Does east follow west to the euro?
The Czech Republic’s fiscal position can be described as solid, with the deficit on track for 3% of GDP this year. Debt levels are at around 30% of GDP.
But the medium-term outlook is harder to predict, as is the case in all the CE4 countries, because of unpredictable politics. Reform initiatives might prove complicated as the Civil Democrats, who won power in parliamentary elections in June, struggle to form a stable majority government.
The impact of fiscal policy in the coming two years is highly uncertain, argues Raffaella Tenconi, an economist at Dresdner Kleinwort. “While the government has approved a draft for the 2007 budget, which foresees a Kc88 billion [$366 million] deficit, about 2.5% of GDP, this is inconsistent with the previously approved social spending increases that, as they stand, will widen the fiscal deficit to Kc175 billion,” she says. “On the whole, there is a significant risk that fiscal policy will turn out to be looser than budgeted and, therefore, more supportive of growth and inflation in 2007/08.”