Commission Opinion on the Czech Republic's application for Membership of the European Union
Date: 1997-07-15
Institutions: European Commission
Subjects: Czechia, EU relations, accession to the European Union, economic situation, political situation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 15.07.1997 
COM(97) 2009 final 

Commission  Opinion 

on the Czech Republic's  Application 

for Membership of the European  Union 

Contents 

A.  INTRODUCTION 

Page 

a)  Preface 

The Application for Membership 
The Context of the Opinion 
The Contents of the Opinion 

b)  Relations Between the European Union and the Czech Republic 

Historical and Geopolitical Context 
The Czech Republic's Position Concerning the European Union 
Contractual Relations 
The Pre-Accession Strategy 
Trade Relations 
General Evaluation 

B.  CRITERIA  FOR  MEMBERSHIP 

1.  Political Criteria 

1.1  Democracy and the rule of law 

Parliament and Legislative Powers: Structure 
Functioning of Parliament 
The Executive: Structure 
Functioning of the Executive 
The Judiciary: Structure 
Functioning of the Judiciary 

1.2  Human rights and the protection of minorities 

Civil and Political Rights 
Economic, Social and Cultural Rights 
Minority Rights and the Protection of Minorities 

1.3  General Evaluation 

2.  Economic  Criteria 

2.1  The Economic Situation 

Background 
Liberalisation 
Stabilisation of the Economy 
Structural Change 
Financial Sector 
Economic and Social Development 

2.2  The Economy in the Perspective of Membership 

Introduction 
The Existence of a Functioning Market Economy 
The Capacity to Cope with Competitive Pressure and Market Forces 
Prospects and Priorities 

2.3  General  Evaluation 

3.  Ability to Assume the Obligations of Membership 

3.1  Internal Market Without Frontiers 

The Four Freedoms 

- General  Framework 
- Free Movement of Goods 
- Free Movement of Capital 
- Free Movement of Services 
- Free Movement of Persons 
- General Evaluation 

Competition 
3.2  Innovation 

Information  Society 
Education, Training and Youth 
Research and Technological  Development 
Telecommunications 
•Audio-visual 

3.3  Economic and Fiscal  Affairs 

Economic and Monetary  Union 
Taxation 
Statistics 

3.4  Sectoral Policies 

Industry 
Agriculture 
Fisheries 
Energy 
Transport 
Small and Medium  Enterprises 

3.5  Economic and Social  Cohesion 
Employment and Social  Affairs 
Regional Policy and Cohesion 
3.6  Quality of Life and  Environment 

Environment 
Consumer  Protection 
3.7  Justice and Home  Affairs 
3.8  External Policies 

Trade and International Economic Relations 
Development 
Customs 
Common Foreign and Security Policy 

3.9  Financial  Questions 
Financial  Control 
Budgetary  Implications 

4.  Administrative Capacity to Apply the Acquis 

4.1  Administrative Structures 
4.2  Administrative and Judicial Capacity 
4.3  General Evaluation 

C.  SUMMARY AND CONCLUSION 

Annexes 

Composition of Parliament 
Single Market:  White Paper Measures 
Statistical Data 

IV 

L-.-.-.-.V-V 

A. INTRODUCTION 

a) Preface 

The Application for Membership 

The Czech Republic presented its application for membership of the European Union on 
17  January  1996,  and  the  Council  of  Ministers  decided  on  29  January  1996  to 
implement  the  procedure  laid  down  in  Article  0  of  the  Treaty,  which  provides  for 
consultation of the Commission. 

That  is  the  framework  in  which  the  Commission  submits  the  present  Opinion, 
responding  to  the  request  of  the  European  Council  in  Madrid  in  December  1995 to 
present the Opinion as soon as possible after  the conclusion of the  Intergovernmental 
Conference, which commenced in March 1996 and concluded in June 1997. 

The Context of the Opinion 

The  Czech  application  for  membership  is  being  examined  at  the  same  time  as 
applications from nine other associated countries.  The Czech Republic's accession is to 
be  seen as part  of  an historic  process,  in which  the  countries  of  Central  and  Eastern 
Europe overcome the division of the continent which has lasted for more than 40 years, 
and join the area of peace, stability and prosperity created by the Union. 

The European Council in Copenhagen in June 1993 concluded that: 

"The  associated  countries  in  Central  and  Eastern  Europe  that  so  desire  shall  become 
members of the Union.  Accession will take place as soon as a country is able to assume 
the  obligations  of  membership  by  satisfying  the  economic  and  political  conditions. 
Membership requires: 

that  the  candidate  country  has  achieved  stability  of  institutions  guaranteeing 

democracy, the rule of law, human rights and respect for and protection of minorities; 

-  the existence of a functioning  market economy, as well as the capacity to cope with 
competitive pressure and market forces within the Union; 

-  the ability to take on the obligations of membership, including adherence to the aims 
of political, economic and monetary union. 

The  Union's  capacity  to  absorb  new  members,  while  maintaining  the  momentum  of 
European integration, is also an important consideration in the general  interest of both 
the Union and the candidate countries". 

This  declaration  spelled  out  the  political  and  economic  criteria  for  examining  the 
accession requests of the associated countries of Central and Eastern Europe. 

The European Council in Madrid in December  1995 referred to the need, in the context 
of  the  pre-accession  strategy,  "to  create  the  conditions  for  the  gradual,  harmonious 
integration of the applicant countries, particularly through: 

the development of the market economy, 

the adjustment of their administrative structure, 

the creation of a stable economic and monetary environment". 

In  its  Opinion,  the  Commission  analyses  the  Czech  application  on  its  merits,  but 
according  to  the  same  criteria  as  the  other  applications,  on  which  it  is  delivering 
Opinions at the same time.  This way of proceeding respects the wish, expressed by the 
European Council  in  Madrid,  to  ensure  that  the  applicant  countries  are  treated  on an 
equal basis. 

In addition to the individual  Opinions the Commission  is presenting  separately to the 
Council, in the framework  of its communication "Agenda 2000", a general assessment 
of  the  accession  requests,  and  its  recommendations  concerning  the  strategy  for 
successful  enlargement of the Union.  At the same time, it is presenting an evaluation of 
the impact of enlargement on the Union's policies. 

The Contents of the Opinion 

The structure of the Opinion takes account of the conclusions of the European Council 
in Copenhagen. It: 

-  describes  the  relations  up  to  now  between  the  Czech  Republic  and  the  Union, 
particularly in the framework of the association agreement; 

-  analyses the situation in respect of the political conditions mentioned by the European 
Council (democracy, rule of law, human rights, protection of minorities); 

-  assesses  the  Czech  Republic's  situation  and  prospects  in  respect  of  the  economic 
conditions mentioned by the European Council (market economy, capacity to cope with 
competitive pressure); 

-  addresses the question of the Czech Republic's capacity to adopt the obligations of 
membership, that  is the acquis of the Union as expressed  in the Treaty, the secondary 
legislation, and the policies of the Union; 

-  makes finally a general evaluation of the Czech Republic's situation and prospects in 
respect  of  the  conditions  for  membership  of  the  Union,  and  a  recommendation 
concerning accession negotiations. 

