Economist Jan Bureš: Czech economy relatively healthy, but cuts still essential
Jan Bureš is chief economist at Poštovní spořitelna, which is part of the banking group ČSOB. Aged 31, he is one of the most visible Czech economists of his generation, frequently appearing on TV and penning a column for the magazine Respekt. Earlier on Monday I spoke with Jan Bureš at ČSOB’s Prague HQ. My first question: almost exactly two years after the collapse of Lehman Brothers triggered an international economic crisis, what state is the Czech economy in today?
“The Czech economy is not in bad shape. We have great advantages. If you compare us with our neighbours and with countries in Western Europe we have very low levels of debt. When we speak about household debts, and also companies, they have low debt.
“Frankly, the government is also somewhere around the average. So that’s also a great advantage. Besides that, we are cost competitive. Wages are pretty low, if you compare us with Western neighbours.
“Our main disadvantage is that we are generally a very open economy. We have been historically and we will be in the future very dependent on our neighbours. Up to now, that has been mainly Germany. Without German growth, we can’t do…anything special on our own.”
The Czech Republic doesn’t have the euro. The recently installed government isn’t planning to bring in the euro. Has that been a good thing, in the light of what’s happened in recent years?
“My view of the euro is that it doesn’t matter so much for our country. It is pretty important for the Baltic states, which are extremely small and have been implementing a monetary policy that was effectively a euro adoption policy for years. So for them the euro is very beneficial.
“On the other hand, we are a country that is small and open, but there is still a lot of space ahead of us in terms of catching up with Western European economies. Our development is still pretty low. We are still somewhere between 60 and 70 percent of real convergence and that’s a pretty…long distance to catch up.
“If you look at Portugal, if you look at Spain, and the irrational bubbles that were made with the help of the euro, it’s a clear risk for us. It’s not only about advantages, it is still also about risks for the Czech economy. So I think the euro really doesn’t matter so much at this time.”
The Czech Republic doesn’t even have a target date for adopting the euro. Do you think it will eventually come in here?
“I think a target date would be a beneficial thing to have. Although I’m not in favour of fast adoption, I think it’s good to have a target date. Though I think it’s not beneficial to have it now, I think in a six- to seven-year horizon it would be beneficial to us, for sure. Targets are helpful for policy makers, because they tend to forget about their aims.”
The government is planning to balance the country’s budget by 2016. It’s bringing in a lot of spending cuts. Given that the economy here isn’t actually in a bad state, are those cuts the right approach to take?
“I think the cuts in the mid-term are necessary, because we have a high structural deficit, and we have to do something about it. If we start now, it will be much easier than later.
“If you look at it, it is one percentage point per year, and it is nothing dramatic. If you consider that the Czech economy is open and very dependent on what happens abroad, and the government therefore doesn’t have a big impact on GDP, you can therefore afford it without these cuts having any significant impact on the GDP growth.
“I believe that pace of cuts is pretty much OK, and shouldn’t have any major impact on our competitiveness.”
The government was elected only in May, and as I say is introducing all these cuts. I saw an opinion poll recently that suggested around 80 percent of Czechs regard these cuts as too severe. Is there some kind of disconnect, do you think, between people’s voting and their attitude to the cuts?
“On one hand people, understand that we must collectively save, it’s impossible to have the deficits forever.
“As the government is trying to do cuts all across the sectors, then many people are going to feel them. Therefore I think there is that public disapproval that we have seen in recent weeks.
“But I think it is still not strong disapproval. If you look at the polls of people’s favourite parties, the centre-right government still has clear support.”
This is a big question, but what do you think is the general outlook for the Czech economy in the next five or 10 years?
“In the nearest term, I am a bit sceptical. I think in one year or a year and a half what we are going to see is that these one-off stimulus measures that we have seen mainly abroad, in Germany and the US are going to get out of the stage…”
You mean for example the car scrappage schemes?
“Car scrappage schemes and everything else, like in the tax area…And it wasn’t only in the developed world, it was also in emerging markets.
“Also companies who started to rebuild their inventories after the Lehman collapse…now, they have just rebuilt them, and it’s going to be difficult to find a new source for growth. The final demand is still very weak, and therefore I am bit sceptical as regards 2011.
“Our labour force is pretty well educated, not in the first league but pretty well educated. And therefore I am optimistic that we will be competitive in the mid-term, in the five-year horizon. We should benefit from the new growth that should come, I believe, in the year 2012.”
