The Effects of Austerity Measures on Czech Economy

This piece was published in the November 2010 issue of The New Presence magazine in Prague, Czech Republic.


PRAGUE – On September 21st, more than 30,000 public service workers took to the streets to protest
government austerity plans to reform the Labor Code and cut public service salaries by 10 percent. The center-right coalition plans budget cuts to reduce the current 4.6 percent public deficit to 3.0 percent by 2013. Teachers, firemen, and policemen joined the demonstration, some angry enough to claim that the right-wing government’s measures were the biggest infringement on employees’ and human rights since the fall of communism in 1989.

Worldwide crisis and gaping deficits have prompted sweeping austerity measures—and labor protests— across Europe. In the Czech Republic, the austerity measures affect society both domestically and
abroad, causing public discontent over unwelcome change to their daily lives. While Czech labor unions struggle to strengthen their role in a modern economy to influence this center right wing policy, Czech workers threaten to strike or even leave the country if their salaries are reduced. Despite good intentions to cut back spending, austerity measures have negative side effects that may outweigh the good, and there may be other solutions to balance the budget.

Deficit all over Europe

Other European countries facing similar deficits include Greece, France, Slovakia, and Spain, whose
governments are cracking down with even tougher austerity bills. In Spain, for example, public sector
wages were cut by 15 percent, and those earning higher than 175,000 euros per year would receive a 2
percent tax rate increase. Similarly in Greece, public sector wages were cut by 15 percent and the
retirement age raised to 65; pensions in both the private and public sector were cut by 10 percent.

Czech Prime Minister Petr Nečas’ so-called “government of budget responsibility” plans to decrease the country’s deficit by more than just salary cuts. The austerity measures will foster cuts in military and welfare spending, tax exemptions, as well as the closing of several Czech consulates around the globe.

Nečas argued that the budget cuts are necessary if the Czech Republic is going to avoid becoming one of the “countries known for not being able to solve their own problems and threatened with painful correction measures not fully under their control.”

Negative Side Effects on Ordinary Lives

The two most important and media-publicized measures are the 10% salary cuts of public workers and the zonal remuneration system. If the measures are passed, public sector workers, ranging from
bureaucrats, police, nurses, firefighters, teachers, museum workers to orchestra members, would receive a 10 percent salary decrease in the next year. The zonal remuneration system would allow those managing individual public institutions to increase wages based on merit rather than seniority.

In other words, instead of automatically increasing the salary of older workers, management would have the freedom to indiscriminately raise wages, based on subjective judgment alone. This functions as a cost savings since all experience groups receive salary cuts, but also does not require senior workers to be paid more. In theory, management would not be legally obligated to increase anyone’s wages.hose with experience who have spent long years working for the same institution will no longer have the security they may have expected at retirement age, since in addition to general cuts, zonal
remuneration also implies future layoffs.

“The solution of how to reach the cut of 10 percent is up to the different institutions, whether they decide to take the path of salary cuts or employee dismissals,” government spokesman Martin Kupka told The Prague Post. “In most cases, it is going to be a mixture of both.”

“What is stupid about these cuts is it’s a one-size fits all; they take the same amount from everyone,”
said Jan Macháček, an economics reporter for Respekt magazine. “And these people, although in
qualified jobs, were already paid poorly.”

Trade Union of Health and Social Care Workers (OSZSP) Dagmar Žitníková believes that in particular, “social workers are those with the worst salary conditions” and that if the proposed measures are passed, the salary of these people would reach minimum wage.

Overall, the average salary of public sector workers is a little more than 20,000Kc a month. Teachers
get paid less, around 15,000Kc a month, and physicians are generally paid around 35,000Kc a month.
The average salary of public sector workers is about the same as the median salary in the Czech Republic, which is about 21,000Kc a month, but will soon drop if the 10% cuts are passed.

One of the most affected public sector areas is healthcare, and many predict that Czech doctors will flee the Czech system en masse in the next year. According to Reuters, a Czech head physician is already paid only about 250 to 300Kc an hour, which is equivalent to about $10-$12 an hour. Some 3,500 Czech doctors have threatened to leave the country to find higher wages in Germany or other Western European countries, which pay nearly four or five times as much.

While the September 21 protest and continuous public complaints brought attention mostly to these 10% salary cuts and zonal remuneration, the effects of the proposed austerity measures are even more
widespread. On the domestic front, retired soldiers and policemen would no longer have the perks of tax exemptions. Selected welfare benefits, subsidies for disabled people to hire assistants, and subsidies given to political parties and movements for their activities would all be reduced or completely cut.

They would also affect the Czech Republic’s influence abroad by closing several foreign bureaus,
including those in the Congo, Venezuela, Kenya, Yemen, and Costa Rica by January 2011. Czech
general consulates in Bombay, India and Sydney, Australia will also be closed. Military spending is to
be reduced while the ministry of foreign affairs is firing 10% of its staff—leaving even ambassadors
anxious for their jobs. Some have complained that the country would lose “diplomatic muscle” because of these cuts and the closing of embassies around the globe.