In assessing the Czech Republic in respect of the economic criteria and its capacity to 
assume  the  acquis, the  Commission  has  included  a  prospective  assessment;  it  has 
attempted to evaluate the progress which can reasonably be expected on the part of the 
Czech Republic in the coming years, before accession, taking account of the fact that the 
acquis itself  will  continue  to  develop.  For  this  purpose, and  without  prejudging  the 
actual  date  of  accession,  the  Opinion  is  based  on  a  medium-term  time  horizon  of 
approximately five years. 

During  the  preparation  of  the  Opinion,  the  Commission  has  obtained  a  wealth  of 
information  on  the  Czech  Republic's  situation  from  the  Czech  authorities,  and  has 
utilised many other sources of information,  including the member states and numerous 
international organisations. 

b)  Relations  Between  the  European  Union  and  the  Czech  Republic 

Historical and Geopolitical  Context 

The Czech Republic  is a landlocked  country  in the middle of Europe, with  flatlands  in 
the  centre  and  a mountainous  periphery.  Its  neighbours  are Austria,  Germany,  Poland 
and Slovakia.  It has an area of 79,000 km2 and a population of  10.3 million. 

For  nearly  four  centuries  after  1527,  when  Ferdinand  I  of  Habsburg  was  crowned  as 
King  of  Bohemia,  the  Czech  territories  were  part  of  the  Austro-Hungarian  Empire. 
Czech  aspirations  for  greater  autonomy  in  the  Empire  grew  during  the  nineteenth 
century.  The Czechoslovak Republic was proclaimed in October  1918.  Its  composition 
51%  Czech,  23%  German,  14%  Slovak  and  5.5%  Hungarian, 
was  multiethnic: 
according to a  1921 census.  The country  inherited  60-70% of the industrial  base of the 
Austro-Hungarian Empire. 

In the  1930s the  Sudeten  Germans'  demands  for  autonomy  created  increasing  tension. 
Under  the  1938  Munich  Agreement  and  the  Vienna  Arbitration  the  regions  bordering 
Germany  and mostly  settled  by  Germans  were ceded to  Germany,  and  a quarter  of  the 
Slovak lands to Hungary.  In March  1939 German troops occupied the rest of the Czech 
lands.  After  the  War  the  Czechoslovak  Republic  was  restored  to  its  pre-war  borders, 
except for Ruthenia, which was annexed by the Soviet Union. The government passed a 
decree  at  the  end  of  the  war  dispossessing  Sudeten  Germans  of  their  property,  and 
almost all of them were forced to leave Czechoslovak territory. 

Czechoslovakia  was  one  of  the  founding  members  of  the  post-war  international 
economic institutions (IMF and IBRD in  1945, GATT in  1948).  But after  the  formation 
in  1948 of a government  composed  of only Communists and their allies the  Communist 
party  expanded  its  hold  on  power.  Under  the  division  of  labour  agreed  within 
In  the 
COMECON  Czechoslovakia  concentrated  on  developing  its  heavy  industry. 
1960s central  controls were partially  relaxed.  Reform  pressures  within  the  Communist 
Party  resulted  in the  election  of  Alexander  Dubcek  as First  Secretary  in  January  1968. 
The  introduction  of  democratic  elements  into  political  and  cultural  life,  known  as  the 
Prague Spring, was brought to a brutal end by invasion by members of the Warsaw Pact 
on 21 August  1968, which led to reimposition of Soviet orthodoxy under Gustav  Husak. 
That  year  the  country  also  introduced  a  federal  structure,  with  Czech  and  Slovak 
Republics as separate entities. 

A  small  dissident  movement,  later  associated  with  the  Charter  77  group,  remained 
active  through  the  1970s and  1980s.  The political  unrest  in many  countries  of  central 
and  eastern  Europe  in  1989 led to  protests  in Czechoslovakia  too.  Popular  reaction  to 
the violent police repression of a student demonstration  in Prague on  17 November,  and 
demonstrations  in  Bratislava,  led  to  Husak's  resignation  and  the  election  the  following 
month  of  Vaclav  Havel,  a  leading  member  of  Charter  77,  as  President.  Elections  in 
1992 led to the formation  of a coalition government of centre-right parties committed  to 
rapid  economic  reform.  In  1996 the  coalition  narrowly  failed  to  win  another  majority 
Though  it  has  been  able  to  form  another  government,  it  has  had  to  slow  the  rate  o 
economic  reform. 

After  1989, the  name  of  the  country  was  officially  changed  to  the  Czech  and  Slovak 
Federal  Republic.  Differences  between  Czech  and  Slovak  politicians  on  the  future 
federal  structure and economic policy became unbridgeably  wide.  In October  1992 the 
parliaments of the two Republics passed a joint resolution dissolving  the federation  and 
creating two independent successor states as of 1  January  1993. 

The Czech Republic's Position Concerning the European Union 

"Return  to  Europe"  was  one  of  the  central  slogans  of  the  political  demonstrations  of 
November  1989.  The  first  post-Communist  government  stated  Czechoslovakia's 
interest  in  becoming  a  member  of  the  European  Communities  in  its  provisional 
programme  of  March  1990.  The  first  Czech  government,  inaugurated  in  July  1992, 
stated that membership of the European Union was the primary  goal for  an  autonomous 
Czech Republic.  The  Czech  Republic  submitted  its application  for  membership  on  23 
January  1996.  The second government of Prime Minister  Klaus, installed  in July  1996, 
expressed  its  commitment  to  membership  as follows:  "the  basic  orientation  and  goals 
of  Czech  foreign  policy  remain  unchanged,  therefore  the  government  will  smoothly 
follow  up  the  foreign  policy  results  of  its  predecessor.  As  its  main  priorities  the 
government  sees  the  quickest  possible  acquisition  of  full  membership  of  the  EU  and 
NATO  by  the  Czech  Republic,  considering  the  fulfilment  of  these  goals  to  be  the 
completion of our country's transformation  from the point of view of foreign  policy". 

Contractual  Relations 

Diplomatic relations between the European Community  and the Czechoslovak  Republic 
were  established  in  September  1988.  The first agreement  between  them  was  the  four-
year Trade Agreement on industrial products which entered into force  in April  1989.  A 
Trade and Cooperation Agreement was concluded in  1990.  An Association  Agreement, 
to  be  known  as  a  Europe  Agreement,  was  signed  between  the  European  Communities 
and  Czechoslovakia  on  16  December  1991.  Its  trade  provisions  entered  into  force  in 
March  1992  by  way  of  an  Interim  Agreement  replacing  the  1989  Agreement.  The 
Interim Agreement provided for the consolidation of previous trade concessions as well 
as  the  gradual  and  asymmetric  establishment  of  a  free  trade  area  over  a  period  of  ten 
years. 

