Economic differences underpinned Czechoslovak divorce

"It’s the economy stupid." That phrase underlying US president Bill Clinton’s first election campaign sums up one of the major fault lines in Czech-Slovak relations in the 20th century and many of the reasons for the eventual divorce. Separated, the two countries initially followed different paths, but the outcome has been surprisingly similar with one notable exception, the euro.

Václav Klaus, photo: ČT

The 1992 Czechoslovak elections were largely fought over the different economic programmes put before voters. The offers of the Czech winners, the Civic Democrats (ODS) of Václav Klaus, and the Slovak winners, the LS-HZDS of Vladimír Mečiar, could hardly have been more different when it came to their road map for the economic future. The Czechs wanted a fast privatisation of state assets and transformation of the economy. The Slovaks were much more cautious, fearing major job losses and the closure of much of their heavy industrial sector implanted over the previous 40 years. ODS stood for elections in Slovakia but its economic message resulted in a resounding rebuff. They won no Slovak seats at all in the national elections.

Former top ODS figure and later minister of finance in the post-divorce Czech government, Ivan Kočárník, says the looming problems over economic transformation were clear to anyone who paid attention to what the dominant Slovak and Czech economists and politicians were saying within two years of the Velvet Revolution and who later read the electoral programmes of the dominant Czech and Slovak parties.

"I was one of the joint authors of the scenario for the economic transformation process. When we saw that Slovak economists did not get it – that is not all of them the liberal economic ones did – and they wanted to pursue a different direction, I understood that if we wanted to complete the economic transformation then it would have to be done differently. I suppose that was somewhere around the end of 1991 and the start of 1992."

It was Klaus and Mečiar’s determination to push ahead with their different economic programmes that was one of the diving forces of the split. But the divorce settlement itself was fairly simple and clearcut. Ivan Kočárník again:

"I understood that if we wanted to complete the economic transformation then it would have to be done differently."

"When it came down to the share out of assets, a lot of property had already been split during 1968 between the two sides of the country. At the level of the federal state there remained what was estimated to be worth 480 billion crowns which should be divided up between the two republics. A commission was created for dividing up the property and I was the chairman of the Czech side of it. There were two basic principles that were agreed for that. The first was that of 2:1 according to the population that was around 10 million Czechs and five million Slovaks. Almost all property was divided in this way. The division for state companies in the foreign trade sector was 3:1 because a lot more of these companies were in the Czech Republic rather than Slovakia."

Ivan Kočárník, photo: ČT

But as the clock ticked down to the end of 1992 and the creation of two new states at the start of 1993, there was one significant exception to the split and that was the common currency of Czechoslovakia. The idea was that should stay in place although would soon be two separate states with different budgets and fiscal policies. To most economists this would have seemed madness, but the idea was championed by both the Czech and Slovak leaders even though its stands at odds with the economic principles usually espoused by Václav Klaus. Ivan Kočárník:

"It was originally thought that the some currency for both countries could continue longer. A big supporter of that was the then prime minister Václav Klaus. He wanted as much of the remaining joint country to be conserved. His biggest opponent was Josef Tosovsky, the governor of the Czech National Bank. He rightly suspected that this could simply just not work. "

"Secrecy was more or less conserved about when the currency would split."

But the speculation that the single currency could not last was immense. The final split was announced on February 2 with barriers to capital flows imposed to make sure that crowns did not flow from Slovakia to the Czech Republic, where everyone reckoned their value would soon be greater. The split of notes started six days later with the Czech and Slovak versions stamped over. It was completed with few problems in four days.

For obvious reasons, there had been the uppermost secrecy pending the negotiations over the currency split and the planning for it to take place. Ivan Kočárník again:

Vladimír Mečiar, photo: Peter Kamošaj, Public Domain

"Secret discussions were called for in a Prague palace. I went to meet Vladimír Mečiar at the airport to bring him and at 3.30 AM in the next morning I took him back completely exhausted. It was agreed finally that the currency split would take place at a certain date. It was debated for a really long time and for all that time Vladimír Mečiar did not want it but he finally agreed and left. I was the next day at parliament and something leaked out. The journalists came up to me and asked if Mečiar had been here the day before. I gave a ‘no comment.’ Secrecy was more or less conserved about when the currency would split."

Economically, the two countries and currencies went their two very different ways. On the Czech side, the Klaus government pushed ahead with coupon privatisation of state assets. That put companies in the hands of many, meaning that no-one, apart from the management, was in any position to run them properly or make strategic decisions. Often management ran the companies down, and then bought them up again at knock down prices. On the Slovak side, it was crony capitalism that held sway with firms being sold to friends and supporters of Vladimír Mečiar and his ruling party. Some economists argue that the end result, which was hardly optimal or fair for most of the population, was not that different in terms of outcome.

When Mečiar eventually lost power in 1998, a very different economic policy came in with a centre-right coalition government. And this to credited with pushing through a lot of fundamental reforms to government and the economy which helped Slovakia rapidly catch up with its Czech neighbour. This was the era of rapid Slovak growth with the country dubbed ‘The Tatra Tiger’ due to its powerful economic performance. Ivan Kočárník reckons that in many ways those reforms continue to give Slovakia an economic advantage over its neighbour.

" I think that Slovakia can give thanks for its economic dynamism due to the Dzurinda government."

"I think that Slovakia can give thanks for its economic dynamism due to the Dzurinda government. There were a whole series of reforms where the Slovaks outperformed us. The reforms created a positive environment for doing business and for life in Slovakia and so on. Things just become basically blocked. There was talk about health reform for the last 20 years but nothing has happened. It is still a black hole. I can give many more examples but there is not enough time."

In many ways, the separated Czech and Slovak republics have followed similar paths over the past two decades. In both countries the car industry is now the biggest single industrial sector, Slovakia has the highest proportion of cars produced per capita in the world. Both economies turned west for trade with the EU accounting for around 85 percent of exports and Germany the single biggest partner.

Photo: Pixabay CC0

But by most accounts Slovakia fared better. Its average growth rate between 2006 and 2016 was 3.1 percent, around twice the Czech overage over the same period. In terms of wealth per capita, the gap between Czechs and Slovaks has almost been closed with some Slovak economists predicting the country could overtake the Czech Republic in terms of per capita GDP over the next five to 10 years.

And there’s another big difference as well. Slovakia used what turned out to be a short window of opportunity to join the euro zone at the start of 2009 before all European economies experienced a sharp downturn and the banking and deficit crisis was sparked. That move effectively puts the Slovaks in a different economic and political context than the Czechs with those differences set to increase in the near future.