main center-left party, the Česká strana sociálně demokratická (ČSSD, Czech Social Democratic Party), is as sharp-elbowed and brash as Fischer is mild-mannered, and he has narrowly begun to eclipse Fischer in the polls after being widely seen to have won a debate earlier this month.  He lost the 2003 presidential election to Klaus after serving as prime minister from 1998 to 2002, and he left the ČSSD four years ago to form his own party, the Strana Práv Občanů – Zemanovci (SPOZ, Party of Civil Rights — Zemanovci).

Ironically, Fischer and Zeman outpace the actual candidates of both the ODS and the ČSSD.

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