The dissolution  of  Czechoslovakia  into  Czech  and  Slovak  Republics  made  it  necessary 
to negotiate separate Europe Agreements with the two successor  states.  The  agreement 
with  the  Czech  Republic  was  signed  in  October  1993,  and  entered  into  force  on  1 
February  1995. 

The Europe Agreement  is now the legal basis for relations between  the Czech  Republic 
and the European Union.  Its aim is to provide a legal framework  for political  dialogue, 
promote  the  expansion  of  trade  and  economic  relations  between  the  parties,  provide  a 
basis  for  Community  technical  and  financial  assistance,  and  an  appropriate  framework 
to  support  the  Czech  Republic's  gradual  integration  into  the  Union.  The  institutional 
framework  provides  a mechanism  for  implementation,  management  and  monitoring  of 
all  areas  of  relations.  Sub-committees  examine  questions  at  a  technical  level.  The 
Association  Committee,  at  senior  official  level,  provides  for  in-depth  discussion  and 
often  finds  solutions  to  problems  arising  under  the  Agreement.  The  Association 

Council examines the overall  status  of relations and provides the opportunity  to  review 
the Czech Republic's progress in preparing for accession. 

A  government  decree  of  November  1994  created  the  Government  Committee  for 
European  Integration,  the  supreme  decision-making  body  in  matters  of  European 
integration. 
It  is  headed  by  the  Prime  Minister.  Permanent  members  include  the 
ministers  for  Finance,  Industry  and  Trade,  Agriculture  and  Foreign  Affairs.  The 
Government  Committee  is supported by a Working Committee of officials  chaired by a 
Deputy  Minister  for  Foreign  Affairs,  and  underpinned  by  23  specialised  Working 
Groups, including one on approximation of legislation. 

The Pre-Accession  Strategy 

Implementation of the Europe Agreement and the White Paper 

The  institutional  framework  of  the  Europe  Agreement  is  fully  operational.  The 
Association  Council  and  Association  Committee  have  each  met  three  times,  and  the 
Joint  Parliamentary  Association  Committee 
The  system  of 
multidisciplinary  subcommittees  agreed  at  the  end  of  1996  is  proving  its  usefulness. 
Cooperation with the Commission has been close and effective  over state aids, industrial 
and  commercial  property  rights,  macro-economic  policy,  reduction  of  customs  duties 
and  other  issues.  Differences  which  have  emerged  on  trade  issues  have  usually  been 
settled satisfactorily  within the procedures laid down by the Agreement. 

twice  yearly. 

There  have,  however,  been  reports  since  early  1997  of  a  limited  number  of  products, 
originating in the Community and conforming  to EC standards, not being admitted on to 
the Czech market.  Moreover, the Czech government introduced in April  1997 an import 
deposit  scheme  which  is  not  in  conformity  with  the  Europe  Agreement.  Contacts 
continue  within  the  procedures  laid  down  by  the  Agreement  to  try  to  resolve  these 
issues. 

The  Commission's  White  Paper  of  1995 on  the  Internal  Market  set  out  the  legislation 
which candidate  countries would have to transpose and implement  in order to apply  the 
acquis  communautaire  and  identified  elements  essential  to  the  implementation  of  the 
single  market  (known  as  Stage  I  measures)  which  would  need  priority  attention.  The 
Czech  Republic  began  a systematic  process  of approximation  of its  legislation  as  early 
as  1991.  In  early  1995 the  government  approved  a timetable  for  approximation.  But 
there  is  still  a  long  way  to  go. 
In  response  to  the  White  Paper,  the  government 
published  in the  spring of  1996 its own "Priorities  for the Implementation  of the  White 
Paper  in  the  Czech  Republic".  This  defines  key  White  Paper  measures  which  should 
have priority up to the year 2000.  The document also recognises the need to change and 
improve  administrative  structures.  New  structures  are  proposed  for  administration  of 
the environment,  direct and indirect taxation, personal data protection and social  policy. 
So far these intentions are yet to be  implemented. 

The  Europe  Agreement  is  for  the  most  part  being  implemented  according  to  the 
procedures  and  timetable  laid  out  in  it.  There  have  been  few  trade  problems,  thoug1 
recently  important  trade-related  problems  have  arisen  (notably  the  import  deposit 

scheme).  There  is  room  for  enhanced  dialogue  and  cooperation  to  prevent  such  issues 
from  developing. 

Sfruntured  Dialogue 

The  Czech  Republic  participates  at  all  levels  of  the  structured  dialogue,  but  considers 
that meetings should be made more productive by better preparation and a more  focused 
agenda  giving  more  opportunity  for  extended  dialogue  with  the  Commission.  The 
decision  of the  General  Affairs  Council  of February  1996 to  improve  preparations  is  a 
step  in  this  direction.  A  priority  area  for  the  Czech  Republic  is  Justice  and  Home 
Affairs,  where  it  sees  insufficient  progress.  The  country  would  prefer  to  see  a  more 
substantive political  dialogué with the Union on a bilateral  level within the  Association 
Council. 

Phare 

Between  1990  and  1996  433  MECU  was  allocated  to  the  Czech  Republic.  The 
allocation  for  1996  was  54  MECU.  Prime  sectors  have  included  private  sector 
development,  infrastructure,  environment  and human  resource  development.  A  Cross-
Border  Cooperation programme in the Czech-German  and  Czech-Austrian  border  areas 
has been operating since  1994.  After  initial hesitations the Czech authorities have come 
to  see PHARE  as an important tool  for transforming  their economy  and preparing  their 
country  for  accession.  But  there  have  been  problems  related  to  delays  in  programme 
implementation and complications in targeting funds to focus on priority areas. 

Participation  in CommunityProgrammes 

As  foreseen  under  the  Europe  Agreement,  decisions  have  been  taken  to  permit  the 
Czech  Republic  to  participate  in  Leonardo,  Socrates,  Youth  for  Europe  and  other 
programmes  in  the  sectors  of  training,  culture,  audiovisual,  social  and  health  policy, 
research and development, energy saving and SMEs. 

