The Czech Republic celebrated a major anniversary on May 1 this year. Twenty years ago on this day, the Czech Republic joined the European Union, and thus became part of the Single European Market. Apart from the political implications, joining the EU had major economic consequences. These are the ones we are going to look at now.
The Centre for Economic and Market Analysis (CETA), together with think tanks from six other European countries, examined the phenomenon of the Single European Market with a focus on assessing the results of the Czech Republic’s economic integration into the EU and its future development. This article summarises the key findings of their study.
Economic Convergence of the Czech Republic towards EU Countries
Throughout the Czech Republic’s membership in the EU, its GDP per capita (i.e. an indicator of the economic performance of countries) has increased by 46 %, which put it ahead of some countries that joined the single internal market earlier, namely Spain, Portugal, and Greece.
While the Czech Republic’s GDP per capita in purchasing power parity terms was 59% of Austria’s in 2004, by 2010 it had climbed to 65%. Unfortunately, however, the Czech Republic’s economic convergence towards the developed EU countries has been slowing down noticeably in the last few years. Since 2017, its GDP per capita in purchasing power parity has been somewhat stagnant between 72–73 % of Austria’s GDP. Let us add that when the Czech Republic joined the EU, the prospects for real economic convergence were much more optimistic.
According to CETA’s chief analyst Michael Fanta, the Czech Republic has undoubtedly been helped by the Single European Market. But he adds that it could help us even more. This is because while in the first years after EU accession the Czech economy was catching up with Austria’s at a rate of about one percentage point per year, since 2017 its convergence has essentially stopped. Michal Fanta even argues that unless something changes, the Czech Republic will never catch up with Austria economically.
Czech Economic Integration
Since 2004, the Czech Republic has continuously been one of the most integrated countries within the European single market. In terms of the proportion of foreign trade with other EU Member States, 80 % of total domestic exports go to EU countries (with 33% going to Germany). As for imports, almost three quarters come from EU member states (with Germany again accounting for the largest share, namely 28 %).
In 2004, when the Czech Republic joined the EU, it saw the highest annual growth in exports, with 29 %. Eurostat data show that the average annual growth in exports for the period 2002–2022 was 9.6 %. The situation for imports is somewhat analogous, with the Czech Republic seeing a 23 % increase in imports in 2004.
Exports to the European Union countries have increased significantly thanks to Czech’s membership in the EU. Whereas in 2002 it was €22 billion, twenty years later in 2022 it will reach €188 billion, with foreign direct investment quadrupling since it joined the EU. This expansion is largely responsible for the positive economic development of this country.
Advantages and Pitfalls of European Single Market
Let us start by declaring that the functioning of the Single European Market can be considered a great success. However, it is also necessary to mention the inherent problems that membership poses. To be more specific, the main problem is the introduction of what was originally one of the core ideas of the Single Market – all sorts of trade barriers and restrictions.
It turns out that the bon mot about how ‘the US innovates, China copies, and the EU regulates’ is quite accurate. In fact, OECD data shows that between 2014 and 2022, restrictions on international trade in the EU did not fall, but rose. It was in the CEE region that the number of measures restricting the expansion of international trade grew faster than in Western European countries. Stricter regulatory rules cut across a wide range of sectors, signaling the need to consider their impact on the competitiveness of individual countries.
Although economists often disagree on many issues and have sharp disputes with each other on some economic policy issues, there are areas where they are absolutely certain. One of these is the benefits of openness to international trade. Indeed, the vast majority of academic economists agree with this thesis. Yet this consensus is not well reflected by political elites. Ales Rod, Executive Director of CETA and a member of the National Economic Council of the Government of the Czech Republic (NERV), even states somewhat satirically that “in the European Union we do not yet have a single market, but we do not yet have the market itself“.
Economic Policy Recommendations
The CETA analysis offers many suggestions for improving the functioning of the European Single Market that would help boost European economic growth, from which the Czech Republic would benefit significantly. We will now outline the most important ones.
The key is an overall reduction in the number of regulatory standards. At the very least, the principle of “1 in, 1 out”, i.e. the rule that whenever a new regulation is adopted, there should be at least one other regulation repealed. Overall, the number of regulations would thus stagnate, which, although only a partial success, can still be considered an improvement on the current situation and expected future developments.
Furthermore, it would be advisable to liberalize the regulations whose impact represents the greatest cost to the European market. This is also true in the ‘digital world‘ where, partly due to overly restrictive regulations, the EU is far from being able to compete with the US or China.
The EU should therefore avoid introducing further redundant regulations that make EU countries less attractive for foreign investment to develop digital companies and innovation. For example, it is suggested not to hinder the use and development of various artificial intelligence systems in order to promote the competitiveness of this sector on the global market. As one of the greatest thinkers of the last century, F. A. Hayek, explains:
“Conservatism cannot alter the fact that the ideas which are changing our civilization respect no boundaries. But refusal to acquaint one’s self with new ideas merely deprives one of the power of effectively countering them when necessary.”
Equally important is the need to rationalize EU environmental policies. While climate change and other environmental threats are a reality and it is essential to find effective ways of protecting our planet, a reasonable compromise should be sought between the pace of ecological transformation and its costs.
Written by Štěpán Drábek – analyst at CETA.
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