Czech Republic: Rising Star in Eastern Europe

• History
• Culture
• Economy

The Cesky Krumlov castle in Bohemia is one of the largest in the Czech Republic. The castle was built between the 14th and 19th century, and was declared a World Heritage Site by UNESCO in 1992. Currently one of the country’s main attractions, 340,478 tourists visited the castle in 2006.

Nestled in between Austria, Poland, Slovakia, and mighty Germany is the thriving center of Emerging Eastern Europe. With a low-cost and skilled labor force and close proximity to Western Europe, the Czech Republic is standing on the cusp of a promising future. Today, the country is a bustling industrialized powerhouse and a magnet for tourism. Smaller than Scotland or South Carolina, the country is home to fairytale castles, some of the world’s best spas, quaint medieval towns, and a bounty of natural beauty that stretches across the ancient lands of Bohemia and Moravia.

As a nation, the Czech Republic has witnessed constant invasions, merciless conquests, and unsurpassed unions and divisions. Its national anthem is a poignant reminder of its turbulent past:

Kde domov můj, kde domov můj? (Where is my home, where is my home?)

History

Of velvet revolutions and velvet divorces

The region which is known today as the Czech Republic was occupied by Celtic and Germanic tribes before the arrival of the Slavs in the fifth and sixth centuries. Conquered by a Mongolian army called the Avars, the Slavs were liberated by a Frank who established the Samo Empire in the mid-seventh century. The short-lived Great Moravian Empire was in power soon after, ruling over the regions of western Slovakia, Silesia, Bohemia, as well as parts of Germany, Poland and Hungary. By the end of the ninth century, the Czechs seceded to form their own independent state of Bohemia under the Premyslids – a dynasty of the legendary Ceši or the Cechove tribe. Incidentally, the Czechs derive their name from this tribe.

The Premyslids held power for more than 400 years, before the German King Otto I conquered Bohemia and annexed it into the Holy Roman Empire. In 1526, the Czech kingdom came under the rule of the Austrian Habsburg, marking the beginning of a century of conflict between the Czech nobility and the Habsburg monarchy.

The clash culminated in the decisive Battle of the White Mountain in 1620 in which the Bohemian army was sublimated, and for the next 300 years, the country remained under the yoke of Austrian imperialism. Czech nationalism rose toward the end of the 18th century, ultimately resulting in the creation of the first independent state of Czechoslovakia on October 28, 1918 toward the end of World War I. Functioning as a democratic republic, Czechs and Slovaks were pulled together for the first time in history. But, the humiliating Munich Pact of 1938 ceded vast border areas of Czechoslovakia to Hitler, including the German-speaking region of Sudetenland. Slovakia declared independence as a satellite state of Germany under Josef Tiso in 1939. Eventually, World War II saw the entire country coming under Nazi occupation. The Prague Uprising of 1945 and the arrival of the Soviet Red Army on May 9, 1945 led to the liberation and formation of independent Czechoslovakia.

Following the 1946 election, the Communist Party garnered the single largest share of 38%, and shared work with the Czech National Front. In 1948, the Communist Party seized complete power, marking the beginning of the communist totalitarian regime. As the country lurched through a period of severe and harsh repression in the 1950s, respite came through a non-violent demonstration that sparked the “velvet revolution.” On November 17, 1989, a week after the fall of the Berlin Wall, the Communist government tried to suppress a student demonstration. Public anger grew and the “velvet revolution” rang the curtains down on communism with Václav Havel becoming the country’s first democratically elected president. The Velvet Revolution was so called as it was a non-violent revolution, which led to the overthrowing of the authoritarian Communist government. Czechoslovakia’s tumultuous past rang the last footnote in 1993 with the “velvet divorce”, which resulted in the creation of two independent countries – Slovakia and the Czech Republic.

At present, the Czech Republic is a multi-party parliamentary representative democracy with the prime minister as the head of government and a president who holds largely ceremonial powers. President Vaclav Klaus was reelected for a second term in February 2008 while Mirek Topolanek was elected prime minister in January 2007. However, the government of Topolanek lost a vote of no-confidence on March 24, 2009. The caretaker administration under Jan Fischer is currently in office, and the general elections are scheduled to be held in the last week of May 2010.

Culture

Synthesis of Folk Tradition

With cities such as Prague, Brno, Telč, Český Krumlov and Karlovy Vary, the Czech Republic is a beautiful synthesis of the cultural and historical traditions that symbolize Europe. Perhaps some of the most outstanding examples of Gothic, Baroque, Renaissance, and Cubist buildings in Europe can be found in this landlocked country. One of the most resplendent countries in the European continent, the Czech Republic is draped with spectacular mountains, meadows, and green forests.

