Jan Zizka, economic journalist with the Czech newspaper E15, offers his opinions on the greatest risks the Czech Republic faced and continues to tackle, most pressing of which is the fiscal budget. While some economic topics are covered, such as the behavior of financial markets and macroeconomic indicators of growth, the bulk of the anlysis focuses on the influence of government and other external bodies on the economy.
19 November, 2009
When the crisis first manifested, what were you and your colleagues most concerned about?
This raises the questions when was actually the first moment [of the crisis]. I have to say that in the Czech Republic, the situation was different than in some Western European countries or in the United States. First of all, we heard some news from abroad. We heard about the financial crisis, and we didn’t have, exactly, the financial crisis here. So, when the crisis started in the US, it was a big issue for us. We started to write a bit more about the foreign economic issues, etc. We had in mind the question, “How can it influence the Czech Republic”
We knew that maybe our banks were not so active in such risky assets as banks in the West, so we were quite sure that our central bankers would say, it can’t be a big problem for us. They were right. But on the other side, it was also clear that the economic weaknesses in the West can influence the Czech Economy. Which, actually, proved right and maybe the influence was even bigger than we expected for the recession was quite severe, both in the US and Central Europe. Then, we started to think more about the macroeconomic consequences, etc. The fear was that the recession could be quite long. So that was the main issue at this point in time.
You said that the banks were not conducting such risky business as in the US and Western Europe. Did you see the recession as consistent with this, or more severe than expected?
Generally, I would say the recession is more severe, that’s right, because there was still – I think many people underestimated the possible consequences of the crisis, both on the economic level, maybe in the press as well in some way. We wanted to be more critical, of course, but still maybe even for us it was surprising that it can be so severe here.
It’s true that we were quite lucky that the financial part of the crisis was not so bad, but the economic recession was more severe than expected.
At the beginning of the crisis, what role did the press play in influencing Czech confidence and mentality?
I would say that there was the discussion, to what extent the press can influence the Czech Republic when the crisis started in the US and Western Europe. The government said that the consequences would not be so big, while the more critical position of others was that we should be more aware of the risk. Maybe now I will move to the mixed media, which is closer to the political right. They were more optimistic because, also the economic journalists in newspapers said that the financial crisis will not be in the Czech Republic as it was in the West. Maybe, well, I’m not now 100% sure, but I think that some newspapers like Pravo, which is rather left wing, was more aware of some problems that could appear because they were closer to the opposition in this way. But concerning the further development, I would say that in some way, the journalists helped make the situation calmer, because, in fact at the beginning of this crisis when we had this financial crisis in the West, it was necessary not to overestimate the crisis, not to create panic. I think the economic journalists have to respect the situation and to explain the fact that the financial crisis is not influencing us directly.
Maybe the other side of the coin was that we underestimated the economic consequences.
What measures did the government set forth initially when it became clear that the recession was to occur here?
Well the reaction of the government was based on having the situation under control in such a way that we wouldn’t have a lot of panic. It’s impossible to say that they were very active in some anti-crisis measures but were passive in fact. But on the other side this was more or less correct at the beginning, because really the main aim at the beginning, before the crisis started to influence our economy, it was necessary not to create panic.
Of course afterwards, after some signs of economic consequences, the government started to be more active in some anti-crisis measures. However, I think that the Czech government was always on the cautious side – for example, within the EU, they were always telling our European partners that we don’t have to make some unnecessary measures.
Here on the economic side, but also on the side of the economic journalists, there was the fear that the EU will not react in a proper way. They would create a lot of expenses in order to deal with the crisis. We saw this as rather dangerous because, for us, the budget crisis was in some way a greater danger than the direct consequences of the crisis.
In some way I think it’s proved to be quite a relevant point because now it seems that the budget deficit coming from these anti-crisis measures can be a very negative aspect, and that now it starts to be a very important topic in many countries. I would say that the reaction of the Czech government was always more proactive than in other countries.
It’s interesting you should use the word proactive, because I perceive, just from reading current events, that they are very inactive with regards to the budget.
Right. I think it’s a paradox, because in fact we started to implement some anti-crisis measures like the reduction of the social contributions, and also, in the field of taxes, etc., which were some anti-crisis measures, and were in some ways similar to those that were worked out in other countries, but it was rather limited here in the Czech Republic.
