The Czech Republic’s steadfast commitment to cautious economic management amid a worsening global outlook has won it a further credit rating upgrade and has increased the credibility of policymakingIt has happened almost imperceptibly, but the Czech Republic is ceasing to be seen as an emerging European economy
It has happened almost imperceptibly, but the Czech Republic is ceasing to be seen as an emerging European economy.
While its neighbours struggle with intractable foreign currency debt burdens and high levels of public debt, Czechs are starting to get used to the idea that the koruna is becoming a safe haven currency for nervous investors. And with its economy more closely integrated into its German neighbour’s than any other in the region, the Czech Republic’s path through the looming crisis looks very different from Hungary’s or Poland’s.
Much of the credit is due to years of cautious economic management from policymakers such as finance minister Miroslav Kalousek. He is quick to share the credit with his government colleagues, adding that his single biggest achievement this year was the austerity budget. "We managed to generate savings of the order of 2% of GDP," he says.
Kalousek, a former Christian Democrat who later became a founding member of the fiscally conservative Tradition Responsibility Prosperity 09 party, insists that it is vital to continue to push through a package of cuts and structural reforms, even at a time of sluggish growth and mounting concerns over the future of the eurozone. “I do expect political pressure, but it is not going to be anything that I have not experienced before,” he says.
Introducing a funded pension system at a time when government revenues are under pressure was a bold move; it was still bolder to compensate for the income lost by hiking VAT from 10% to 14% when household budgets are under strain. But Kalousek insists that “postponing again and again any required structural reforms” is not an option. “Reforms and austerity policies must be introduced as long-term measures, without taking into consideration any short-term fluctuations.”
This determination was recently rewarded with an upgrade of the Czech Republic’s sovereign debt rating by Standard & Poor’s to AA-, bringing its rating into line with Japan and China at a time when many other countries in the region are fighting to ward off downgrades. Although Kalousek was keen to stress that the significance of the upgrade “should not be overestimated”, he added that it represented “yet another signal confirming the higher credibility of the Czech Republic”.
Of course, close integration with Germany’s economy has its downsides: with disappointing economic news from Europe’s core economy, Kalousek all but concedes that his previous 2.5% growth forecasts will have to be revised down when the government issues its latest forecast next month. He adds that the uncertain eurozone growth outlook highlights the need for the Czech economy to grow its trade links with emerging economies in an effort to diversify its export base.
But Europe remains a priority, even at a time of great uncertainty, as does eventual membership of the single currency. “It goes without saying that the eurozone will be different after the crisis than before it... It is in the interest of the Czech Republic to partake in discussions on the future of the eurozone and to adjust its decision about the date of joining it depending on the success of such discussions,” he adds.