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The Czech Republic

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1) REFERENCES

Commission Opinion [COM(97) 2009 final - Not published in the Official Journal]
Commission Report [COM(98) 708 final - Not published in the Official Journal]
Commission Report [COM(1999) 503 final - Not published in the Official Journal]
Commission Report [COM(2000) 703 final - Not published in the Official Journal]
Commission Report [COM(2001) 700 final - SEC(2001) 1746 - Not published in the Official Journal]
Commission Report [COM(2002) 700 final - SEC(2002) 1402 - Not published in the Official Journal]
Commission Report [COM(2003) 657 final - SEC(2003)1200 - Not published in the Official Journal]
Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

The July 1997 Opinion considered that it was too early to decide on the Czech Republic's participation in the euro area immediately upon its accession. If it were to participate in the third stage of economic and monetary union (EMU) while not being a member of the euro area, this should not pose a major problem. However, the Opinion requested that the legislation on the Czech central bank be made fully compatible with Community requirements. The priorities listed in the Opinion included reinforced privatisation and competition in the banking sector. It also considered that, as regards the free movement of capital, the remaining restrictions, particularly those on the purchase of real estate by non-residents, could be removed without difficulty.

The November 1998 Report stressed that only slight progress had been made in this sector.

The October 1999 Report made the same comment. Certain measures were adopted during that period, in particular concerning privileged access by public authorities to financial institutions, the independence of the Czech National Bank (CNB) and the privatisation of banks.

That view is echoed in the 2000 Report. Little progress had been made with regard to the prohibition of direct public sector financing by the central bank. However, the Report noted that the Czech Republic was already largely in line with Community law as regards the prohibition on privileged access by the public sector to financial institutions.

In its November 2001 Report the Commission noted that considerable areas of the acquis relating to EMU had been adopted but that significant gaps still existed.

The October 2002 Report noted that the Czech Republic had completed the alignment of its legislation to the acquis relating to EMU.

The November 2003 Report finds that the Czech Republic meets the commitments and requirements resulting from the accession negotiations relating to EMU.
The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The third stage of EMU began on 1 January 1999. This date entails far-reaching changes for all Member States, even those not forming part of the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the Stability and Growth Pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to have liberalised capital movements.

Member States not forming part of the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common concern by all Member States, who must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must in due course comply with them on a permanent basis.

EVALUATION

The 1998 Report notes that the framework necessary for the functioning of a viable market economy is broadly in place in the Czech Republic, which can be considered a viable market economy. However, various improvements remain to be made. In 2000, the Czech Republic reached a high degree of trade integration with the European Union (EU). Small and medium-sized enterprises (SMEs) employ 56% of the working population and generate 53% of gross domestic product (GDP). In 2001, average per capita income expressed in purchasing power terms was 57% of the Community average. About 80% of GDP was generated by private companies. The Czech economy has become an attractive market for foreign investment.

The 2003 Report notes that, in general, the Czech Republic has maintained macroeconomic stability but that the public finances have deteriorated. The rate of unemployment had been reduced in the preceding three years, reaching 7.3% in 2002, but the trend reversed in the first quarter of 2003.

Regarding economic activity, growth slowed down in the Czech Republic in 1997, with GDP growing by only 1% over the year compared with 3.9% in 1996. In 1998 the Czech economy tipped into recession and real GDP declined by 2.3%, deteriorating further in 1999. In 2000, for the first time after three years of recession, the Czech economy showed positive growth of 3.3%. In 2001, GDP grew at a rate of 3.3%, although the rate of increase slowed down over the course of the year. The devastating floods of August 2002 will probably have a negative impact on the economic growth of that year, although their overall impact on the economy cannot yet be measured. The average growth of 1.1% over the period covered by the reports is the result of two years of declining activity (1997 and 1998) followed by an upturn.

The 2003 Report notes that the GDP growth remained at 2% in 2002 despite the floods, the strengthening of the Czech koruna and the decline in foreign demand.

Regarding the public finances, the budget was in deficit in 1997. Although the aim was to achieve a balanced budget by 1998, the national budget ended the year with a deficit of about 1.5% of GDP. The deficit was 4% in 1999 and 4.2% in 2000. The deficit recorded for 2001 is 5.5% of GDP and is anticipated to rise to 6.6% in 2002. At the end of 2001 government debt rose to 23.6% of GDP from 13.7% in 1998. These figures do not completely reflect the reality of the debt, given that they take account of only part of the debt of the institutions responsible for the process of economic transformation. The 2002 Report noted the reluctance to undertake a general reform of expenditure, which led to this deterioration in public finances.

