eastern europe

Czech Your Head

  • Why it matters

    Why it matters

    The Czech Republic is an important economic partner for Germany. But years of political stability appear over.

  • Facts

    Facts

    • Czech annual GDP growth, at around 2.8 percent, promises to remain at the top of European league tables.
    • Czech relations with the EU have cooled in recent months, as Prague refuses to take in refugees.
    • National elections in October promise a change new coalition government, as Euroskeptic populists rally under billionaire businessman Andrej Babis.
  • Audio

    Audio

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High Angle View Of Light Trails On City Street
Boom town: Prague. Source: Getty

The Czech Republic is looking ahead to parliamentary elections in four months’ time. In the meantime, the country presents a paradox for foreign businesses, many of which are located across the border in Germany. On one hand, the economy is booming, with steady growth and near full employment. On the other, political instability is on the rise. The upcoming election promises to be divisive and bitterly fought.

For foreign investors, the country remains a highly attractive place to do business. “The Czech Republic still has relatively low labor costs, even if economic growth has caused some wage growth,” Wolfgang Schopf, vice chair of the Česká spořitelna bank, told Handelsblatt. Skoda, a subsidiary of German carmaker Volkswagen, is the country’s largest employer.

The Erste Group, an Austrian bank and financial services provider, predicts Czech economic growth will hit 2.9 percent this year, with 2018 down only very slightly to 2.8 percent. Raiffeisen Bank International, which is active in the country, forecasts slightly lower but still healthy growth of 2.3 and 2.7 percent respectively.

26 p14 Czech Republic in Numbers 1-01

“Companies have full order books,” says Bernard Bauer, managing director of the German-Czech Chamber of Industry and Commerce. He adds that, “93 percent of German companies are very satisfied here. People are very open to German business.”

The country’s technological progress also makes it an attractive business location. “High tech has been here a long time already,” Mr. Schopf says. “This country’s capacity for innovation is underestimated.”

Mr. Bauer agrees: “The days when the Czech Republic was just a workshop for other countries are long over.”

The boom has led to some inflation of commercial and residential property prices, above all in Prague, the capital. “Temperatures are definitely heating up in the property sector,” Mr. Schopf says. “But there is no over-heating yet, although we can see tensions rising.”

The country’s patchy infrastructure is beginning to improve, too. The 200-kilometer (125-mile) old concrete highway between Prague and Brno, the country’s second-largest city, is finally being asphalted. Along it, road signs with the EU’s blue and gold flag remind drivers where the money for all this is coming from. Last May, parliament approved €24.5 billion, around $27.5 billion, to expand the network of high-speed rail lines, focusing above all on connections to Germany, by far the country’s biggest economic partner.

“The days when the Czech Republic was just a workshop for other countries are long over.”

Bernard Bauer, managing director, German-Czech Chamber of Industry and Commerce

Yet there has been bitter criticism of the state’s failure to apply for all the European funding available. Most critics blame the mess on an incompetent civil service. “For many reasons, the country has difficulties applying for the available funds in time,” Mr. Schopf says. Major traffic congestion, poor rural infrastructure and aging rail links are daily reminders of the need for improvement.

But the country’s real problems are more about politics than infrastructure or the economy.

On a recent visit to Charles University in Prague, the EU Commission’s president Jean-Claude Juncker said he was “convinced that the Czechs are great Europeans.” This may have been wishful thinking. Surveys show only 35 percent of Czechs approve of the EU, while 41 percent would like to see “Czexit” — the country’s total withdrawal from the 28-nation bloc.

26 p14 Czech Republic in Numbers 3-01

Embattled Prime Minister Bohuslav Sobotka recently refused to take part in the EU’s refugee redistribution scheme, which would have seen tens of thousands of refugees sent to the Czech Republic. Mr. Juncker may be forced to bring out the big guns and take the country to court for breaching European constitutional law.

Now, it is unclear who Mr. Juncker should even be negotiating with in Prague. Mr. Sobotka resigned as leader of the social democratic CSSD in June. It seems likely that the party will be led through October’s general election by pragmatic Foreign Minister Lubomir Zaoralek, on an ambitious platform of social reform. Another leading figure in the party, Interior Minister Milan Chovanec, is a hardliner on refugee policy.

It is clear that a four-year spell of stability in Czech politics is coming to an end, but no one — certainly not foreign business observers — has a clear idea what will come next.

Most bets in Prague would be on controversial billionaire Andrej Babis and leader of the populist Action for Unsatisfied Citizens (ANO) party winning October’s vote. The charismatic businessman owns some 250 companies. Among them, leading German baked goods maker Lieken and many Czech media outlets, including the newspaper Mladá fronta Dnes and the freesheet Metro.

Only 35 percent of Czechs approve of the European Union, while 41 percent favor total withdrawal.

Mr. Babis served as finance minister in the current coalition until the end of May, when he resigned over accusations of tax fraud and undue influence on the media.

Opinions polls suggest ANO is the country’s most popular political force. The big question is probably not if it will form a government, but who it will enter a coalition with to do so. A continuation of the current coalition, between the Social Democrats, Mr. Babis’s ANO, and the KDU-CSL center-right party, seems highly unlikely.

Mr. Sobotka’s Social Democrats, in common with many European mainstream social democratic parties, has seen its popularity decline — in this case, to just 10 percent of the vote. Analysts expect a tough, tense campaign. “It is going to be very confrontational,” one German expert in Prague predicts.

Another economic question dominating headlines is the country’s extraordinarily low unemployment figure. At just 3.6 percent, it’s among Europe’s most impressive.

“In Prague, the labor market has been swept clean,” Mr. Bauer of the German-Czech Chamber of Commerce says. More and more companies are reporting dismal recruiting experiences. “The antiquated education system is a problem,” says Mr. Schopf. “The lack of well-educated workers is palpable in many places.”

26 p14 Czech Republic in Numbers 2-01

Hans-Peter Siebenhaar is Handelsblatt’s correspondent in Vienna and specializes in media and telecommunications coverage. To contact the author: siebenhaar@handelsblatt.com

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