Coronavirus underscores advantages, disadvantages of Czech economy being most industrial in Europe, ex-central banker says

Illustrative photo: Gerd Altmann, Pixabay / CC0

The lower house of parliament on Tuesday approved a rise in the 2020 central state budget deficit to a record 500 billion crowns, in the first of three scheduled readings. That figure, equivalent to around 9 percent of projected GDP, is more than 12 times the deficit agreed before the coronavirus pandemic. Will it be sufficient to shore up the economy, projected to contract by 8 percent already this year? And is the country over reliant on the automotive industry?

According to the Ministry of Finance, a staggering CZK 1.13 trillion, or more than 20 percent of the country’s total GDP, has already gone towards mitigating the economic impact of the novel coronavirus. A so-called “second wave” of the virus this year could see Czech GDP contract by double digits, though projections now are for a 7-8 percent drop.

Former central bank governor Miroslav Singer says that as bad as all that sounds, the economy should weather the storm – due to years of investment and a low debt to GDP ratio, among other factors. At the same time, Singer told Czech Radio, the worst could be yet to come, as no one can predict the course of the pandemic across the globe.

Miroslav Singer,  photo: Filip Jandourek

“The loss in revenue is not yet that high … But the damage to the economy will certainly amount to hundreds of billions of crowns. We have already seen a slump in industry of a third, which is unprecedented. This is going to sound bad, but I really am not afraid that the economy will not suffer.”

Although the Czech Republic is the most industrialized country in Europe in terms of value added (the sum of profits and wages), it does not differ so dramatically from other “new” EU economies of the Visegrad Four, Singer argues.

But in relation to the share of GDP into investment, the Czech economy has often ranked among the top three in the EU. As such, the coronavirus will not erode the relative competitive advantages of the economy, he says – though the heavy reliance on the automotive sector, which accounts for more than 9 percent of GDP, is a concern.

“We are the most industrialized country in Europe and that will not change anytime soon. I think it reflects a tradition that has always been here. It can be an advantage or disadvantage, but the coronavirus will not close the factories.

“Still, I’m a bit afraid it is not great to be such an industrial state at the moment. It seems to me that we in Europe have greatly overloaded the car industry, and we are among those who could pay a heavy price for it.”

Singer, now supervisory board chairman of insurer Generali Pojišťovna, argues that while a “second wave” of the coronavirus could change priorities, the immediate focus should remain on preserving existing jobs in the nation’s automobile factories and other sectors, in line with continued subsidies to businesses and the self-employed and to keep unemployment down.

Furthermore, after having driven down government debt over the past few years to 30.8 percent of GDP in 2019 – versus an EU average of 79.3 percent – the Czech Republic is in a solid position to borrow.