The 2003 Report finds that the general government budget deficit amounted to 3.9% of GDP in 2002 and 6.7% of GDP if the activities of the Czech Consolidation Agency are taken into account. The constant deterioration in the budget deficit prompted the government to propose measures intended to reduce the deficit to 4% of GDP for 2006, as compared with the 7.6% forecast by the Czech authorities for 2003.

The slowing down of inflation has been a positive development. Having peaked at 13.4% in February 1998, the rise in prices was then reduced. At the end of 1997 the CNB made a significant change in its monetary policy, abandoning the policy of targeting money supply in favour of setting explicit inflation targets. Inflation continued to fall in 1999 and consumer price inflation fell as low as 1.8%, although it has risen again recently. The rate of inflation climbed to 3.9% in 2000 and 4.5% in 2001. Inflationary pressures were contained in the first half of 2002. However, over the whole period, inflation fell considerably. It dropped to 0.1% in 2002, i.e. below the lower limit of the margin fixed by the monetary authorities.

Although there is no longer any explicit exchange-rate policy or target, the Czech koruna has been in a managed float against the German mark since mid-1997 and against the euro since 1999. This policy is aimed at avoiding excessive volatility. Nonetheless, the value of the Czech koruna has fluctuated considerably since then. The CNB sought to limit the koruna's instability in 1999 but succeeded only partially. The 2001 Report noted that, in an environment of strong foreign capital inflows, the Czech koruna continued to appreciate against the euro. This strong appreciation from the end of 2001 led the government and the central bank to adopt a package of measures to halt this trend. The current monetary and exchange-rate policies have had a positive effect on the economy.

The reduction of the trade deficit also led to a considerable improvement in the current-account balance. The current-account deficit narrowed significantly from 6.1% of GDP in 1997 to 2% in 1999. This improvement is due chiefly to a reduction in the trade deficit. In 2000 the situation changed and the current account recorded a deficit of 4.8% of GDP, increasing to 5.5% in 2001. It fell to 3.5% of GDP in 2002.

Regarding structural reform, measures announced in 1997 were the main impetus for economic reform. The reforms proposed included privatisation of the remaining state-owned banks and companies, improvement of the general business environment and stronger action against economic and financial crime. In 1999 the Czech Republic continued its structural reform with the ongoing reform of the banking sector, in particular through the preparation of privatisation of the remaining large banks. In addition, the Government has been seeking to tackle the remaining problems in the enterprise sector. The length and seriousness of the economic recession has shown that structural reform in the Czech Republic has been insufficient. The 2000 Report noted that the Czech Republic had speeded up its structural reforms. Tax reform had become a political priority. The assessment of the 2001 Report was that progress in the area of structural reform had been mixed. The government embarked on reform of the pension system and the privatisation of the banking sector was completed in 2001, after a long and costly process. The 2002 Report noted that the privatisation process was close to completion but some strategic enterprises in the corporate sector were still awaiting a change of ownership. The 2003 Report finds that the Czech Republic has continued to make headway with the reform, but with less determination. The Commission considers that more deeply-seated and wider-ranging reform must be undertaken with regard to welfare provision, pensions and health care.

Regarding the independence of the central bank, no amendments were made to the legislation on the central bank in 1998. The legislation on privileged access of the public sector to financial institutions is already in conformity with the acquis but the legislation on the central bank still allows short-term credits to be granted to the government. The 2000 Report noted that the amendments to the law on the independence of the central bank were incompatible with the Treaty in the provisions on the central bank's budget and the setting of the inflation target in agreement with the government. Amendments were adopted in 2001 on the prohibition of direct public-sector financing by the CNB, which prevent it from granting short-term credit to the government. However, they fail to ensure the independence of the central bank regarding its budget, the rate of inflation and exchange rates. In March 2002 the Parliament amended the law on the central bank in order to align it fully on the acquis. With regard to the central bank's independence, the changes guaranteed its conformity with the acquis in the area of financial, personal and institutional independence. The constitution has also been amended to make price stability the prime objective of the central bank. The Czech Republic has thus achieved a high degree of alignment on the acquis on EMU. The 2003 Report notes that there has been total alignment on the acquis.

Regarding the negotiations, the Czech Republic has accepted the acquis on EMU. The administrative structures for the implementation and application of the acquis have been put in place. The country will participate in EMU upon accession, with the status of a country with a derogation under Article 122 of the EC Treaty. The negotiations on this chapter were closed in December 2002. No transitional provisions have been requested. The Czech Republic is generally respecting the commitments it made during the accession negotiations in this field.

This summary is for information only and is not designed to interpret or replace the reference document.

Last updated: 15.03.2004
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