Czech Republic. The return to Europe

20.12.2013 | Ivan Vorontsov

In 1913, the Czech lands were the most industrialized and the wealthiest part of the Austro-Hungarian Empire. Czechoslovakia in the times of the First Republic (1918-38) became the 2nd best country in Europe after Switzerland in terms of standards of living and was the worlds 10th largest industry. The German occupation during WW II was accompanied by mass repressions, however, there were almost no serious battles in the Czech Republic and industry and cities in the country suffered much less than Polish, Ukrainian, Hungarian or German cities... If it was not for the communists, we would now be the wealthiest country in Europe, say many Czechs

Even in the times of socialism, Czechoslovaks lived relatively well, let along in comparison to Poland or the Soviet Union. However, after the Velvet Revolution the natural desire of the majority of the population was to return to the free, civilized and prosperous Europe. The Czech Republic managed to go along this path without major hassles and shocks, peacefully split up with Slovakia and avoided hyperinflation and massive unemployment. The key achievement was the successful modernization of industry with the help of foreign investments. The Czech Republic has the largest share of people employed in industry among all EU countries 38% (accounting for 35% of GDP, 62% are employed in the service sector and only 3% in agriculture). In 1993, Prague signed an association agreement with the EU (in force since 1995) and on May 1, 2004 it became a full member. Since 2007, it has been a part of the Schengen zone and since 1999 a member of NATO.

Against the background of the current situation in Ukraine one has to wonder: how did the EU help its future members to prepare for membership. Direct financial support was relatively low: in the 1990s the Czech Republic received 476 mn. In 2000-03, it received 151 mn. In total 627 mn, adjusted for inflation, which is near 1 bn in terms of current purchasing power, or 100 per every Czech citizen. The money has been spent primarily on restructuring of the banking system, the agrarian sector and modernization of roads.

After accession to the EU, the Czech Republic received much more: 9.75 bn in direct subsidies directly from the EU budget in 2004-12, plus approximately 29 bn in subsidies from structural funds. But the main thing was not the assistance, rather the European integration of the countrys economy. EU countries account for 82% of Czech exports and 70% of imports. The Czech Republic has a positive trade balance (+ 11-12 bn a year), so the possibility of free trade with its EU partners is the most important economic factor.

At the same time, the Czech Republic, which is not a member of the eurozone, profitably uses a floating exchange rate of the national currency - the Czech koruna. For example, in November, the Central Bank intervened devaluating the koruna by 7%.

The hi-tech industrial products account for the lions share of Czech exports and the most important sector in the country is the automotive industry. Including subcontractors, it accounts for approximately 20% of total industrial production of the Czech Republic that employs 110,000 workers that produce nearly 1.2 mn cars a year. The secret of success is foreign capital and technology. Back in 1991 Skoda, which produced outdated and unrealiable Favorit cars, became a part of the Volkswagen concern. Under German leadership factories were completely modernized. Production increased by more than 5 times (172,000 in 1991, 949,000 in 2012) and today more than 90% of the cars is exported.

In local pubs some so-called patriots complain that Skoda is not a real Czech car any more, but simply a Volkswagen with a slightly different body. From the technical point of view that is true, but the Czechs did not have their own resources to create competitive vehicles in the 1990s and an alternative to the merger with Volkswagen would have been the fate of Trabant or Tavria. Also, since 2005 the Czech Republic opened the new TRSA factories (a joint venture of Toyota and French SAR producing mini vehicles, 215,000 in 2012, 99% of which are exported) and plants belonging to the Korean company Hyundai.

On the background of the obvious benefits of EU membership, the following fact seems paradoxical: Euroskeptic sentiments are most popular among all the newest members of the EU.

The dismantling of communism brought us freedom and sovereignty. Our gradual approach to the European Union was a process with much different characteristics than the first one, said one of the Euro-skeptics and former Prime Minister and President of the Czech Republic Vaclav Klaus.

Why? There are several reasons. The first is economy: over 20 years (1989-2009) the standards of living of Czechs improved twofold. But in recent years, due to the global financial crisis the economy has been teetering between stagnation and recession (the reverse side of dependence on exports), while the average actual incomes of most people are falling (by 1.3%).

The second reason is cultural and psychological. 20 years ago many Czechs recalling the pre-war prosperity hoped to banish Russian occupiers and the Communists. In a couple of years we will live like Austrians and Germans. But the country is still far from it. While the level of incomes of successful individuals managers, business owners is on par with their Germany peers, the difference in the welfare of the common people is still quite significant. Though the cost of living in the Czech Republic and Germany is practically the same, a Prague saleswoman earns 450 amonth, while a saleswoman in Berlin earns 1,250 a month.

Be that as it may, according to most political experts, there was and still is no alternative for the Czech Republics membership in the EU. On the other hand, the countrys joining the eurozone in the near future is unlikely. The Czech koruna is stable and solid and the government, which obligated itself to adopt the euro by signing the agreement to join the EU, is constantly postponing the transition. The deadline was set for 2010, but now it is planned for 2019.

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