Trade Relations 

Between  1989  and  1992  EC  imports  from  Czechoslovakia jumped  from  2.6  BECU  to 
5.5 BECU (a jump  of  112%);  and EC exports from  2.4 BECU to 6.3 BECU (a jump of 
163%).  Between  1992 and  1996 the Czech Republic expanded  its trade with the Union 
even  further.  EU  imports  increased  from  4.9  BECU  to  9.4  BECU  (92%  up)  and  EU 
exports  from  6.1  BECU  to  13.3 BECU  ( up  118%).  In  1996 the  Union  accounted  for 
just  over  60% of  Czech  foreign  trade.  The Czech Republic  accounted  for  2.25% of all 
EU exports and  1.66%  of EU imports. 

This  reorientation  of  trade  and  the  ability  of  Czech  exports  to  penetrate  new  markets 
suggest  that  the  quality  of  goods  has  been  rising.  But  part  of  their  competitive 
advantage  has  come  from  wage  levels,  initially  low  but  since  much  raised.  Czech 
exports are highly concentrated, with machinery and transport equipment accounting  for 
33%  of the total, and manufactured  goods 29%.  The same two categories constitute the 
largest  share  of  imports, adding  up together  to  57%.  In  1996 exports  of  manufactured 
goods, earlier one of the growth areas, contracted. 

The Czech Republic has a Customs Union with Slovakia and is  one of the initiators of 
the  Central  European  Free  Trade  Agreement.  Trade  with  CEFTA  partners  has 
consolidated over recent years. 

<rtMrrf evaluation 

Since its foundation  the Czech Republic has pursued stronger links with the European 
Union in all fields.  The Europe Agreement has been effectively  implemented  in most 
sectors.  There have been few trade problems, though the still not resolved issue of its 
import deposit scheme is one exception.  Confident of its progress towards meeting  the 
obligations  of  EU  membership,  the  Czech  Republic  has  at  times  shown  signs  of 
reluctance  to  acknowledge  difficulties  and  seek  a collaborative  approach  to  resolving 
them. 

B. CRITERIA FOR MEMBERSHIP 

1. 

Political Criteria 

The European Council in Copenhagen decided on a number of "political" criteria  for 
accession  to be met by the candidate  countries  in  Central  and Eastern  Europe. These 
countriesonust achieve "stability of institutions guaranteeing democracy, the rule of law, 
human rights and respect for and protection of minorities". 

In carrying out the assessment  required  in this connection, the European  Commission 
has  drawn  on  a  number  of  sources  of  information:  answers  given  by  the  Czech 
authorities to the questionnaire sent to them by the Commission in April  1996, bilateral 
follow-up  meetings,  reports  from  Member  States'  embassies  and  the  Commission's 
delegation, assessments by international organisations (including the Council of Europe 
and the OSCE), reports produced by non-governmental organisations, etc. 

The following assessment involves a systematic examination of the main ways in which 
the public authorities in each of the candidate countries are organised and operate, and 
the steps they have taken to protect fundamental  rights.  It does not confine  itself to a 
formal description but seeks to assess the extent to which democracy and the rule of law 
actually operate. 

This assessment relates to the situation in June  1997.  It does not examine in detail any 
changes which have taken place since the fall  of the Communist regime or which may 
come about  in the future,  though  it  generally  takes  account  of any  stated  intention to 
reform a particular sector.  The situation of the public administration is mentioned here 
only in passing: it will be examined in greater depth in chapter 4. 

1.1  Democracy  and  the Rule  of  Law 

The Constitution adopted in December 1992 by the National Council of the Czech 
Republic, and the Charter of Fundamental Rights which forms an integral part of it, 
established a parliamentary democracy. The Czech institutions function smoothly, the 
various authorities showing awareness of their respective areas of competence and of 
the need for mutual cooperation. 

Parliament and Legislative Powers: Structure 

The Parliament is a bicameral body - consisting of the Chamber of Deputies and, since 
November  1996, the Senate, - which respectively comprise 200 and 81 members elected 
by direct universal suffrage.  Deputies are elected for 4 years on a proportional 
representation basis (representation requiring a minimum threshold of 5% of votes cast) 
and Senators for 6 years by a majority vote spread over two rounds, one-third being 
renewed every two years. There are no specific rules which guarantee the representation 
of minorities in the Parliament. The Chamber of Deputies enjoys greater powers than 
the Senate and may overrule it during the procedure for passing laws (Article 47 of the 
Constitution).The Government is answerable only to the Chamber of Deputies. 

The President of the Republic may dissolve the Chamber of Deputies if the Government 
fails to win a vote of confidence  or if the Chamber of Deputies is no longer able to 
function  normally  (Article 35 of the Constitution). Dissolution is not possible in the 
three months prior to elections to the Chamber. 

Members of Parliament are accorded traditional immunities under Article 27 of the 
Constitution. 

The Opposition plays a recognised and participatory role in the functioning  of the 
institutions in the Czech Republic, as demonstrated by the formation  of parliamentary 
committees of enquiry within the Chamber of Deputies (Article 30 of the Constitution) 
in which each political group is represented in proportion to its total weight in the 
Chamber. These committees may be chaired by a member of the Opposition. 

The Czech Republic is governed on a multi-party basis (54 political-parties registered, 
of which 20 took part in the last elections to the Chamber of Deputies). The political 
parties represented in Parliament are funded  from the State budget in proportion to the 
number of members elected. 

Parliament is the legislative body and shares the right of initiative with the Government. 
The latter also has regulatory power, where conferred  by the legislator, exclusively  for 
the purpose of implementing laws. 

There is no procedure for referenda  in the Czech Republic. 

Functioning of Parliament 

Elections are free and genuine. The elections of June  1996 to the Chamber of Deputies 
gave victory to the ruling Centre Right coalition (cf. Annex). 

Parliament operates in a satisfactory  manner: its powers are respected and the 
Opposition plays its normal role. 

The Exceptive: Structure 

The President of the Republic is elected by Parliament for a 5-year term, renewable 
once only. He can call upon Parliament to conduct a further  reading of a law on which a 
vote has just been taken, but the Chambers may disregard this veto by a simple  majority 
vote. He enjoys the traditional powers of a Head of State. 

The President of the Republic appoints the Prime Minister and, on the latter's proposal, 
the ministers. The Government, and the ministers individually, are answerable  to the 
Chamber of Deputies. Ministers may also be held liable for crimes and  offences 
committed  in pursuance of their functions,  except in the case of statements made  before 
the Chambers. 

The country is divided administratively  into 75 districts administered by representatives 
appointed by the Government and answerable to the Minister of the Interior. Each 
ministry, at district level, is subdivided into decentralised departments answerable to the 
central authority. The district leader is assisted by an assembly  comprising 
representatives of the communes; he may suspend decisions taken by the assembly and 
call for central government  arbitration. 

10 

The Czech Constitution provides for two levels of local authority: regions and 
communes. The former have not yet  been set up, but the Government has undertaken to 
ensure their creation before the year 2000. The number of such regions is currently  the 
subject of debate (between 8 and  13). The communes, of which there are 6233, are run 
by municipal councils elected by universal franchise  for a 4-year term; the councils 
themselves elect their mayors. 

