Jan Macháček

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Czech Business Weekly

Timely EU entries and why it’s ‘no go’ for nuclear

19. 05. 2008
Not every new member of the European Union has experienced as much good luck as the Czech Republic, Poland and Slovakia following their accession.

These three countries enjoyed a period of quite dynamic, relatively healthy economic growth prior to their entry, and even more after it took place.

But some other newcomers are struggling. Romania, for instance, is heading for the trap recently experienced by South Africa, Iceland and Turkey, namely that of a large trade imbalance and high inflation. Industrial growth in Romania slowed to 2.9 percent in March, but inflation is running ahead at almost 9 percent (even though the country’s central bank predicted 3.5 percent) and Romania’s output of durable goods has actually contracted. The leu, the Romanian currency, has recently depreciated against the euro and economic data suggests that it needs to depreciate more.

These difficulties present us with a good occasion for reminding ourselves of why Poland, Slovakia and the Czech Republic have been a success in Europe. All these countries are naturally important transit countries between Europe’s East and West. It is actually their location that is the most important factor in “sentencing us to success.” The trio, especially the Czech Republic, can also point to their traditional pools of skilled manufacturing. Romania’s assets in this area are most certainly poorer.

Also instructive is the fact that, in advance of the newly minted EU memberships, the institutions that service the market economies of the various Central European countries were more developed than their counterparts in Southeast Europe. While, last but not least (when we count our lucky stars, we can say that unlike Romania and Bulgaria) we entered the EU when the world still enjoyed low oil, commodity and energy prices. By the time the Romanians and Bulgarians were celebrating their arrival in the Brussels club, the genie of global inflation and financial instability was already out of the bottle.

But can they cut the mustard?

Before the last general elections, a competition broke out over whom would cut taxes more. The Civic Democrats (ODS) and their then-economic guru Vlastimil Tlustý were proposing aggressive tax cuts, but the Social Democrats (ČSSD) were also speaking about lowering taxes. Something similar, it seems, has these days arisen in Germany.

It was all started by the Christian Social Union (CSU) of Bavaria, the sister party of the Christian Democratic Union (CDU). Their overall sum of proposed cuts amounts to almost €30 billion (Kč 750 billion). Middle class families are supposed to benefit most. Social Democrats (SPD) chairman Kurt Beck, meanwhile, has said that his party will announce its own tax cut proposal later this month. These cuts are also supposed to be helpful to the middle class, plus lower-income families. But not to be outdone, German Chancellor Angela Merkel (CDU) has joined in, saying that her party will link up with the CSU in announcing a joint tax-cutting plan.

Politicians competing over tax cuts—could the voters wish for more? It sounds like paradise. But stop right there. In the case of the Czech Republic, taxes actually went up during the first year of the so-called reform “backpack.” In the next few years, taxes should go down, but now it looks like a lot of the gains will be eaten up by higher inflation.

Germany’s current grand coalition came to power with the goal of putting the public finances in order and it actually raised taxes: value-added tax (VAT) rose from 16 percent to 19 percent. Now all the major parties are not only promising lower taxes, they are also committing to spending more on, for instance, infrastructure.

This scenario is also familiar to us. The difference is that we are still far from having a balanced budget, though our ratio of public debt to GDP (30 percent) is still much lower than that of Germany. The unwillingness of politicians to curb spending seems to be almost universal.

Nuclear (investment) deterrents

Apart from the Greens (SZ), almost all the major political parties in this country (and not only in this country) speak fondly about nuclear energy. It is supposed to liberate us from skyrocketing energy prices and lower our energy dependence on Russia. We are also informed that more nuclear energy will decrease our dependency on burning coal. Coal power plants, of course, are considered to be major polluters.

It is not too much of a stretch of the memory to recall the story of the 1980s and 1990s when the costs of the Temelín nuclear power plant went up and up and up. Yet there is talk of building two more nuclear blocks at Temelín, provided, that is, that the Greens can be shunted out of government.

Let’s catch up on the situation in the U.S., a country that has recently decided to renew investments in new power plants. As reported by The Wall Street Journal, a new generation of power plants is on the drawing board.  The project costs—nearing $ 12 billion (Kč 193.33 billion) per plant and four times the earlier rough estimates—are causing a shock.
America’s current power plants are profitable, but this is because these were sold by the state to current operators for a fragment of their actual cost during privatizations.

Also worth reminding ourselves about is the auction of shares in the British Energy Group that operates the U.K.’s nuclear power plants. It has just ended up in a fiasco. Only French state operator Electricite de France (EdF) submitted a bid by the May 9 deadline.

The conclusion has to be that once this country decides to again invest in nuclear plants it will face an awful lot of difficulties. And a corollary to this is that the chances of a full privatization of energy producer ČEZ with nuclear power plants featuring heavily in the equation are not good.

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