Budget deficit could scupper euro adoption

Photo: European Commission

Although the Czech economy is booming, the government has surprisingly posted a large budget deficit of 93.7 billion crowns or roughly four and a half billion US dollars, which could have dire implications for the country's future development. With the Czech Republic mired in political stalemate, this news could not have come at a worse time.

Photo: European Commission
Four and half billion dollars is a lot of money. That's how much the Czech government overspent last year despite the fact that the country is enjoying record levels of economic growth, a fact that has many Czech economists pulling their hair out in frustration. Ales Michl is a financial analyst with Raiffeisenbank.

"I think you have to blame the politicians, because today we have the highest economic growth in the history of the Czech Republic. If you have your highest ever economic growth it's not possible to have a rising budget deficit."

A lot of this economic growth is down to massive foreign investment and the early adoption of the euro is seen as crucial to keep this money flowing into the country. Unfortunately the budget deficit is in danger of scuppering this objective. The EU has said that countries need to keep public spending below three percent in order to join the euro zone. As the Czech Republic is well over this limit, Ales Michl thinks the country is now unlikely to meet its euro adoption target.

"I don't think we can adopt the euro by 2010. We should be expecting to join the euro zone by 2012 or later. The only reason for this is the public finance deficit and politics. Nothing else."

Apart from a delay in joining the euro zone, Ales Michl says the soaring budget deficit is also bad news for many ordinary Czechs.

"The deficit is growing and this pushes interest rates higher. When you think about mortgages and loans, you can see how this is a big problem for Czech citizens. It's a bad situation for Czechs."

Although the Finance Ministry blames lower tax and social insurance revenues for the budget shortfall, many analysts say the main reason for this potentially disastrous situation is high social welfare spending and bad use of public funds. This hasn't been helped by the fact that many politicians have used money earmarked for vital public services to finance projects in their own constituencies.

With parliament locked in a stalemate and early elections a distinct possibility, it is hardly surprising that many politicians are busy tending to their own electoral patch rather than looking at the wider economic situation.

Ales Michl thinks that it is unlikely a solution to the deficit will be found until the uncertain political situation is resolved.

"I expect early elections in the Czech Republic within two years. I do not expect that the situation will improve before this happens. We have wasted two years of rapid economic growth until now. We still have a lot of tools to push the deficit below three percent. The only problem is the political willingness to do it. Nothing else."