The public service is hinderedsomewhat by the absence of civil service regulations and 
the fact that salaries are relatively low, which explains why the most competent staff  are 
leaving it for the private sector. All of these factors add to the difficulty  in combating 
corruption. 

Under the "lustration" purification  law which was adopted in  1991 and extended in 
1996 up to the year 2000 (after having been sent back to Parliament by the President  for 
further  scrutiny), members of,  or collaborators with, the former security services and 
persons who played an active role in the former communist regime are excluded from a 
number of public service jobs (government and administration, army, security  services 
and police, justice, radio and television and public enterprises). 

Under this system the administration issues "certificates" to any person who so requests, 
based on records kept by the former  security services. Since  1996, any interested person 
may request access to such documents; this right is no longer confined  to the courts for 
the purposes of legal proceedings. 

The army, the secret services and the police faHunder civilian control and are subject to 
the jurisdiction of the civil courts. The secret services are required to report their 
activities to Parliament. 

Functioning of the Executive 

The central institutions of the State operate smoothly. 

Local authorities continue to encounter difficulties  in asserting their autonomy, 
particularly in respect of funding,  as they depend on the State for approximately two-
thirds of their budgetary resources. 

Application of the "lustration law" has produced the following  results: of the 300 000 
certificates  requested, only 9 000 (3%) resulted in an exclusion decision; in 580 of these 
cases the decision was contested and half of the complainants had their exclusions 
annulled by the courts. The Government has signalled its intention not to extend the 
system beyond the year 2000. 

The police, which is currently undergoing reorganisation, is frequently  criticised for the 
slowness of its investigations and for inefficiency  in combating drug-trafficking  and the 
rise in organised crime. 

The secret services operate in a manner which would appear to respect the essential 
rules of democracy. A parliamentary committee of enquiry set up in  1996 to examine 
possible cases of illegal surveillance of leading figures, political parties and  foreign 
embassies reached the conclusion, at the beginning of  1997, that no such  illegalities 
were being  perpetrated. 

11 

The Judiciary:  Structure 

The Czech judiciary is independent..  Magistrates are appointed for life by the President 
of the Republic, on a proposal by the Minister of Justice and on request of the presidents 
by the courts. They may not be removed from office,  nor may they be  transferred 
without their agreement. Equally, they may not be dismissed or suspended except on 
grounds strictly laid down by law. 

The State Prosecutor is appointed by the Government on a proposal by the Minister of 
Justice, who appoints the other members of the State Prosecutor's Office.  They are 
subject to the hierarchical authority of the Minister. 

The scrutiny of administrative measures falls within the competence of the civil courts. 
Under Article 91 of the Constitution, they come under the authority of an administrative 
Supreme Court which has yet to be established. 

The Czech Republic has no Ombudsman. 

The Constitutional Court comprises  15 judges appointed for  10 years by the President of 
the Republic with the approval of the Senate. The Court scrutinises the conformity  of 
laws and regulations with the Constitution and international treaties. It may also annul 
measures taken by government authorities if they infringe  the autonomy of local 
authorities. 

The Constitutional  Court undertakes advance verification  of laws (referred  by the 
President of the Republic, 41 Deputies or  17 Senators) and regulations (referred  by the 
Government, 25 Deputies or  10 Senators). It may also scrutinise existing laws either at 
the request of a court, in the case of a current legal proceedings, or of a private 
individual who, having exhausted preliminary avenues of appeal, considers his/her 
fundamental  rights to have been infringed.  The Court may also refer cases to itself. 

Functioning of the Judiciary 

The situation of the courts in the Czech Republic constitutes a major challenge for the 
country's integration into the European Union. The courts are overloaded, numerous 
cases do not receive a judgement and the average length of commercial  law 
proceedings, for example, exceeds 3 years. 

These problems result less from understaffing  or inadequate facilities than from 
inadequate experience and qualification  on the part of the judges, who have to apply 
legislation which frequently  is totally new and for which, most often, there is no 
established legal precedent. 

The Constitutional  Court plays an important and active role in the operation of the 
Czech institutions. Since its establishment it has had nearly 4 900 cases referred  to it 
and there has been a large increase in the number of cases since  1995. It has granted 
approximately  200 petitions. Its decisions on questions of nationality and  ownership 
testify  to its role in enforcing  the rule of law. 

12 

1.2  Human Rights and the Protection of Minorities 

The Czech Republic has introduced various internal rules designed to ensure respect for 
human rights and the rights of minorities. Such protection is also afforded  by various 
international conventions, in the forefront  of which is the European Convention for the 
Protection of Human Rights and its principal additional protocols. Under Article F of 
the TEU, these texts  form part of the "acquis communautaire" and any State wishing to 
join the European Union must first have ratified  them. 

The Czech Republic, a member of the Council of the Europe since  1993, has been party 
to the European Convention for the Protection of Human Rights and its additional 
protocols since March  1992, when they were ratified  by Czechoslovakia. It also permits 
individuals to take their case to the European Court if they consider that their rights 
under this convention have been violated. 

The Czech Republic has also ratified  various other international conventions on the 
protection of human rights and the rights of minorities including the Convention on the 
Prevention of Torture, and has signed but not yet ratified the Framework Convention on 
National Minorities and the European Social Charter. It has also ratified the principal 
United Nations conventions in the field of human rights. 

In the Czech Republic, under Article  10 of the Constitution, the provisions of 
international conventions on human rights take precedence over provisions of internal 
law and are directly applicable. 

Civil and Political Rights 

There is adequate opportunity for access to the courts in the Czech Republic. A system 
of legal aid exists for criminal cases and also, in certain instances, for civil actions. 

The death penalty was abolished for all offences  in  1990 and is prohibited by the 
Constitution. 

There is protection against arbitrary arrest, such that a person may not be arrested 
without a warrant issued by the Prosecutor's Office  and must be brought before  a judge 
within 24 hours. Within the following  24 hours, the judge will decide if the person is to 
be released or charged. However, periods of remand have tended to increase in length 
over recent years (average of 89 days in  1989 compared with 200 in 1995). 

Electoral rights are guaranteed for all citizens aged  18 years or over. 

Freedom of association is guaranteed in the Czech Republic, as demonstrated by the 
existence of a large number of active bodies (33 000 associations and 4 700 
foundations).  They enjoy  tax advantages (30% tax reduction) but not total relief in 
respect of their activities. 

Freedom of assembly  is only restricted  for reasons concerning protection of the rights 
and freedoms  of other persons or on grounds of public order, morality, health or State 
security. , The Constitution also permits a ban on demonstrations potentially  prejudicial 

13 

to the "prosperity of the country". However, to date, there is no record of this provision 
having been applied. 

