Czechia is the top country in Eastern Europe when it comes to economic growth, which has enabled the country to overtake Portugal and Spain and reach parity with Italy, the Financial Times reports. However, Czechia may fall into the same debt traps that have plagued other so-called success stories.
The economic rise of the Czech Republic and other Eastern European countries is a “forgotten success”, the greatest since the East Asian economic miracle of the 1990s, according to Ruchir Sharma, manager at the Morgan Stanley investment bank, who mentioned Czechia first among the leaders of the globally successful region.
Critics of Sharma’s adulation warn that the prosperity of the former communist countries could face pitfalls — for example, high debts — as was once the case in Southern Europe.
The Financial Times article was published only a few days after Czech Prime Minister Andrej Babiš made similar comments.
“Our economy is growing at a record pace, as is the standard of living of our people. In terms of GDP per capita, we have already overtaken Portugal, Spain, and Italy,” the prime minister said, regarding the ANO movement results of the last eight years, when it was in power.
Czechia’s secret for success
From Sharma’s point of view, Babiš is also one of the world’s most successful politicians, though he is no exception in Central Europe. The Morgan Stanley expert was measuring prosperity with the World Bank rule, according to which a state is included among developed economies if its economic performance (GDP) exceeds $17,000, or €14,500, per person per year. The Czech Republic succeeded in this regard as early as 2014, and among the post-communist countries, along with the smaller economies of Slovenia and Estonia, it is still in the top three.
Babiš emphasized the uniqueness of domestic performance by converting economic performance per capita into purchasing power. Thanks to lower domestic prices, Czechia is in the first place among the post-communist countries, overtaking Spain the year before and Italy last year.
“The secret of success is consistently strong growth,” writes Sharma, mentioning the main advantage of Eastern Europe.
Developing countries usually experience a slump after one successful decade, then never make it to an advanced economy state. However, countries such as Czechia or Poland have been growing steadily for 30 years compared to the European West. In the crisis years of 2007 to 2014, the Czech GDP (calculated per capita and purchasing power) moved closer to the EU average by 4 percent, while in the prosperous years between 2014 and 2020, it was by 6 percent. It did not matter whether the country was ruled by Civic Democrats (ODS) and TOP 09 or the ANO movement and Social Democrats (ČSSD).
Is Eastern Europe’s growing prosperity a mirage?
The image painted by Ruchir Sharma of an unstoppably growing region has garnered some criticisms, however. According to some experts, the prosperity of Eastern Europe is, in fact, fragile, and there are several pitfalls that can lead to its downfall.
For example, Cornell Ban, a professor at Copenhagen Business School, warns of the fate of Southern Europe, which fell into unmanageable debts between 2008 and 2013 after two decades of growing prosperity. During the long recession, it had to deal with painful cuts in public spending and wage cuts.
Specifically, the development of Czechia’s public finances is reminiscent of some southern states ten years ago. The bravest of them at the time were the Greeks, who were sure that the 5-percent deficit would always be outweighed by inflation and the-then usual economic growth of 5 percent. The strategy failed after 2008 when the economic crisis arrived, and government debt doubled within a few years.
The current budget strategy of the Babiš government is more reminiscent of the slightly more cautious approach of Spain, which in times of prosperity also used tax revenues to reduce the liabilities of the state treasury. Nevertheless, Spain spent too much, and after the unexpected crisis came, it tried to save the economy with massive subsidies, and in the end the country’s debt shot up to unmanageable heights.
Czechia can avoid a similar fate only if, after the pandemic declines, the economy will start to grow again at a rate of 3 to 4 percent, as expected by the Czech Ministry of Finance. If the forecast does not work out, all that remains is to reduce the debt and inflated wages by devaluing the currency.
Title image: Czech Republic’s Prime Minister Andrej Babis departs at the end of an EU summit in Brussels, Tuesday, May 25, 2021. European Union leaders gathered for a second day of meetings to discuss the coronavirus pandemic and to assess new measures on how to meet targets to become climate-neutral by mid-century. (Johanna Geron, Pool via AP)
