The UK’s departure from the EU is less than six months away. While the implications will be profound for all of Europe, Dutch bank ING forecasts that Brexit will resonate in the Czech Republic especially in terms of a drop in EU funds to many regions.
A new report by ING titled ‘Brexit’s impact on Central Europe: Who and what is most at risk?’ foresees a 20 percent drop in the countries’ EU funding, with disruptions to key supply chains hitting the region hard.
While the Czech Republic is exposed to British demand for motor vehicles, in particular, the larger implication of Brexit here will be what it means for the 2021-27 EU budget in general, to which the UK now contributes around 6 percent, says Jakub Seidler, ING’s chief economist in the Czech Republic.
“The exposure of the Czech economy to the United Kingdom is significant in our most important segment, which is manufacturing. Motor vehicle or car exports to the UK represent about 7 percent of total Czech car exports, and the UK was the second-biggest export destination after Germany… If British demand disappears after Brexit, it would mean that 2 percent of total Czech employment would be at risk in some way, and mostly from the industry and car sector.”
Even larger still could be the indirect impact, says Mr Seidler, as Brexit will see average GDP per capita levels decline in the EU, thereby depriving some countries of funds as their own levels rise above the post-Brexit EU average.
“So, this means that some regions in the Czech Republic will hit the threshold of 75 percent of average GDP per capita and will no longer be eligible for EU structural funds – it relates to the European Regional Development Fund and European Social Fund. So our regions will get less money due to crossing that threshold, which will change partially also due to the departure of the UK from the EU.”
“Another factor is the new financial perspective of the EU budget 2021-27 takes into account also other criteria – not only GDP per capita but also, for example, unemployment of young people, education levels, climate changes or attitude towards migration, so these criteria will also be a little bit shifted. So it seems that part of the money in the new financial perspective will be going more towards, for example, Portugal, Spain, Greece, Italy and not to our CEE region.”
“It means, altogether, that the Czech Republic could lose more than 20 percent of EU funds in the new financial perspective compared to the current one.”
The Czech economy has been doing well for many years and unemployment is at a 21-year low. So how well is the Czech Republic suited to absorb this shock – if you would call it a ‘shock’? “Exactly. This is an important note because the Czech labour market now is so overheated with job vacancies above 320,000, some shock related to lower demand could be easily mitigated by the labour market right now because there is really a scarcity of a suitable workforce.”
“Basically, Brexit is right now some kind of uncertainty that is difficult to quantify in economic forecasts, so even the Ministry of Finance is always noting in macroeconomic forecasts that Brexit or trade wars are ‘potential risks’.
“But on the other hand, looking at the big picture figures, the Czech fiscal stance is very sound. Right now we have a huge fiscal space, compared to other countries in the region, because our total debt-to-GDP ratio should get to 33 percent, one of the lowest figures among European countries. So definitely there are risks, but we have space to mitigate it somehow.”