Freedom of expression is evident in the pluralism of the media, both in the press and the 
audiovisual sector with  11 national daily newspapers, 4 television channels (2 public 
and 2 private), some 60 radio stations, and  numerous foreign channels carried by the 
cable network). However, freedom of expression is limited under the Criminal Code, 
which prescribes sentences of up to 2 years' imprisonment for defamation  of the 
Republic and its President. So-far, these rules have not had excessively harsh 
consequences since the President of the Republic has generally pardoned those liable for 
such penalties. Likewise, it was deemed by the Constitutional Court in  1994 that these 
rules did not apply to defamation  of Parliament, the Government or the Court itself. 

Another difficulty  is that some of the laws governing this sector are outdated. For 
example, the press continues to be subject to a law of  1966, and although amendments 
made between  1990 and  1992 improved the protection of journalists'  sources of 
information, they failed to deal adequately with journalists' access to administrative 
documents. The audiovisual  sector too is still subject to laws adopted in  1991, prior to 
the establishment of the first private channels. 

Ownership rights are guaranteed and expropriation is possible only on grounds of public 
utility and subject to adequate compensation. However, restitution of expropriated 
property applies only to confiscation  imposed after 25 February  1948 and may  benefit 
Czech citizens only. The person concerned may choose between restitution of the asset 
or financial compensation calculated according to criteria laid down by law. The 
Constitutional Court ruled in  1996 that residence in the Czech Republic should not be a 
requirement for entitlement to benefit under the law on restitution. There is currently a 
dispute about assessment of the number of buildings and hectares of woodland to be 
returned to the Catholic Church. The Czech authorities are working on computerisation 
and updating of the land register. 

Respect for privacy is assured: a warrant must be issued by a judge before any police 
search or phone tapping may take place. 

The question of acquisition  has posed problems. At the time of partition, the Czech 
Republic demanded that Slovaks resident on its territory be able to show a clean police 
record over the previous five years in order to quality for naturalisation. The move, 
which deprived a number of gypsies (Roma) of Czech nationality, was inconsistent with 
the rule that state succession cannot result in people who have lived continuously  in the 
territory becoming aliens or stateless persons; it was relaxed by a law introduced in 
April  1996 which exempted persons resident on Czech soil on 31 December  1992, 
subject to possession of a clean police record over the previous five years. 

The Czech Republic has ratified  the Geneva Convention on Refugees,  thereby giving 
asylum seekers internationally  guaranteed rights and protection. 

There have been no reported cases of inhuman or degrading treatment. 

14 

Economie, Social and Cultural Rights 

The right to a minimum means of subsistence and social security are enshrined in the 
Charter of Fundamental Rights, itself incorporated in the Constitution. 

Freedom to engage in trade union activity is a guaranteed right in the Czech Republic. 
There are some 57 trade unions, most of which are grouped within two large 
confederations. The rate of union membership is approximately 60%. 

The right to strike is recognised, with the exception of judges and personnel of the 
armed and security  forces. 

Freedom of education and religion are also guaranteed rights; 21 religious 
denominations are registered and receive State financial aid if they number at least  10 
000 members. The Jewish community benefited  from these provisions from  1989, 
before that threshold was set. 

A law was introduced in  1992 to combat racism, anti-Semitism and incitement to racial 
hatred. These legal measures were strengthened in 1995 with stiffer  penalties imposed 
to curb such actions. 

Minority Rights and the Protection of Minorities 

Minorities in the Czech Republic account for approximately 7% of the population, 
mainly Slovaks (4%) and gypsies (Roma) (2%-3% according to various estimates). 

International conventions guarantee the protection of minorities.. The Czech Republic 
has not ratified the Council of Europe Framework Convention on National Minorities. 
Moreover, Recommendation  1201 of the Council of Eurojpe's Parliamentary  Assembly, 
which provides for recognition of the collective rights of minorities, is not legally 
binding. 

The Charter of Fundamental Rights recognises the right of minorities to maintain their 
own identity, to be educated in their own language and to use that language in their 
contacts with administrative authorities. There are no specific rules  to ensure the 
representation of minorities in Parliament. All minorities are represented in the Council 
of Minorities set up in  1992 which is consulted by the Government on all matters 
pertaining to them. Likewise, each Chamber has a standing committee on human rights 
and minority rights. 

Since partition, Slovaks who have chosen to remain in the Czech Republic have 
encountered no special difficulties  in living there. 

The situation with regard to the Roma, however, would appear much more  difficult. 
They are the target of numerous forms of discrimination in their daily lives and  suffer 
particular violence from  skinheads, without  adequate protection from the authorities or 
the police. Their social situation is often difficult  (though sociological  factors to some 
extent account for this), alongside any discrimination they may suffer  from the rest of 
the population, notably over access to jobs or housing. In addition, the way in which 
some Roma were expelled during partition has been criticised by a number of 

15 

humanitarian organisations. A better knowledge of the social situation of the Roma 
(level of unemployment, health indicators, level of education, etc.) would make it easier 
to the appropriate decisions. 

The already substantial efforts of the Czech authorities in the cultural sphere (e.g. Czech 
language courses for the Roma population on public radio and television stations, and 
the financing of various publications) must be stepped up in the future. 

1.3  General  Evaluation 

The Czech Republic's political institutions function properly and in conditions of 
stability. They respect the limits on their competences and cooperate with each other. 
Legislative elections in 1992 and 1996 were free and fair. The opposition plays a normal 
part in the operation of the institutions. Efforts to improve the operation of the judiciary 
and to intensify the fight against corruption must be sustained. 

There are no major problems over respect for fundamental rights. There are, however, 
some weaknesses in laws governing freedom of the press. Particular attention will need 
to be paid to the conditions governing any further extension of a law excluding from 
public service members of the former security service and active members of the 
Communist regime. There is a problem of discrimination affecting the Roma, notably 
through the operation of the citizenship law. 

The Czech Republic presents the characteristics of a democracy, with stable institutions 
guaranteeing the rule of law, human rights, and respect for and protection of minorities. 

16 

2.  Economie  Criteria 

In  examining  the  economic  situation  and  prospects  of  the  Czech  Republic,  the 
Commission's  approach  is  guided  in  particular  by  the  conclusions  of  the  European 
Council  in  Copenhagen  in  June  1993,  which  stated  that  membership  of  the  Union 
requires "the existence of a functioning market economy, as well as the capacity to cope 
with competitive pressure and market forces within the Union". 

This part of the Opinion therefore gives a concise survey of the economic situation and 
background,  followed  by  a review  of  the  Czech  Republic's  progress  in  key  areas of 
economic  transformation  (liberalisation  of the price  and trade  system,  stabilisation  of 
the economy, structural change, reform  of the financial sector) as well as its economic 
and social development. It concludes with a general evaluation of the Czech Republic in 
relation to the criteria mentioned by the European Council and a review of prospects and 
priorities for further  reform. 