However, the universal opinion is that we started the exit strategy earlier than some other countries. And in fact we now have the situation where some anti-crisis measures were adopted a few months ago, but we already started to remove them without having any effect, and we started to speak a lot about the budget deficit, which is actually, you are right – now they are very inactive in reducing the budget deficit – but this can be seen as an exit strategy already, rather than as anti-crisis measures.
Of course it’s up to the observer to judge. Maybe there can be different opinions on this. We started with some anti-crisis measures, but we have started to remove them and implement our exit strategy. Now our main concern is to reduce the budget deficit, but at the time, some other countries in the West said, of course we have to reduce the budget deficit, but now we still have to implement some anti-crisis measures.
What were some (more specifically) anti-crisis measures implemented here? You mentioned tax reduction…
Yes, tax reduction, social contribution; there was also a plan to have support for removing old cars; there was a plan proposed, actually proposed by the Social Democrats, by the left-wing opposition party. (It is difficult to judge who is actually the opposition because we have the non-party government, but yes, more or less the social democrats were the opposition from the government of Mirek Topolanek)
So it was this plan that was adopted in the anti-crisis measures. However, the plan was removed because with this reduction of the budget deficit for there is no money for this measure. This is another example.
Actually we started to increase taxes, which is also in the opposite direction from what was proposed in the anti-crisis measures.
Do you think the government is preemptive in decreasing the budget deficit and implementing an exit strategy?
Well it’s very difficult to answer this question. It is my opinion that on one side, our government was always right to take into consideration these budget deficit consequences. I agree with their approach not to be very active with the anti-crisis measures. But on the other side, I have to admit that it is a bit confusing because we started some anti-crisis measures, limited, but still, and we didn’t see the outcome; we have already started our exit strategy. So yes, from this point of view it is a bit confusing.
Do you think there will be enough political will and consensus to actually follow through with the exit strategy and sufficiently reduce the fiscal deficit?
It will depend a lot on the next election. Now, this non-political government is fighting for reducing the public deficit. However, these measures are for next year. Nobody knows what will happen with the budget for 2011. So, I would say that the Social Democrats, who can win the next election, might be less active in reducing the public deficit, and I see this as a threat. But on the other side, within the Social Democratic party, there are people who know that the deficit is a problem. So I think that there will be people who will fight within the government formed by the Social Democrats and within the party in the future. So it’s not really clear, it will develop in the future with further political development.
Do you believe that the next government will be able to take into account NERV’s suggestion (as published in its final report of 09/2009) to follow Finland’s example, or do you think the Czech Republic is headed in the direction of Hungary’s economy?
First of all, I have to say that the Social Democrats were never in favor of this NERV institution. So, they were rather critical to what they said, and I wouldn’t expect that they would really accept NERV’s outcomes. On the other side, there are some good economists within the CSSD as well. So, probably these economists would think about the public finances in a similar way. As I said, there can be a struggle between the populists and the economists within the party.
I would say that some measures proposed by NERV could be adopted without saying that these are the suggestions of NERV. But because of the pragmatic approach, it can be really accepted by the Social Democrats as well. We will see.
Still I think within the Czech Republic, there is a bigger awareness about the public finances problems than there was in Hungary. So I wouldn’t expect a situation similar to this Hungarian situation of a few years ago. On one side, it can seem that now already the public deficit is growing, and the public debt, etc. So the situation even now could be, according to some observers, similar to the Hungarian situation, but I think there is a big difference because Hungary had this deficit before the crisis, so they were punished very quickly by the financial markets. Now the financial markers are not so straightforward in punishing the countries with big public deficits because we see now a big public deficit in the US and the UK, and in some way in this situation of the crisis, it is maybe not normal acceptable if we want to struggle through the crisis. Now I am not speaking about my personal opinion but rather about the overall picture, how it is perceived by the relevant economists and in some way by the financial markets.
So what the financial markets will judge is the strategy for the next years, namely whether the country is able really, to reduce the deficit. And I must say, I think the Czech Republic is not so bad off in this field because still there is the chance for us to reduce our deficit if there is the political will, which of course is always the question mark; but maybe we are in a better situation than many other countries in this way.
