Can the Czech Republic “invest its way out” of the Covid-19 crisis?
Governments, industries, businesses and everyday people worldwide are grappling with how to recover from the Covid-19 pandemic, not least in financial terms. The European Commission has set out a massive, coordinated response to counter the impact of the public health emergency. But what do leading Czech economists think is the best way forward for this country?
Few topics are more pressing than tackling the health and economic crisis presented by the ongoing pandemic. Even employers whose businesses survived the lockdowns and other restrictions – and employees who kept their jobs – are grappling with record-high inflationary growth and greater job insecurity.
This August, inflation in the Czech Republic rose by 4.1 percent year-on-year, the most significant increase since November 2008, according to the Czech Statistics Agency. And while the country still enjoys a very low unemployment rate compared to the European Union average, in large part industry has been propped up through record-high government spending, and the share of manufacturing jobs is among the highest in the bloc.
Can the country “invest its way out” of the Covid-19 crisis? That was the basic question put to leading economists Ivan Pilný and Filip Matějka on Monday during Czech Radio’s regular debate programme Pro a Proti (Pro and Con).
Ivan Pilný, a former finance minister, is a member of the independent platform KoroNERV-20, formed to brainstorm strategies to overcome the effects of the coronavirus pandemic on society as a whole and the economy in particular.
“I’m a bit sensitive to the cliché that the best way out of a crisis is to invest. But I’d like to quote the famous American investor Warren Buffett, who says only when the tide subsides will we know who was swimming naked. I think this cliché ‘invest out of crisis’ means to seize an opportunity. This is generally true, but I quite have doubts that the Czech state, the Czech government, is doing it.”
Associate Professor Filip Matějka of CERGE-EI, an academic institution specialising in economics created by Charles University and the Economics Institute of the Czech Academy of Sciences, notes a paradox that often accompanies large investments by the state.
“The moment state money starts to flow, people start to worry that their pensions will not be funded in the future, and so they start saving more. So, the effect is often negative. I agree with Mr Pilný that crises can present great opportunities. That’s true, and it makes sense to invest in that we are often hugely short-sighted. Investing means giving up some current enjoyment and thinking about the future. We should be doing that, but we are not.”
The European Commission in July approved the Czech Republic’s National Recovery Plan and will allocate CZK 180 billion to the country from the EU’s Resilience and Recovery Fund. In total, the plan envisions spending CZK 208.9 billion by investing across a wide variety of sectors.
Meanwhile, the Ministry of Finance forecasts another record-high budget deficit in 2021, in part due to a record high level of investment, with funds going into research and development, as well as raising pensions.
Ivan Pilný of the independent platform KoroNERV-20 is among those who also worry the Czech government is taking on too much debt.
“The whole [European Commission] recovery plan is actually a de facto loan, because the EU will not generate that money, it will borrow it and the Czech Republic, like all EU countries, must repay them. We are borrowing everywhere, and it’s getting more and more expensive to service the state debt, and it will have to be repaid.”
Filip Matějka of CERGE-EI is likewise concerned. Not that the country plans huge budget deficits over a few years – as in exceptional circumstances it makes sense to borrow. His concern is that running higher deficits will become a longer-term trend.
“It’s a bit like an alcoholic saying I’ll have 10 beers today and stop drinking tomorrow. Borrowing during the Covid-19 pandemic is absolutely fine, but raising expenses while cutting taxes over the long term cannot work. If they wanted to change everything this year and go the opposite direction next year, maybe. Otherwise, it just won’t work.”
Both economists told Czech Radio they are concerned that the government is getting into the “planned economy” business by targeting industries.
Under the National Recovery Plan, the government has earmarked CZK 208.9 billion of investment across a wide variety of sectors. Specifically, the investments will be split into six categories: Physical Infrastructure and Green Transition (CZK 85.2bn), Digital Transformation (CZK 27.8bn), Education and Labour Market (CZK 48.1bn), Post-Covid Institutional, regulatory and business support (CZK 10.8bn), Research and Innovation (CZK 13.2bn) and Health and Resilience (CZK 12.4bn).