A weekly round-up of business news, interviews and comments from leading economic experts

Photo: European Commission

Welcome to Economics Report. Coming up later in the programme, we'll examine whether the Czech lion can - or should even try - to roar like a Celtic tiger. But first, here's Daniela Lazarova with the latest economic news.

Feeling cross at the border

Photo: European Commission
Accession to the European Union was meant to signal the end of long waits for lorry drivers at the Czech borders. But some importers are actually having a rougher time getting goods through than before. Czech customs offices have been plagued by computer problems since Monday, the first work day since the "big bang" EU enlargement, as they were unable to connect into an overloaded central server in Brussels. Meanwhile, major retailers, like Vin de France, which imports French wine, have not been able to get their products onto the shelves of Czech supermarkets because of problems with customs codes. It may take some importers weeks to get their goods to market.

Disciplinary actions on budget deficits

The Czech Republic and several other countries that joined the European Union at the weekend are to be officially warned that their budget deficit levels are in breach of the 3 per cent of GDP ceiling set by the EU's Growth and Stability Pact. Aside from the Czech Republic, Poland, Hungary and Slovakia are tipped for disciplinary proceedings as are the island nations of Cyprus and Malta. Under the terms of their accession, all of the 10 new EU member states will join the eurozone this decade. The EU's new Economic Affairs Commissioner, Joaquin Almunia, told reporters it would be a "great mistake" not to apply the rules from the first instance.

Cost of living

Poland has the lowest cost of living in the enlarged European Union, according to a new report by the German government which compared prices in each of the 25 capital cities. The Czech Republic has the second-lowest cost of living of the accession countries, with prices about 27 per cent below those in Germany, while Cyprus and Slovenia are the most expensive. The cost of living index did not factor in taxes or average rents.

Czech Republic best in region for "offshore services" - survey

In other news, the Czech Republic is the fourth best location for "offshore services" in the world, according to a study released this week by A. T. Kearny, a global management consulting firm with headquarters in the United States. Elsewhere in the Central Europe, Poland and Hungary were ranked 10th and 11th respectively on the "Offshore Location Attractiveness Index". The survey praised the stable Czech political and business environment and noted successful investment projects here by multinational companies such as DHL, Accenture, IBM and ExxonMobil. The transport infrastructure and proximity to Western Europe was the biggest advantage for businesses locating in the Czech Republic, said the consulting firm.

Can the "Czech lion" become a "Celtic tiger"?

Ireland is often held up as a "European success story", a worthy model for the 10 new, relatively poor members of the European Union to emulate. Once a poor nation and net exporter of labour, the Irish economy is now positively vibrant with foreign investment pouring in along with immigrants eager to work lower-end jobs in Dublin's pubs, hotels and stores.

But how easy will it be for the "Czech lion" to emulate the success of the "Celtic tiger"? Or does the model even apply?

The Irish flag
John Fitzgerald from the Economic and Social Research Institute, an independent think-tank based in Dublin, says that before trying to follow Ireland's example, the new EU members should first learn from its mistakes.

"The Irish economy has done well in the last few years. But I think the interesting thing about Ireland is not what it did right but what it did wrong. Some of the lessons to be learned from Ireland are: you should invest in education — Ireland didn't in time. And I'd say remember investment in human capital and training. Alright, your educational systems are already reasonably good, but human capital is extremely important."

The Irish path to success got off to a rocky start. After joining the EU in 1973, Ireland actually experienced an economic downturn for nearly two decades, as some traditional manufacturing companies lost ground to increased foreign competition.

But Ireland invested the nearly $14.7 billion it received in EU structural funds wisely, says Mr. Fitzgerald, with much going to improve the island nation's infrastructure, and by the 1990s Ireland could boast Europe's most dramatic economic turnaround.

The newcomer states to the EU, like the Czech Republic, however, will get far less money from Brussels, notes Professor Martin Potucek, the head of Charles University's Centre for Social and Economic Strategies, a Prague-based think tank.

Potucek: "In general, the enlargement is the cheapest in EU history. It means that even if the new EU member states can expect a considerable amount of money from EU funds, it will not cover most of their needs in reconstruction and modernisation of their countries. "

For his part, Mr. Fitzgerald says it is actually more important what the new EU member states do with the money than how much they receive.

"The sums they will be receiving will probably actually be a higher percentage of their existing GDP because Ireland was much more developed than the bulk of them, going back to 1990. In many ways, it wasn't so much the money as the learning process which the structural funds brought about how to do our business better. Part of what the EU made or encouraged Ireland to do was evaluate how it spent the money — and publish the results. There was a transparent process. It was at least as important as the money."

A key aspect of Ireland's successful economic strategy in attracting foreign investment and stimulating growth is thought to be its exceptionally low corporate tax rate — at 13 per cent, the lowest in the old European Union, which had a median rate of 33 per cent.

The Czech Republic has a corporate tax rate of 28 per cent but it is due to drop to 24 per cent in a couple of years. Neighbouring Slovakia has a tax rate of 19 per cent; Hungary will lower its rate to 16 per cent next year.

I asked Professor Potucek if lowering tax rates further made sense for the Czech Republic.

"There is no direct link between decreasing corporate taxation and increasing economic efficiency. It may well be so in some instances but it very much depends on a specific situation of a specific country. And the Czech Republic is in between, is on a semi-periphery of economic and social development. "

German Chancellor Gerhard Schroeder complained last week that the low tax rates amount to "fiscal dumping" and warned the EU newcomers that they should not expect Brussels to make up the difference to state coffers with subsidies from Brussels.

Prime Minister Vladimir Spidla has said he has no intention of further reducing the corporate tax level and said the country itself is under threat from "tax dumping". President Vaclav Klaus and right-wing opposition Civic Democrat leaders argue, however, that the Czech Republic must lower taxes in order to remain competitive, even if that means losing out on EU money.

Professor Potucek again:

"I can see two trajectories. The first is to follow the Irish model but without some of the resources that were at the disposal of Ireland in the beginning of its transformation. Or, there is the second option that would stress the modernisation of the country and its institutions; it means more funds from the public budgets and this means not following Ireland but probably to adhere to the German case. "