How does that affect your opinion on the Czech Republic’s potential as an emerging market and its ability to distinguish itself among other CEE Economies?
Actually, our government wanted at the beginning of this year, for example, to make sure that we are not put in the same basket as Hungary and some other countries, which really face a very severe economic situation. So now the question is whether we want to be judged as an emerging market at all.
In some ways it can even be advantageous because after the economic recovery I think that investors would again come to the emerging markets and they will differentiate among those markets, so we will see if, for example, the situation will improve. Right now Hungary is making very important measures to deal with their situation, so maybe their situation is not as bad as it can seem right now.
But still I think that the Czech Republic can be seen as a safe emerging market. From this point of view, it can be a rather quite good situation for us. So we are not so risky, but still emerging.
And do you think that the media can play a role in encouraging this perception of the economy? How about the government?
Yes, but what I was thinking now, well, was that also the image abroad can be improved in some way. Of course, the local media cannot do very much in this regard, so maybe the newspapers like the Financial Times are better placed for this task. But what we can do is to explain what measures can be done that; for example, explain that the situation with the public deficit is to be improved, so in this way we can play a role.
The government can help if they produce a very clear strategy for next year – that we will really reduce the public deficit, and really improve the situation in public finances.
Do you think that the strategies in place are just that – clear strategies?
I would call it a clear strategy – there are some plans. But I think that the strategy should be worked out after the election because everyone will wait for the next government.
How do you think that the government or perhaps media as well, can encourage FDIs?
Now the situation with the FDIs is quite specific in the Czech Republic because we benefited very much from FDIs in the last decade, lets say. And in some way we reached the point where we reached the limits because at some point it is very difficult to attract new investment when we have quite a lot of investment here already.
In this regard we have the example of the automotive industry, which is very important for the Czech Republic now. In fact, we have three big factories – Skoda-Volkswagen, Toyota, and Hyundai. So now it is very difficult to imagine that we would attract another big automotive company to invest in the Czech Republic. I think the market has in some way reached its limits. Now the task is to rather attract very high tech investment; this can be from software firms or traditional industry with very modern technology. That’s the problem now: we have quite a lot of investment, but sometimes it is not so modern. Now the quality [of investment] is more important for us than the quantity. In this way, of course, it’s necessary for the government to show that the Czech Republic [is a suitable environment] for high technology. That we are already moving to the higher stage of modern economy, that we can support the science here, research and development, that it is really worth investing in very modern industries here in the Czech Republic; this needs support in education. Actually we have some problems in this field. There is a lot of criticism concerning our education system which I think is correct, so that’s what we have really to improve now – our education system, our system of research and development, and to show the people, the world, that we are able to modernize our economy in this way.
On the other side, I would say that it is inevitable that some foreign invest will migrate further east to the Ukraine. We just have to accept this because the work force is cheaper in the Ukraine and Asia. We will have to work more on attracting a more qualified work force. Well actually [our first task is] to improve the quality of our work force, but also to attract investment that is interested in more sophisticated things.
What do you believe are the country’s long-term risks, excluding the deficit?
Well I think I have mentioned it already. The risk is that we will not be able to improve significantly our education system. Concerning the macroeconomic situation we have also to make an important reform of the pension system and of health care, which is also related to public finances. Without reforming pensions and health care, we will have a bigger deficit in the future – even more dangerous than current deficit caused by the crisis (which is more or less manageable in a few years, I think). But without reforming the pension system and health care we will have more serious problems with the public deficit and with public finances in the future.
What business opportunities excite you most?
Research and development – to attract new industries, some strategic services let us say, high tech industries – that’s the challenge really, for the economy.
Concerning the recession: do you think a second dip is likely?
It is likely. I think there are two options and we will see which one will prevail. Either we can have a second Wave of the crisis, which is quite possible. As I said, the automotive industry is quite important in our economy, and the automotive industry was supported by some measures in Germany and in other countries where there was support for removing old cars and incentives for buying new cars. This helped our manufacturers, especially Skoda. As a result of the removal of those measures in Germany and other countries, it seems quite possible that next year there will be a new wave of the crisis for these industries. But we will see.
