The government’s national economic council, NERV, ended its activities on 14 September, but it is offering the Czech Republic a new beginning. In its final report, the group of volunteers from the ranks of economic experts is trying to give the Czech Republic what it has been missing at least since the country entered the European Union: a vision.
Not long before the 20th anniversary of the Velvet Revolution, the council’s final report gives the country a crucial decision on its future direction.
“The report compares the Czech economy to Finland’s as an example to be followed, and to Hungary’s as a deterrent example,” Pavel Kohout, an analyst with the consulting company Partners and a NERV member, told Aktuálně.cz when summarizing the objectives of the report.
NERV wants to offer its report for use to political parties because, according to the council, it will be mainly up to the sides which direction the Czech Republic takes.
NERV says that, as Finland does, the Czech Republic should opt for savings, curb corruption, and focus on innovative segments with high value added.
But let’s remind ourselves first why the Hungarian way is the deterrent.
Strict diet follows filling Hungarian goulash
To put it simply, it is the story of a country that was unable to give up living beyond the means of its “goulash capitalism”. Living on credit quickly became unsustainable in the current economic crisis, bringing the country to the verge of bankruptcy.
Hungary therefore needed help from the International Monetary Fund, which, however, conditioned its aid by huge cuts and reforms.
Czech public finance is starting to show “Hungarian” symptoms as well.
“It has become apparent that our government expenditures are based on a growth of 6% or 7%,” NERV member Michal Mejstřík, a professor of economics at Charles University, told Aktuálně.cz. “And that still would not be enough. We are eating up future income as if there were no crisis.”
“So, even under optimistic forecasts, our fiscal policy is unsustainable in the long run,” he added. “Nobody paid attention to that, and the current recession has only uncovered that fact.”
Finland, by contrast, offers a completely different story. Many years ago, it managed to take advantage of a deep crisis to start its way to prosperity. It began in the 1990s, when the country was hit by three disasters.
First was a cyclical decline in wood processing and the paper industry, on which Finland depended to a great extent. Second, the collapse of the Soviet Union and the subsequent deterioration of the extraordinary business relations that Finland had with that country. And third, Finland experienced a banking crisis at that time.
Finland’s advice: Change the subject
So suddenly a combination of problems emerged that could knock the country on its back. “But Finns found a solution,” said economist Miroslav Zámečník, who recently travelled to Finland, along with Mejstřík and fellow NERV member Tomáš Sedláček, of the ČSOB bank, at their own expense to gain experience.
“Finns then found out that their previous sources of incomes had been exhausted and that they would have to start doing something else,” Zámečník said. “They introduced huge investments in science, research and education,” he added. “These were their only priorities: They decided to cut all other expenditures.”
He admitted, however, that even Finland has been hit by the crisis as other small economies have and that its GDP dropped by more than 9% in the second quarter of this year.
Nevertheless, over a decade, Finland managed to settle half of its government debt from budget surpluses at a time when the expanding Czech Republic was accumulating bills. Nokia, which sells 40% of the world’s mobile phones, then became a symbol of the new Finnish economy. And the Finnish education system ranks among the best in the world.
NERV is facing us with a choice between Hungary and Finland during what experts describe as a decisive moment.
“We are about halfway to the Hungarian scenario,” Raiffeisenbank economist Aleš Michl said, and Finance Minister Eduard Janota agrees. According to Michl, real problems may yet come to the Czech Republic.
“Growing unemployment, debts and packages fading away,” said Michl, the author of the website verejnydluh.cz, which shows how Czech public debt is rising every second. “These are the three main figures suggesting that a fall could return. If politicians do not come to their senses, we could get the worst of it next year or the year after next.”
Czech economy in recession, politics in crisis
The consequences that everyone would have to bear would then be much harder than the costs of necessary reforms today, Michl said. “We can get stalled for five or 10 years,” he said. “Pensions and the salaries of public servants would not increase because there would be no money for that. The same would go for government orders.”
But the starting position for the Czech Republic to avert the Hungarian scenario is not bad. Unlike the Baltic countries with 20% slumps, the Czech economy is decreasing at a pace of about 5%.
“So what we are facing today is not any big crisis, but unwillingness to deal with problems that we will have to take on anyway,” Michal Mejstřík said. “We are really bringing the crisis about,” he added.
A possible turn toward the Finnish scenario would require political will, however, which is why it won’t be that easy under current conditions. One of the reasons is that Finland, unlike the Czech Republic, ranks among the countries with the lowest corruption rates, so lobbyists there do not win over public interests as often as they do here.
“Fighting against corruption in the public sector is therefore another important point in our final report,” Kohout said, “because the macroeconomic dimension of corruption-related costs is huge.”
Politicians’ willingness to curb corruption, however, is as little as their readiness to cut costs – and to explain why it is necessary to tighten one’s belt following the vision of a clear objective. But, thanks to Finland, NERV has a convincing answer to that now.
“It is not easy, but we can see that it is possible,” Kohout said.
What is NERV proposing?
• The introduction of five-year expenditure frameworks for individual ministries, which would be set by law
• Sanctions for ministers and their deputies who fail to comply with these frameworks (they would lose as much as 20% of their salaries)
• Reinforcing the roles of the Finance Ministry and national budgetary policy
• Cutting the costs of motorway construction, which are overly high in the Czech Republic
• Bringing the reduced VAT rate (now at 9%) closer to the basic rate (now at 19%)
• Raising property taxes
• Tax relief to boost the hiring of people newly entering the labour market and of the elderly
• The revision of social benefits, which should stimulate job hunting and training
• The introduction of alternative employment types, such as shorter working hours