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Czech: Prague's Trade Row With EU Risks Damaging Membership Chances

By William Echikson

Brussels, 10 June 1997 (RFE/RL) -- The Czech Republic and the Executive Commission of the European Union are headed for what looks like a damaging clash over Prague's plan to cut foreign imports.

The row with Brussels comes at an extremely difficult moment for the Czechs, who are beset with severe economic problems, which in turn is sending shock waves through the country's political system. And worst of all is the possibility that the disagreement could hinder the Czech Republic's efforts to become an EU member as soon as possible.

An RFE/RL correspondent reports that at a meeting on May 29 in Brussels, EU officials put an ultimatum to the Czechs: withdraw the scheme before the end of June or face arbitration before the Association Council. That's the body consisting of representatives of the EU and of countries which have association accords with the EU. In that case, the Czechs could face fines.

Prague so far is refusing to budge from its decision to require importers to place for six months in a non-interest bearing account a deposit equivalent to 20 per cent of invoiced price for most imported agricultural products, foodstuffs and consumer goods.

In a confidential position paper delivered to European Commission, the Czechs paint a dramatic picture of their declining trade situation. "We will keep the import deposit as long as needed until the situation improves and the trade deficit comes down to a reasonable level," says Petr Kubernat of the Czech Mission to the EU.

For EU officials, the import barriers represent a blatant contravention of free trade. "We understand that the Czechs face a difficult economic situation", said Lousewies Van der Laan, an EU Commission member. "But this move totally contravenes free trade and we cannot permit it."

The dispute highlights the growing crisis in the Czech Republic. Until recently, the Czech economy seemed to be flourishing, and to present a model or other countries emerging from communism. In October, 1995, the country became the first transition country to enter the rich club of OECD members. With the exception of the inflation rate of about 9 per cent, the Czechs even have met most of the Maastricht criteria for the single currency. Vaclav Klaus, the father of the Czech model and prime minister since 1992, is the longest ruling Prime Minister in Central and Eastern Europe.

For a long time, the expanding trade deficit was not a source of serious concern. Klaus explained it away as a predictable result of fast growth and high investment. But by last year, the trade deficit reached an astounding 8.6 per cent of GDP, and during the first five months of this year, the situation continued to deteriorate.

In mid-April, the government adopted measures to tackle the crisis. The Czech currency, the koruna -- whose strength and stability over six years represented a key feature of Czech economic success -- was attacked. After a costly battle against international speculators which cost $ 3 billion in two weeks, a quarter of the country s hard currency reserves, the Czech Central Bank set the koruna free on May 26. The currency rate, which was till then tied to the dollar and the D-mark, fell by 8 per cent in a single day.

There were resignations of cabinet ministers, and at the end of May, Prime Minister Klaus acknowledged that "the transformation road will be longer than was planned and wished." Klaus announced radical budget cuts along with the new import restrictions, setting the scene for the present row.

According to Article 65 of the trade agreement between the Czech Republic and the EU, restrictive measures are indeed allowed, for a limited period and in accordance with principles set out by the World Trade Organisation, in the event that the country faces serious difficulties concerning its balance of payments.

But the EU does not see the Czech move as justified by the economic realities. David Ringrose of the EU delegation in Prague insists that the Czech foreign currency reserves are large enough to cover present imports without the need for restrictions. And the EU Commission says that the data provided by the Czech authorities is not sufficient to justify the import deposit.

The Czech government replies that its trade situation is deteriorating faster than expected. Petr Kubernat of the Czech Mission said that the import deposit must be installed for at least three or four months.

Both parties say that the dispute will not interfere with the prospective negotiations between Prague and Brussels about Czech membership of the European Union. Still, the potential for damage is considerable. The Czech Mission in Brussels continues to insist that its country remains the most dedicated free marketeer among the candidate countries. Ominously, EU officials appear not quite so sure. The import deposit scheme comes as "unfortunate at the time of the finalising of the Commission's opinions on the applications of the associate countries," says David Ringrose.

In defense of its import deposit scheme, the Czech Republic presented the European Executive Commission with a document on May 19 detailing its deteriorating economic situation In this document, the Czechs said that in the first three months of 1997, negative tendencies proliferated, with exports almost stagnating while imports continued to grow. Consequently, the country's trade deficit in the first quarter increased substantially to some $ 1.3 billion which was nearly 50 per cent larger than in the same period of last year.

The document said the Czech Government is determined to follow a liberal policy. But in reaction to this and other disruptions, it had decided to apply a set of systematic corrective measures designed among other things to reverse risky developments in the balance of payments.

It said the temporary import deposit scheme was chosen because of its ability to have an immediate impact on the situation without increasing inflation or adding to the devaluation pressure -- factors of particular importance for a country in transformation. The document stressed that the list of products subjected to the deposit scheme was not arranged to grant protection to any particular domestic industry.

It said the scheme is non-discriminatory, being applied to all countries, including those with which the Czech Republic has preferential trade agreements.