Czech government prepares for catastrophe

By bne IntelliNews December 7, 2011

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With Central Europe beset with doubt over the size and impact of the coming slowdown in the Eurozone, the Czech government is drawing up contingency plans for four possible economic scenarios, including a "catastrophe" option in which the euro collapses and the economy dives into deep recession.

In such an event, according to business daily Hospodárské noviny (HN), under the plan the option of new state debt will be off the cards and the government will instead raise taxes, drastically cut spending, and introduce a short working week.

The country's economic advisory council NERV and the Ministry of Finance are drawing up the plans, which include 30 proposals on responses to the four scenarios of economic development. Finance Minister Miroslav Kalousek already said in early December that the 2012 budget, which was passed based on a growth forecast of 2.5%, will be amended early next year.

The move to consider a range of scenarios for economic growth - including a sharp slowdown - shadows that of next-door neighbour Poland, which announced in November that it was studying three scenarios after struggling to come up with a forecast for its own draft budget, past a much criticised 4% target proposed in September.

Warsaw finally announced on December 6 that it will also base its plan for next year on a 2.5% growth forecast - the middle of the three options considered, based on "some slowdown" provoked by the crisis in the Eurozone. Third-quarter manufacturing figures released across the region in early December suggest that a significant slide in export demand is starting to be felt in Central Europe, with worse anticipated in the final three months of the year.

However, Poland is far less dependent than the Czech Republic on exports, thanks to far stronger domestic demand. Warsaw did not include a "catastrophic" scenario in its deliberations, although its worst case scenario featured a 1% contraction. The country has also used its current holding of the EU presidency to call for stronger action from Germany in recent days.

In Prague, Kalousek expanded on the Czech Republic's anticipated action should the fallout in Europe from the sovereign debt crisis indeed prove catastrophic. "A completely new era is upon us - [which will mean] the end of living on debt and more personal responsibility," he said, according to HN. "We have to adapt our personal needs to this. The myth whereby the state can raise growth with debt is disappearing; [likewise the myth] that the economy must grow and the state must guarantee that growth."

Economist Tomas Sedlacek, the head of NERV's working group for public finances, says that due to the economy's small size and high dependence on exports, attempts to simulate the Czech economy with cash would not work should the eurozone collapse. Raiffeisenbank analyst and NERV member, Ales Michl, concurred: "Stimulation measures won't help. Now it's important to balance budgets and strengthen companies' competitiveness."

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