Czech cuisine combines hearty, good food, with the world’s first golden beer, the Pilsner, which was brewed first in Plzeň in the Czech Republic. Culturally vibrant and diverse, Czech art and literature has matured like fine wine over the ages, nurturing such brilliant writers as Franz Kafka, Rainer Maria Rilke, Milan Kundera, and singer Magdalena Kožená. Bedřich Smetana was one of the greatest Czech composers, who along with Antonín Dvořák and Leoš Janáček, was responsible for creating a distinct Czech musical identity, combining folk traditions, songs, and dances in a mesmerizing blend.

With a long history of puppetry, the Czech Republic has a National Marionette Theater in Prague offering some of the best puppet shows in Europe.

Puppetry, puppetry making, and marionettes have been part of Czech history and tradition since the 18th century, evolving into a revered national art form over centuries. These puppets were traditionally carved from wood or made from plaster. Josef Skupa and his famous puppet characters “Spejbl and Hurvinek” were notable proponents of the art during the early 20th century. Almost 95% of the 10.2 million people who inhabit the Czech Republic are ethnically and linguistically Czech, with a small minority of Germans, Roma, Slovaks, and Poles.

Economy

Economic Miracle of Europe

Since its independence, the Czech Republic was thrown into a net of communist control. The communists created a rigidly centralized economic system where virtually all segments of public and economic management were under the control of the government. Despite maintaining a high standard of living, at least in comparison with other Eastern European nations, the Czech economy deteriorated under such strict controls. It was not until the Velvet Revolution of 1989 that the economy was liberated and reorganized as a free enterprise.

At the time of the ‘divorce’ from Slovakia in 1993, the Czech Republic enjoyed the status of being the more economically privileged of the two. The Czech economy was relatively more stable and diversified. Slovakia, on the other hand was traditionally a major producer of arms for the communist countries in Eastern Europe, and this had stifled growth in its other sectors.

The Czech Republic is a member of the North Atlantic Treaty Organization (NATO) and joined the EU in 2004. It is also a member of the International Monetary Fund (IMF) and other international organizations such as the Organization for Economic Cooperation (OECD), the European Bank for Reconstruction and Development (EBRD), and the Central European Free Trade Agreement. Although a member of the EU, the Czech koruna (crown) continues to be in circulation.

With a low-cost and skilled labor force, proximity to Western Europe, and a low level of foreign debt, the country was able to reform and advance its economy at a quicker pace. Large parts of the economy were privatized through a voucher system and Czech citizens were allowed to purchase shares in companies owned by the state. Spectacular growth followed, and the “Czech miracle” reached its peak in 1995, with the introduction of several structural reforms. The expanded private sector now contributed 74% of the GDP, the highest in the region.

However, in the late 1990s, the country suffered a devastating recession, leading to a marked decline in GDP, a rising foreign-trade deficit, and growing unemployment. Despite this blip on the radar screen, the economy was back on track at the onset of the 21st century, clocking one of the highest growth rates in the EU region.

Although approximately 39% of the Czech Republic’s geographical area is cultivated, the sector contributes a mere 3% of the GDP. Main crops include wheat, corn, rye, barley, potatoes, flax, and hops. Around 58% of the GDP comes from services, such as telecommunications, tourism support, banking, and accommodation, which have expanded rapidly in recent years. Since 2002, the tourism industry in particular has witnessed spectacular growth. The country’s architecturally diverse cities, unspoiled lakes, and mountains attracted more than six million tourists in 2007, a 3.8% jump compared to the previous year. Tourism is responsible for 105,000 direct and indirect jobs, representing 2.2% of total employment in the Czech Republic.

Home to more than 1.2 million people, Prague, with a per capita GDP of $33,784, is among the richest cities in the European Union. The city also generates nearly 20% of the national GDP, and is the prime epicenter of Czech tourism.

The retail industry continues to be one of the strongest in the country with foreign chains managing to grab 60% of supermarket retail turnover. The telecommunications sector is robust, but Internet penetration is still low and well below the EU average, despite the fact that 24% of Czech households have a computer. During the long decades of occupation by foreign forces, especially between 1918 and 1939, Czechoslovakia was primarily a light industrial producer, manufacturing textiles, glass, and porcelain.

Under communist rule, however, the focus shifted to heavy industry such as metallurgy with the manufacture of steel, machinery, and weapons, mainly in Slovakia. Today, industry contributes to 39% of the GDP and the automotive industry plays a crucial role in the Czech economy, even as traditional branches such as the glass industry are being revived. In addition, rubber and plastic production have made great progress in the country in recent years. The petrochemical industry has some of the largest plants in the Czech Republic with oil refineries located in Litvínov and Kralupy nad Vltavou. Inorganic chemical production is concentrated in Lovosice, which is known for manufacturing fertilizers and artificial silk. Steel production is centered around the Ostrava locality in Moravia.