2.1  The  Economic  Situation 

ffadigronnd 

The Czech Republic, with a population  of  10.3 million, has a gross domestic product 
(GDP) of 94 billion  ECU (expressed in purchasing power parity); its population is about 
3% of that of the Union, while its economy is only about 1.4% of that of the Union, GDP 
per head is about 55% of the Union average. The average monthly wage is 290 ECU a 
month (October 1996). 

The  Czech  Republic  was a founding  member of the WTO and of  CEFTA;  it joined  the 
OECD in 1996. 

Progress in Economic Transformation 

Czechoslovakia in  1938 was one of the richer countries in Europe, with the majority of 
the wealth concentrated in what is now the Czech Republic. After the communist take 
over  in  1948,  central  planning  was  imposed.  Macroeconomic  policies  however 
remained  prudent,  avoiding  the  significant  imbalances  that  were  visible  elsewhere  in 
eastern  Europe:  little  debt  was  built  up  and  inflationary  pressures  were  relatively 
subdued. However, by  1989, after  50 years of central planning, it had dropped behind 
even the least developed Member States. 

Reforms  began  shortly  after  the  fall  of  the  communist  regime  during  the  "velvet 
revolution" in November  1989. The basic elements were price and trade  liberalisation, 
reduced  subsidies  to  enterprises,  internal  currency  convertibility,  restrictive  monetary 
and fiscal policy,  institutional  changes,  and  a  rapid  and  comprehensive  privatisation 
programme.  While  the  split  into  Czech  and  Slovak  Republics  in  1993  caused  some 
disruption, the establishment of a market economy continued apace. 

In  contrast  with  many  other  transition  economies,  privatisation  of  state-owned 
enterprises  took  place  relatively  early  in  the  transition  process.  Large  parts  of  state 
assets  were  quickly  sold  off,  or  distributed  among  the  population  under  the  mass 
privatisation  scheme  by  vouchers  which  began  in  1992 and  was  completed  in  1994. 
17 

Restructuring  was  expected  to  take  place  once  enterprises  were  in  private  hands.  This 
radical  privatisation  drive  led  to  a  dramatic  increase  in  the  role  of  the  private  sector: 
from  being  almost  non-existent  on  the  eve  of  reform,  it  has  grown  rapidly  and  now 
accounts for an estimated three quarters of output. However, the state still has a  majority 
or  significant  stake  in a number  of  large enterprises  and, most  importantly,  in the  four 
main banks. 

Main indicators of economic structure 
(all data for  1996 unless otherwise indicated) 

Population 

GDP per head 

as % of EU-15 average 

Share of agriculture in: 

gross value added 
employment 

million 

PPS-ECU (1995) 
per cent (1995) 

per cent (1995) 
per cent (1995) 

Gross foreign debt/GDP 

per cent 

Exports of goods & services/GDP 

per cent 

Stock of foreign  direct  investment1 

billion ECU 
ECU per  head 

Source: Commission services, national sources, EBRD 

10.3 

9410 
55 

5.2 
6.3 

39 

57 

5.3 
520 

Foreign Direct Investment 

Foreign  direct  investment  has  been  strong  in the  Czech  Republic: the  cumulative  total 
for  1989-1996 is estimated at 5.3billion  ECU (source: EBRD). The largest share of FDI 
came from  Germany followed  by the Netherlands, and the United States. In  1995, it was 
particularly  high  as  a  result  of  the  investment  by  a  Dutch-Swiss  consortium  into  the 
telecommunications  industry.  In  1996,  inflows  of  foreign  direct  investment  totalled 
0.96billion ECU which is 94 ECU per head. 

Economic Structure 

The  economy  has  the  structure  of  an  industrialised  nation.  Agriculture  accounts  for 
5.2% of gross value added (1995), and for some 6.3% of employment. The  privatisation 
process  is  almost  complete.  The  initial  decrease  in  production  was  reversed  in  1995. 
Price support is limited but export subsidies are used for certain commodities. 

Industry has long had an important part to play in the Czech Republic. The*country was 
successful  in  producing  diverse  products  from  the  large-scale  production  of  steel  to 

1  FDI  stock  converted  at end -  1996 exchange  rate of  1ECU = $1.25299 

18 

relatively sophisticated engineering and high quality glass. Under the previous regime, 
there  was  over-employment  in  industry.  This  is  still  visible  to  some  extent,  as  it 
accounts for  43% of employment, but only 34% of gross value added. The number of 
redundancies  has  been  relatively  limited,  but  this  is  increasing  in  certain  areas,  for 
example  the  steel  industry.  The  economy's  energy  consumption  is  very  high,  which 
accentuates the impact of price adjustments. Russia will continue to supply the majority 
of  oil  and  gas  in  the  coming  years,  although  the  Czech  government  is  successfully 
diversifying energy sources. 

The services  sector  has seen  growth  for  a number  of years, in particular  through  the 
development  of new private  activity.  As a result, the  share  of  services  in  output  and 
employment is quite important: it accounted for  53% of gross value added and 50% of 
employment in 1995. The main growth area has been tourism. 

Libéralisation 

Price Regime 

In  1991, the vast majority  of consumer prices were liberalised. By  1995 only prices of 
energy  (gas,  electricity,  and  heating),  some  public  services  (health  care,  transport, 
communications,  water)  and  housing  were administered.  They  form  a relatively  high 
proportion  of household  consumption,  so the weight of the administered  prices in the 
price index is quite significant.  At their current level, administered prices do not  fully 
reflect the costs of production. The government is aware of the need to adjust regulated 
prices. In  1997 significant  increases  are planned  for  household  rents and energy  (as a 
result of VAT increasing to 22%). 

Subsidies have been reduced  substantially  since  1989 and  are now quite  low: around 
2.5%  of  GDP. In  addition  they  have  generally  been  applied  in  a  non-discriminatory 
fashion,  and  have  been  designed  to  avoid  interference  with  market  forces  and  the 
competitive environment as much as possible. This is particularly true of agriculture. 

Trade Regime 

The Czech Republic moved rapidly towards a liberal trade regime from the start, on the 
grounds  that  this  promotes  structural  adjustment,  competition  and  efficient  resource 
allocation. Many of the old barriers to trade were removed and the remaining ones were 
made  more  transparent  by  transforming  them  into  tariffs.  Import  tariffs  currently 
average about  5% in weighted value terms - they range from  4% on primary  goods to 
10% on finished goods. The tariffs are generally applied uniformly. 