The other option is we will come out of recession, but growth will be very slow for a long period of time.
For 2010 – GDP growth is estimated 0-1%. What is your opinion on that subject?
I would expect rather lower, perhaps 0, maybe 1%. I wouldn’t expect a fast recovery. But, in some way, we will face consequences of the crisis, which we hadn’t been exposed to with such severity until now, for example unemployment. Now it will be very difficult to reduce unemployment. We can have recovery without reducing unemployment.
For example, in the social field in relationship to unemployment, still there can be a very difficult period extending through the next one or two years.
Czech people’s optimism [for the government and for the economy] has largely dissipated as compared to the sentiments of 20 years ago. What can people take stock in once more?
Concerning the economic situation I think the skepticism will not disappear. Especially because of the situation with unemployment, etc., which will rather grow slightly. This data will not be more optimistic in the next few years. I think it’s very difficult to find anything that will be a very big push of optimism for the people. The situation is still rather bad in this field.
What lessons has the country learned from the 90’s crunch? Has it helped in dealing with the crisis?
Yes, this experience helped with the financial part of the crisis because, as I said, we were not very influenced by the financial crisis. After the events of 90’s, the banks were privatized, they were rather cautious in moving to risky assets, they started of course to be more and more involved in loans for consumers, and this trend has been growing during recent years quite significantly.
In comparison to Western countries, the debt of consumers is lower than in the West.
We have to face the issue now because our people are not aware of the risks of various forms of loans. There is some very risky business coming to the market – some institutions which are not part of the bigger banks, but smaller financial institutions offering very dangerous loans. In fact, they want to hide to the people that it is not advantageous to accept these loans.
Concerning the macroeconomic picture, I would say the banks were rather cautious. Also, we also had an autonomous system of regulation. The Czech National Bank is still responsible for regulating the financial market, and in my opinion they are doing this job quite well. Also, the experience of the 90’s was knowledge that the Czech National Bank took into consideration; the regulation is quite good, I think.
On the other side, some people might say the problem is that we are not part of the broader European market. For the financial crisis, this was an advantage because our autonomous system of regulation actually helped make sure the financial crisis wouldn’t affect us so much.
Do you believe there will be a second wave of regulation concerning these risky loans?
Actually, that’s an interesting point because the opinion of Czech National Bank right now, and also to some extent of the government, is that there’s the risk of overregulation in the West, in the European Union within the G20 group. On one side I said the regulation is quite good here in the Czech Republic. My personal opinion is that the Czech bankers are right in making the point that the problem in the EU and in the West was not a lack of regulation, but maybe that the regulation was not good in some way; maybe it was not implemented properly. I would suggest, as the Czech National Bankers suggest, thinking about better implementation of regulation rather than regulating new businesses and other industries like hedge funds, for example. This is not so important, because actually it’s not the hedge funds that caused the crisis – it was the financial banks in the US and in the West.
I would be also afraid that in some way we would over regulate and create some negative consequences from this. For example, the Czech president would say that the problem was not a lack of regulation, the problem was rather a lot of regulation we had in a past. That’s not my exact opinion, but in some way we should think about the risk of overregulation, that’s a point that I would agree on.
How can the Czech Republic create a more suitable environment for businesses?
I think the situation concerning starting a business improved. Five or seven years ago, the situation was much more negative in this field. I expect that there can be some further improvement, but concerning the legal and business environment, I would say that there was certain progress.
For me, the main thing we should do now is to show that we can support modern technology, education, research and development – this is our main task. Concerning the business environment, we can still improve some things and think once more about our legislation. On other side we have a tax system which is in some way more transparent than it was a few years ago; we have a single tax rate both for people and for corporations. I think we can continue with improving this. I would be afraid that the left-wing government would make this system more complicated, so we will see.
Still, I think the system can be made more transparent in some way. Of course we should think more and more about the regulation impact of the legislation which is maybe the field in which the government made quite a lot of promises to assess every new piece of legislation from the point of view of the regulation impact on business. I think much more can be done in this field, so from this point of view the situation can be bettered. I hope there will be an improvement; whether it can really happen we will see.
