To fight, or not to fight the economic slowdown?

Pavel Mertlík

The Czech economy is slowing down, though at present it has managed to stave off a recession. With the EU recently agreeing on a stimulus package, while many individual countries do the same, the question is being asked – what, if anything, can the Czech Republic do to boost its economy? I spoke with economist Pavel Mertlík and began by asking him if there was any sort of political consensus about what to do:

“I don’t think so. The political parties are working on some stimulus packages, but the view of the government is that this is something that should be prepared for the future if is necessary, but not for now. Meanwhile, the opposition Social Democrats believe that now is the right time.”

And there is clearly an ideological or partisan perspective – the Social Democrats are suggesting both tax increases but also a lowering of VAT (or sales tax), while the Civic Democrats are not. So what exactly are the various measures being proposed?

“The government is rather focusing on the supply side of the economy decreasing corporate taxes, while the Social Democrats would prefer some demand-side policy, like increasing some specific public expenditures in order to support economic growth.”

Do you think that being a right-of-centre government, that there is some resistance to putting together a stimulus of some kind?

“I think that a key issue is the level of the budget deficit, which the government wants not to exceed too much. But on the other hand, I think that they will be flexible, depending on developments. Also, the government approved, or agreed with a package of one and a half percent GDP, so they will definitely have to prepare some formulation of that for the Czech example.”

Photo: archive of CRo 7 - Radio Prague
Could you explain that to our listeners? When you say one and a half percent GDP, what exactly does that mean?

“The European Union package, which was approved by the heads of the EU states, which was targeted to increase aggregate demand by one and a half percent of GDP on the Europe-wide level. This means that the Czech government agreed to go in the same direction as regards the Czech economy, which entails extra expenditures too.”

Obviously, the Czech economy is in nowhere near as bad a shape as the US or UK economies. Is there any sort of consensus here as to whether acting early or waiting to see if it gets worse is the best form of action?

“That kind of consensus is not yet here. But we shall see what happens in the future. The difference between the Czech and US or British economies is that there were not huge asset price bubbles, but on the other hand, the Czech Republic is heavily dependant on foreign exports, and shrinking demand, particularly in the car industry is something which is very important for the economy.”

And that is something that the Czech Republic presumably cannot influence – it is dependant upon the economic health of Germany or other EU neighbours…

“Yes, exactly.”