With limited energy resources, the Czech Republic is forced to import most of its energy needs. Nuclear power accounts for 15% of the country’s energy supply, while renewable energy sources (RES) provide approximately 3% of the power. The Czech Republic has set a target of 15% to 16% of RES in total energy consumption by 2030, and currently it ranks sixth highest among the EU countries in terms of biodiesel production capacity.

Today, the Czech economy is considered 68.5% free from the rigid control of communism, ranking 34th on the Index of Economic Freedom (2009). The country is also classified as a high-income country with a gross national income per capita of $16,650, and in January 2008, the Topolanek government introduced a single 15% personal flat income tax rate. Annual life expectancy at birth is estimated at 75.9 years, with female and male life expectancy at 79.1 years and 72.7 years respectively.

Rebounding from Recession

The Czech Republic’s open investment climate was instrumental in helping the country transform itself from a centrally planned economy to a free market economy. The small, export-driven economy registered a GDP growth of over 6% a year during 2005-2007, while it grew 2.3% during 2008.

The quality of Czech engineers and the long automotive tradition in the Czech Republic made the country a force to reckon with in the global automotive industry.

The economy had everything going for it when the financial crisis struck during the last quarter of 2008. As cheap credit dried up, the country’s export market shrank, causing its currency to sink, triggering more financial turmoil. Though the economy contracted less than expected during the period, the outlook remained grim. This is because of the falling demand in the euro zone, which affected Czech exports. Retail sales and industrial output declined steeply. The Czech industry continued its decline in January 2009, with the Czech Purchasing Managers’ Index falling below the 50 mark for the seventh consecutive month. Consumer price growth slowed in January, while unemployment soared more than forecasted, as companies slashed jobs amid a deepening recession. As such, the Czech economy registered a negative growth rate of 4.1% percent in 2009. The country partly benefited from a 7.5 billion euro bailout package from the EU and the World Bank, which also helped Latvia, Poland, Estonia, and the Nordic countries emerge from the recession.

Czech banks were comparatively less impacted by the global financial crisis, but growth was hit hard by the deepening recession in Western Europe. The Czech banking system has certain advantages compared to many of its Western counterparts. In the 90s, the banking system was more or less purged of bad assets, which were mainly found in the books of the Czech Consolidation Agency, the state bailout institution. The conservative business model of many of the Czech banks, a relatively underdeveloped mortgage market, and limited involvement with crisis-battered global financial groups, helped the country’s banking sector weather the recession. The crisis also brought to the fore the differences among EU members, with Germany categorically rejecting a collective bailout for Eastern Europe as a whole. The Czech Republic, a major auto-maker, accused France of protectionism by helping out local car makers at the expense of foreign subsidiaries.

The economy was barely emerging from recession when the sovereign debt crisis, which threatened to engulf the euro zone, surfaced during the first quarter of 2010. Though the IMF-EU bailout package for Greece and other euro zone countries helped contain the damage to a certain extent, the bigger implications of the crisis are still unfolding. Though the initial assessment was that the Euro-zone financial crisis would have no immediate impact on Central and East European countries, the European Bank for Reconstruction and Development recently said fiscal cuts in western Europe prompted by the Euro-zone deficit crisis will hit demand for exports from central and Eastern Europe and undermine the emerging region’s recovery. The saving grace though is that the Czech Republic, Hungary, Romania, Croatia, and Slovakia have a collective state debt of only 200 billion euros, lower than Greece’s total debt of 300 billion euros. But, the Greek debacle may delay the Czech adoption of the euro even longer. Public sentiment is weighing against the adoption of the common currency, with a recent survey suggesting that more Czechs are now against adopting the euro than in favor of it.

Rising European star has hurdles to overcome

The Czech Republic is distinguished as one of the most stable and prosperous economies among the post-communist states in Europe. Foreign direct investment (FDI) is among the highest in the region, with a strong balance of payments contributing to a resilient fiscal outlook. A favorable location coupled with low labor costs make this economy attractive for multinationals the world over.

The Czech central bank recently cut interest rates to 0.75 percent, below the Euro-zone’s 1 percent. The surprise move may underscore the bank’s confidence in the Czech currency koruna’s ability to withstand any further downward pressure from the Greek debt crisis.

