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Central and Eastern Europe towards the EU and NATO: The Czech Example

English Pages, 23. 9. 1997

It is a great pleasure for me to be here and to combine this presentation with my today’s official visit to Denmark. It is not my first speech in Denmark, my first speech in this country was given several months before the Velvet Revolution at the University of Aarhus where I tried to outline some of the possibilities for a future reform of a centrally planned economy and society. I spoke for the second time here in Denmark during the UN Social Summit in 1995 where I tried - in a visible discrepance with the majority of speakers - to argue that there is no better way to solve social problems than to guarantee economic growth. My third speech was given on the same day but to a totally different audience - it was my acceptance speech for being awarded the Adam Smith Prize by the Adam Smith Institute.

Talking about the current situation in the Czech Republic, I do not think I will be in contradiction with my three previous speeches in this country. The Czech Republic has been undergoing the most rapid political, social and economic transformation and has achieved the position where we can - with sufficient confidence - apply for a membership in the European Union and NATO.

In the political sphere, the Czech Republic has already a sufficient degree of political pluralism and a very strong parliamentary system with six clearly and transparently defined political parties represented in the parliament. The political system is already very European, with all well-known pluses and minuses of proportional election system and of coalition governments. The current government has - after 1996 elections - only a very small majority, but the current political leaders in my country have been in charge of the country without interruption since the fall of communism which is very unique, not only in the post-communist world.

Economically, rapid liberalization, deregulation and privatization together with an unprecedented speed and scale in opening the economy to the rest of the world created a totally different economic system which - in most of its aspects - resembles the economic system of Western Europe. Nevertheless, the markets are new and weak, the newly formed or privatized firms are in the process of radical restructuring and modernization. Until very recently, we supposed that we can smoothly continue our transformation and economic development but we should have known that any economy - especially the transforming economy - is very vulnerable to all kinds of economic impulses and disturbances. As a result of it, we have been going through a very turbulent year of 1997.

To understand the current problems, we have to return back. The transforming economy had to go through two different stages. The first one, in our country between 1990 - 1992, was a period of economic decline, of the inevitable and healthy shake-off of all economic activities connected with the old economic system which could not continue in a market economy with flexible prices and with unsheltered markets. The economic transformation had non-zero costs, and there was absolutely no way to keep the previous GDP and living standards and to start adding to it immediately. The utopists of all kinds and colours have been dreaming about this but it is not possible as it has been proved in any transforming country. The industrial output went down by one third, the agricultural output by one quarter and GDP by one fifth. The external equilibrium of the economy was very easy to achieve - exports grew much faster than imports (because of the lack of domestic demand) and foreign capital was flowing into the country.

The second stage, which started in 1993 and lasted utill 1996, was a period of relatively rapid economic growth, reaching the highest figure in 1995 at the level of 5,9%. It was an investment-led growth with rapidly growing domestic absorption and especially demand for imports. With the loss of former COMECON markets and difficulties in penetrating occupied and protected markets in Western Europe, external imbalance started to grow and turned into an apparent bottleneck of the whole economy in 1997. Our Central Bank made a strong move to the slowing down of the rate of growth of money supply which brought the economy to a stand-still in the first month of 1997 and to only a very moderate growth in the whole 1997. The state budget, prepared as a balanced budget but assuming 5,4% rate of GDP growth, got into difficulties and we had to cut down the expenditures during the year by 5% which proved to be politically very costly. Growing political and financial instability led to a speculative attack on the Czech crown which had been from December 1990 to the spring of 1997 (around 75 months) fully stable. The May currency depreciation of about 10% led to an increased financial uncertainty and to a change of the exchange rate regime. For the past more than 4 months, we have been on the floating and do not envisage to return to the fixed exchange rate in a visible future. The slowdown of the aggregate demand together with currency depreciation changed the prevailing tendencies. Exports started to grow faster than imports again and the current account deficit has been decreasing. We hope these tendencies will continue. We are now in the middle of the state budget debate and the Czech government will send to the Parliament a balanced budget with the forecasts for 2,2% GDP growth for 1998.

We are keen on intensifying economic relations with EU countries, including Denmark. Recent statistics tell us that the degree of economic openess (measured by the foreign trade divided by GDP) is in the Czech Republic highest in Europe, with the exception of Belgium. We are interested in trade, both ways, we are interested in investments, more into the Czech Republic than the other way round. I hope Denmark and especially Danish firms and Danish private sector will be participating strongly in the Czech Republic. You are all welcomed.

Václav Klaus, Draft of the address delivered at the Annual Conference of the Confederation of Danish Industries, Copenhagen, 23 September 1997.