The Role of Czech Labor Unions

Amidst the turmoil over the austerity measures, the Czech labor unions are experiencing their own
growing pains, and must re-evaluate their roles in both government and economy in order to properly
function in a free market economy as influential institutions.

“Right now the Czech Republic is unsure of what society it will form or who to model after,” Macháček said. “Should we model after Austria, where the position of unions is stronger, or do we want to be able fight unions and overrule them? Do we want to be like Germany, or perhaps Scandinavia where unions have a lot of power?”

Prime Minister Nečas has remained firm in his stance to carry out the austerity plans, but the unions have, through media and publicity, managed to deter the government from at least a few measures.

Czech labor unions are not there just for show; they certainly have exhibited power in mobilizing media, and can indirectly affect policy. However, protests by Czech labor unions do not have as much influence over government policy as do the well-oiled, familiar strike scenes in France or Spain. This may be caused by the fact that the Czech public simply does not take part in labor protests or strikes to the same extent as they do in a country like France. On a deeper level, one can analyze the way Czech labor unions were accustomed to work under communism to better understand the current role of labor unions in the modern economy.

Zora Butorová, a Slovak sociologist and public opinion researcher, says that what differentiates the labor union scene in the Czech Republic and Slovakia from that in Western European countries is that “under communism, we didn’t get a chance to protest the government or learn how to do things collectively.”

Project Syndicate writes, “…[O]ld socialist functions have so distorted the notion of what a trade union is that many reformers fail to understand their role in a modern economy.”

In the West, unions are channels for information and power, which bridge the gap between workers and the government. Under communism, on the other hand, there was not much of a bridge between
workers and employers; “Communist era unions had a greater resemblance to human resource
departments of companies than true worker collectives and, as such, were controlled by management,”
Project Syndicate states.

Deciding the role of labor unions in the Czech Republic, as institutions that can directly affect the
economy, will be a major factor in Czech economic reform. The unions plan to hold a strike on December 8, 2010.

Negative Side Effects on a Broader Scale

While ordinary people will personally feel the immediate effects of the budget cuts, studies show that
austerity measures can have negative long-term effects that can stall the economy even more than it can help accelerate it.

Raiffeisenbank analysts calculate that austerity measures will slow the Czech economy’s growth by 0.8 percentage points. The small open economy’s growth, which is expected to increase by only 1.3 percent next year, will be largely driven by exports, VAT (value added tax) rate, and construction of solar power plants. This shows that the Czech Republic is more on par with its Western neighbors than it is with Slovakia or Poland, whose economies are expected to grow at higher rates. Unemployment is also expected to increase, according to Labor and Social Affairs Minister Jaromír Drábek.

“The examples of Ireland, Italy, Lithuania, Latvia, Portugal, Greece and Spain all show one thing:
saving can be quite costly,” wrote journalist Petr Holub.

According to Eurostat, a detailed statistics database on the EU, these countries’ budget revenues were greatly reduced, but the expenses stayed the  same or even increased in some cases, in order to ease the effects of the global crisis. In The Financial Times, U.S. economist Joseph Stiglitz wrote, “A household that owes more money than it can easily  repay needs to cut back on spending. But when a government does that, output and incomes decline,  unemployment increases, and the ability to repay may actually decrease.” According to a recent poll in he Czech Republic, 58 percent of Czechs believe the austerity measures will lead to slower economic recovery.

Middle of the Road Solution

Those battling the center-right government over the cuts include Social Democrat and Parliament
Member Jan Hamáček, who considers the austerity debate one of the most controversial issues in
Parliament at the moment. “Although the Social Democrats will probably lose this battle, we want to
take a look at other solutions to the budget deficit,” which include corporate and income tax, sales tax,
which would cause the rich to be taxed more than the poor, he said during a meeting at Parliament. This, along with not-so-drastic budget cuts, would provide a more balanced solution.

“The current coalition government pledged during their campaign to not tax the rich, so they feel they
cannot fall through on this promise,” Hamáček said. “They are also more conservative, so they believe
that big companies actually need to be taxed less in order to flourish, especially in this economy. But we  need to focus on something that doesn’t put so much pressure on the middle class people.”

Those who oppose the center-right government’s austerity measures completely, such as the labor
unions, are more in favor of taxing the rich—but Macháček says this may not be any more effective.
“It’s a political symbol to tax the rich, but you can’t get much out of these taxes,” he said. “You have to
have a balance of cuts and tax increase. Here the coalition government says just cuts—and labor unions  are saying no cuts, only tax increases. But the best is when you have non-ideological experts, who offer  a middle-of-the-road solution.”


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