Encouragingly, the Czech Republic appears to be more resilient than its counterparts in Eastern Europe in weathering the financial turmoil. Its currency, the koruna, was relatively less volatile than the Hungarian forint, which witnessed a massive depreciation in October 2008, as nervous investors led a capital flight from the economy.

However, the dark clouds of recession seem to hover over the country still. While most of Western Europe seems to have come out of the crisis, the effects of the economic slowdown are still visible in the industry-heavy, export-oriented countries of central Europe such as the Czech Republic. The country primarily manufactures cars, computers, glass, and electronics for consumption in the markets of Western Europe. The Czech Republic continues to be heavily reliant on trade with the EU; over 85% of its exports and just under 70% of its imports are conducted with its EU neighbors. A pronounced slowdown in the Euro-zone as well as the EU economy is likely to hamper exports from the Czech Republic. Germany is a significant trade partner, especially an important destination for automobile sector exports from the country. The good news is that the regional banks have more or less recovered, posting good profits.

Pointing to the shape of things to come in 2010, the Czech central bank recently cut interest rates to 0.75 percent, below the Euro-zone’s 1 percent. The surprise move may underscore the bank’s confidence in the Czech currency koruna’s ability to withstand any further downward pressure from the Greek debt crisis. The decision could also reflect the central bank’s expectations that economic growth will be sluggish, both in the Czech Republic and the Euro-zone. Predictably, the bank left its GDP growth forecast for 2010 unchanged at 1.4 percent and cut its 2011 outlook to 1.8 percent from 2.1 percent. The central bank also lowered its inflation expectations for the second quarter of 2010 to 1.8 percent from its earlier forecast of 2.1 percent. While the apex bank does not expect a strong recovery in 2010, it is optimistic of stronger economic growth in 2011. The bank’s decision also reflects the general consensus that a rate hike will not be on the agenda for much of the central European region.

The political uncertainty prevailing in the country in the absence of a majority government did delay the Czech ratification of the European Union’s Lisbon Treaty, which finally occurred on November 3, 2009. The treaty is widely seen as an attempt to streamline EU institutions to make the enlarged bloc of 27 states function better, though opponents see it as a threat to national sovereignty.

Tourism has been one of the main drivers of the Czech economy, though the country’s high GDP growth has been propelled primarily by domestic demand. Still, the Czech government needs to reform the labor market, as long-term unemployment problems persist. Not unlike the rest of Europe, ensuring a consistent labor supply will remain a challenge. This is especially so in the Czech Republic, since according to World Bank estimates, medium-term spending pressures are likely to rise due to the Czech government’s more than generous social entitlements, provisions for healthcare, and a radical pay-as-you-go pension scheme.

The paneláks are set to undergo a major transformation, supported by EU funding together with the Czech government, which pumps in around $36 million annually through three renovation programs. By 2015, places like the Roma ghettos would be changed forever.

The new government regime, which will assume power after the upcoming elections, will have its hands full. It needs to get down to the task of improving the regulatory environment for businesses and modify the tax system to promote medium-term growth. The tax policy needs to be amended to focus more on consumption, environmental, and property taxes rather than labor and income taxes. Public finance needs immediate attention as well, with the new government looking to reduce the public deficit to 3% of the GDP. The strength of the country’s economic recovery will depend mainly on the growth in world trade. However, domestic demand is likely to remain subdued in the near term as household consumption is constrained by rising unemployment and the tightening of public budget.

Despite these challenges, for the most part, the Czech Republic is still considered one of the greatest economic successes in the European region, and most Czechs enjoy a standard of living higher than other former communist countries in Europe.

Indelible heritage of communism

To understand the future of the Czech Republic, one needs to visit its past. Prague’s ornate, elegant architecture hides its darker underbelly – the infamous paneláks that seam through the edges of the city. Paneláks were shabby huge housing estates, dull, drab, and dreary, which were built during the Communist era to symbolize the ideology of material equality through affordable housing for all. These monolithic facades house nearly a third of the Czech population. During the 1950s and 1960s, in a stagnant economy where demand for housing exceeded the supply, these mediocre, featureless buildings cast a grey pallor over Prague and the Petrzalka, now in Slovakia. With the fall of communism, these aging buildings are undergoing a transformation. The monotony of grey is being replaced by vibrant splashes of art, and supermarkets jostling side-by-side with huge, glitzy malls. The Czech government is pumping in more than $135 million towards refurbishing these concrete labyrinths. As communism’s social engineering experiment fades into the dark and democracy comes alive in the Czech Republic, the paneláks stand still and Golden Prague with its Baroque architecture and splendid castles comes into focus. Change is blooming. Like the paneláks, the Czech Republic is no longer tethered to its past, and the country is young, free, and marching ahead.