European Commission criticises Czech Republic over public deficit

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It came as no surprise on Wednesday but that took no edge of the news: the European Commission's issuing of a warning to the Czech Republic for not doing enough to rein in its public deficit. With an increase in expenditures the Czech Republic is set this year to miss the EU's mark of keeping the deficit below 3 percent of the GDP as part of its convergence requirements.

On Wednesday European Commissioner Joaquin Almunia said that the Czechs Republic's programme - updated in March - had "postponed" planned correction of the deficit, despite the fact that in 2006 it had already been below three percent and despite the fact that the country had seen stronger than expected economic growth. A missed opportunity? That's a question I put to analyst David Marek of Patria Finance:

"The Commission is right: we missed a very good economic period and now we will be forced into reforms in a much less positive economic environment. Who is to blame? Definitely previous governments. We could have started reforms four or six years ago and we lost all that time."

Bohuslav Sobotka, photo: CTK
But former Finance Minister Bohuslav Sobotka of the Social Democrats rejected the idea on Wednesday that previous Social Democrat-led governments were to blame. He spoke to public broadcaster Czech TV:

"Our governments were never criticised by the European Commission for failing to meet the requirements of the convergence programme and our government did not agree with some legislative proposals put forward by some MPs in the spring of 2006."

For the government to be able to turn matters around (and it has de facto staked its political future on it), a lot depends on whether or not it will be able to push public finance reforms through a Parliament where it has no guaranteed majority. Here's how David Marek views the government's plans:

"I would guess that it is a good first step but it is only a first step towards finance stabilisation in the Czech Republic. But we need to have second and third and more steps aimed at decreasing expenditures, not just tax reforms. But it will be difficult. The split of votes in Parliament is something that can be an obstacle on the way to necessary public finance reforms. "

As it stands - even under the most optimistic prognosis - the earliest date the Czech Republic can expect to enter the euro zone is in 2012 and then only if it gets its act together. According to analysts the date may be pushed back even further. By comparison, neighbouring Slovakia has been slated to join the euro zone in 2009, followed closely by the Baltic states and Bulgaria aiming for 2010.