Brussels to keep watchful eye on Czech Republic's deficit-to-GDP ratio

08-07-2004

European Union finance ministers this week gave the Czech Republic an official "slap on the wrist" for running excessive budget deficits, but have approved the Czech finance ministry's plan to rectify the situation.

Photo: European CommissionPhoto: European Commission The European Union this week launched official proceedings against the Czech Republic and five other new EU member states that are running excessive budget deficits. However, the board of Finance Ministers from the now 25 EU member states (ECOFIN) have approved a timetable put forward by the Czech Republic for reducing its budget.

Under the terms of the EU's "Stability and Growth Pact," governments cannot run a budget deficit greater than 3 per cent of GDP, nor can they have a debt ratio of more than 60 per cent of GDP. Thanks to taking on unusually high "one-off" loan guarantees, the Czech Republic last year posted a 12.9 per cent budget deficit as a percentage of GDP -- the largest of any EU country.

Professor Kamil Janacek is the chief economist of Komercni Banka in Prague and an advocate of the "go-slow" approach for new EU members in terms of reining in budget deficits in line with the so-called Maastricht criteria.

"The main task for the Czech economy for the moment is to speed up the 'catch up' with the old EU member states -- to increase GDP per head and the life standards -- and then to accelerate the structural reforms, to speed up the public finance reforms, and to digest the very complicated acquis communautaire."

Professor Janacek there was speaking to me on the margins of a conference on the implications of adopting the Euro held earlier this summer. He says that for economies in transition to run high deficits is perfectly "normal" and that the new EU members have enough on their plates in implementing the acquis communautaire -- the body of EU law, which is compiled in no less than 80,000-pages of text.

There is no need for the Czech Republic to make life more difficult by rushing to join the eurozone, says Professor Janacek - and Brussels seems to agree. This year the Czech Republic's budget deficit is likely to be 6 per cent of GDP.

But Brussels said this week it is okay with the Czech Finance Ministry's new plan to bring the deficit down below the 3 per cent mark by the year 2008, and will impose no disciplinary measures. ECOFIN noted that new EU member countries like the Czech Republic are still in transition and should be allowed greater leeway in meeting the Maastricht criteria towards adopting the Euro.

Professor Janacek agrees:

"My stance as far as the adoption of the euro for the Czech Republic is concerned is: don't hurry. And I think that the costs in the near future of the early adoption of the euro surely would outweigh the benefits. I think it is very reasonable to orient ourselves for the adoption of the euro around 2010 -- or even beyond."

Whilst agreeing with the timetable, ECOFIN will, however, be keeping a close eye on the Czech budget deficit. The convergence programme submitted by the Czech side to the EU is binding for the Czech Republic and any changes will have to be consulted with Brussels, the Czech Finance Minster, Bohuslav Sobotka, said this week.

In its report, the EU warned the Czech Republic against the difficulties posed by its aging population and called on the government to launch urgently needed health care and pension system reforms. ECOFIN also recommended that the Czech state cut wage costs in the public sector and spending at individual ministries, whilst working to adopt effective rules aimed at reducing the risks of growing indebtedness on the part of regional and local self-governments.

Last week, the cabinet pushed two laws through parliament reflecting other EU requirements, namely the inclusion of ceilings for medium-term spending in the budgetary rules and a tightening of rules for the operation of the Czech bailout agency, Ceska konsolidacni agentura, the CTK news agency noted.

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