Slovenia just qualified in its attempt to get into the Eurozone – and just in time too: its 01.01.09 entry date had been agreed upon before the economic winter that began in September 2008. Hungary would have probably given its last paprika to have achieved the same ‘just-in-time’ membership, but matters economic in Budapest were falling apart a good two years before Hurricane Lehman blew in. As for the Czech Republic, the best behaved and the best positioned of the three central European states, regarding their entry to the Eurozone, they “could’ve, should’ve but didn’t.”
There is a gritty sense of independence about the Czechs, most likely a hangover of the fact that throughout history, they have regularly been told what to do by overbearing authorities from Berlin, Vienna and now (they fear) Brussels and Frankfurt. These ‘persuasions’ have usually been against the Czech will and often against their best interests. As if to illustrate this, the Czech Republic is now the only country of the EU 27 not to have signed the Lisbon Treaty, even if it is almost impossible to imagine that they will have to ‘give in’ and sign sometime in 2010.That said being a full member of the Eurozone will probably have to wait three more years.
As of now, both Parliament and the Constitutional Court have told the President to ‘sign’ the Lisbon Treaty, but Kontrarian Klaus, aided by some disgruntled Eurosceptics on the right of the ruling party, is playing “hard-to-find-the-pen”.
Some Czechs might bridle at this comparison (especially in the light of recent history) but there is also a lot North German reserve in their national make-up. (At the risk of having caused offence, I say this as a high compliment!) They didn’t overborrow in the run-up to the recent down-turn – no Swiss Franc mortgages for the burghers of Prague. (Or was this not so much Czech caution but remembering the burnt fingers of a late 1990s banking crisis that did cost them 6% of GDP?!) Their trade account is normally in surplus; what turns it into a current account deficit is the dividend outflows to the foreign car assemblers (mainly German) who dot the Czech Landscape and who – as in Hungary and Slovakia – represent the backbone of Czech industry. Their privatisation campaign post-1989 was probably the most comprehensive any country ever pursued revealing their essential bias towards an economy which is more private sector and less public sector than most of its former Eastern Bloc peers. Noticeably, when the Iron Curtain was ripped apart, of all those nations that emerged from behind that twisted drape, the price structure of Czechoslovakia (now two countries, not one) was most in line with countries to their west. If you need a mathematical representation of how well behaved the Czech Republic is, consider this: their “not-yet-in-the-Eurozone” interest rates are at 1.25%, only 25bps above the Eurozone’s rate yet some 550bps below the rates of the “have-a-go” Hungarians.
Let’s get the boring but important bits out of the way. Excepting for the growth rate of -4% this year, Czech is in great shape, all things considered. As the low interest rate suggests, inflation is contained under 2%. Debt – unlike in Hungary – is not an issue so Czech is far from needing an IMF programme. The banking system (nearly 100% foreign-owned) is very sound (helping boost the multiplier effect of the fiscal stimulus), although public finances will blow out this year and next to a low of a 6% deficit; overall, this recession will shift the govenment debt ratio from 30% to 40%, still not in any way excessive. A trade surplus and a small current account deficit mean there is little downward pressure or even risk on the Czech Koruna. Unemployment will rise but not to dangerous levels.
Bottom line, Czech is in a lot better shape than many (most?!) members of the EU and even Eurozone. This makes them a very weak ‘convergence play’, so much of its future prospects may already be in the price (FX, bonds and equities).
I wonder what is going through Vaclav Klaus’s mind at the moment as he considers taking the Czech Republic into ‘Lisbon’? The Groucho Marx quip – “I would not want to be the member of any club that would want me as a member” – comes to mind. In some respects, the Czech Republic is far too good for the “average EU”.
But Czech has little option longer term but to get on board the Eurozone “Express”. The big question it now faces is can it help reinvigorate this anything-but-Express Puffing Billy?!