1. EU Hidden Triggers (Czech Republic’s experience) ALEŠ ROD 03. 06. 2016 BRATISLAVA, SK

3. Facts and basic information Czech Republic ◦Established: 1993 ◦NATO membership: 1999 ◦EU membership: 2004 ◦Area (total): 78 866 sq. km ◦Inhabitants: 10 553 843 ◦GDP per capita (EUR): 15 600 ◦GDP per capita (PPS): 23 200 ◦Unemployment rate (total): 4.1 % ◦Unemployment rate (>25 years): 9.5 % ◦Public debt / GDP ratio: 41.1 %

4. Expectations… EU Economic convergence EU funds Easy travelling Access to labor market Geopolitical stability FDIs International status Rule of Law More competences Less corruption

5. … and reality European Union membership has decreased economic costs of having “non-member” status European Union membership has increased economic costs related to excessive regulation European Union membership has brought opportunity to comment on international topics European Union membership has cut down sovereignty of the national economic policy … EU membership has many pros and many cons. These are changing in time. EU membership is not universal cure for all national diseases. “What do you do for yourself, that you may have!”

6. 1. Economic performance All Czechs were expecting a rapid economic convergence to the level of Western Europe. In current market prices, the gap between EU15 and Czech Republic is even higher today ◦CZE convergence gap 1995: + 14,300 Euro ◦CZE convergence gap 2015: + 17,500 Euro In Purchase Power Standard, the convergence of all V4 states is noticeable ◦CZE convergence gap 1995: 64 % level of EU 15 ◦CZE convergence gap 2014: 78 % level of EU 15 ◦Progress of Slovakia, Poland and Hungary is even more significant Data shows a ratio of people at risk of poverty has not been increasing ◦Czech Republic, Slovakia and Poland X Hungary

10. 2. Labor market The situation on labor market is determined especially by domestic economic factors (but also driven by demand for semi-finished products from abroad). Mobility of labor: Due to communism experience, Czechs have very low preferences to do so (persistent political barriers on international labor market do not matter here). The Czech economy has recently the lowest unemployment rate within the EU states and reasonable unemployment rate of people under 25 years (industry + services). The issue is a structure of the Czech economy – many firms uses a comparative advantage of lower wages as a key input in their business ◦Czech Republic should not be place for automated series production or fitting area for R&D ideas which were developed abroad ◦Czech Republic should be an incubator for startups, research and development, joint ventures between universities and private sector, etc.

13. 3. Fiscal situation Although the fiscal situation is not crucial question nowadays, several issues should be discussed ◦Government expenditures continuously increase! ◦Gross debt continuously increases! ◦Annual fiscal balances do not follow economic cycle! ◦Positive development of tax quota is driven rather by GDP than by systematic decrease of taxation level! ◦Growing competition among political parties motivates political subjects to political (fiscal) populism!

21. Recommendations (9) 1.A country should follow own comparative economic advantages. 2.A country should use as many opportunities stemming from international cooperation as possible, but the core of economic, political and social issues will always remain on the country itself. 3.A country should use EU funds as a complement, not substitute of own economic activity. 4.A country should project own interests and advocate them ex-ante; ex-post advocating is not feasible. 5.A country should fight against rational ignorance of voters, the Alfa and the Omega of all problems related to public choice 6.A country should invest as much effort into building “knowledge economy” as possible. 7.A country should vary about frequent legislative changes, but focus on reforms with broad political consensus and support. 8.A country should smartly work with educational system (diversification, undergraduates, inflation of university degrees, realistic job requirements at public sector, etc.) 9.A country should support the only factor systematically generating wealth: ECONOMIC FREEDOM.

22. Thank you for your attention. Ing. Aleš Rod, Ph.D. Research Director CETA – Centrum ekonomických a tržních analýz Jungmannova 26/15 110 00 Praha Česká republika ales.rod@eceta.cz +420 608 939 645 www.eceta.cz