However, in April  1997, the Czech government introduced an import deposit schemeas 
one element of a package of measures to tackle a growing trade déficit,  a large budget 
deficit  and a slowdown in growth. The measure requires importers of consumer goods 
and  foodstuffs  to  deposit  20%  of  the  value  of  the  import  in  a  bank  for  180  days. 
Although  the  cost  increasing  effect  of  the  measure  is  limited,  the  measure  can 
effectively  block all imports by small importers that do not have sufficient  access to the 
financial  markets to finance  the deposit. Consequently, the exact effect  of the measure 
on the trade deficit  is hard to predict. Nevertheless  it is clear that this move is a step 
backwards. 

19 

There are measures to support and promote exports based  on an Act of  1995. The  state 
support  is  mainly  in  the  form  of  export  credit  guarantees.  Two  state  institutions,  the 
Czech Export Bank and the Export Guarantee and Insurance Corporation, administer the 
support.  In  addition,  information  centres, trade  fairs  and  exhibitions  are  subsidised  by 
the state. Export  licences  are still  in use, though mainly  for  surveillance  purpose  rather 
than as a restrictive measure. 

Foreign Exchange Regime 

The currency  was made convertible for all current account transactions  in October  1995 
when the IMF Article vm obligations were formally  accepted, although they had de facto 
applied  for  several  years.  At  the  same  time,  capital  movements,  in  particular  capital 
inflows, were liberalised extensively. The main restrictions in place relate to the  outflow 
of capital. 

In  1991, as a result  of a number  of realignments  the currency  was  devalued  by  75%. It 
was  then  fixed  against  a  basket  of  currencies.  The  basket  changed  on  a  number  of 
occasions,  but  the  exchange  rate  was  effectively  fixed  within  a  very  narrow  band 
(+/-0.5%) for  over 5 years. The stability of the currency  over this period  is all the more 
remarkable  given the  initial  low level  of reserves, and the fact  that  inflation  eroded  the 
competitive advantage of the  1991 devaluation. 

The currency's  stability was helped greatly by the fact that the Czech National Bank has 
total and exclusive control of the exchange rate. In recent years, a somewhat  paradoxical 
situation  developed.  On  the  one  hand,  the  positive  economic  developments  attracted 
very considerable capital  inflows  - both in the form  of direct investment  and  short-term 
capital  inflows,  attracted  by  the  combination  of  high'interest  rates  and  a  very  solid 
exchange  rate.  This  tended  to  strengthen  the  currency.  In  contrast,  the  existence  of  a 
huge trade deficit  suggested the currency might need to be devalued  to maintain  export 
competitiveness. In the event the Bank opted to widen the crown's  fluctuation  bands to 
+/-7.5%  from  February  1996,  introducing  an  element  of  uncertainty  that  would  deter 
speculative  inflows,  and  give  monetary  policy  more  autonomy.  The  move  was 
successful  in that the short-term flows dropped sharply. 

In  1996  and  early  1997,  the  currency  continued  to  remain  strong  despite  a  soaring 
current account  deficit  which was no longer  fully  financed  by capital  inflows.  However 
strong  pressure  for  a  devaluation  in  the  currency  started  to  emerge  during  April, 
developing  into  a currency  crisis  in the middle of May  1997. Nervous  sentiment  on the 
foreign  exchange  markets  about  emerging  markets  with  large  current  account  deficits 
generally,  combined  with  domestic  political  instability,  resulted  in  attacks  on  the 
currency. The Czech National  Bank did initially attempt to support the currency, but on 
May 27, it was  forced  to abandon  the currency band  and to allow the  currency  to  float. 
The  abandoning  of  the  exchange  rate  regime  allowed  the  currency  to  depreciate 
significantly:  the crown depreciated by over 20% against the dollar, and over 7% against 
the mark over levels at the end of  1996. 

It is necessary  to wait  and  see at what rate the currency  stabilises  before  it can be  seen 
how the economy  will react to the large devaluation.  However the devaluation  is likely 
to increase  inflation  temporarily,  somewhat postponing  convergence  with inflation  rates 

20 

in the EU. It should  also increase exports, providing  spare capacity  can be mobilised  to 
meet the increase in demand. 

Stabilisation of the Economy 

Domestic 

The Czech Republic has been successful  in achieving macroeconomic stabilisation, thus 
laying a firm basis for strong and steady growth. From the outset, the CSFR had opted  for 
tight  monetary  and  fiscal  policies.  These  were  combined  with  a  sharp  competitive 
devaluation.  This  gave  the  economy,  and  in  particular  exports,  a  cushion  by  making 
goods  very  competitive  internationally.  Exporters  were  not  penalised  by  domestic 
inflation,  which  unavoidably  remained  relatively  high  for  some  time  as  prices  were 
freed and subsidies removed. After  the initial devaluation the exchange rate was fixed to 
avoid  importing  further  inflation.  These  policies  were  adhered  to  strictly,  and  were 
continued  after  the  split  of  the  federation.  They  began  to  produce  dividends  in  1994 
when economic growth resumed, as a result of strong exports and very rapid  investment, 
and inflation  came down to 10%. 

By  the  end  of  1995  the  economic  situation  was  strong:  single-digit  inflation,  low 
unemployment,  a  budget  surplus,  increasing  household  incomes  and  rapid  investment. 
Economic  activity  was increasing  steadily: agriculture  recovered  and  industry  was  very 
dynamic.  However,  in  1996  growth,  though  still  solid,  slowed,  unemployment  rose, 
inflationary  pressure persisted,  a deficit  on the budget  emerged  and the current  account 
deficit  soared  to  8%  of  GDP.  The  deterioration  has  been  attributed  to  the  lack  of 
restructuring,  a  shortage  of  skilled  labour  and the  fact  that  corporate  governance  is not 
always totally  effective. 

In  April  1997.  the  Czech  government  announced  a  package  of  measures  aimed  at 
boosting  economic  growth  and  tackling  the  problems  of  growing  budget  and  trade 
deficits.  The  measures  included  budget  cuts,  limits  on  public  sector  wage  growth, 
lowering corporate taxes, raising certain excise duties and the introduction  of an  import 
deposit  programme.  On  28  May  1997,  after  the  Czech  National  Bank  was  forced  to 
abandon  the  exchange  rate  band,  the  government  announced  a  further  package  of 
measures.  This  second  package  reinforced  the  government's  commitment  to  the 
policies announced  in April, but also included further  cutbacks in state expenditure, and 
a  ban  on imports  financed  through the  government  budget.  It  is too  early  to  know  the 
impact  of these  two  sets of measures.  The  government  has warned  that  if the  external 
position  does  not  improve  significantly  by  the  third  quarter  of  1997,  it  may  consider 
taking further  restrictive trade measures such as introducing an import surcharge. 

External 

The Czech Republic  is an open economy, with exports of goods accounting  for  37% of 
GDP. Trade  remained  very  dynamic  for  several  years.  Although  the  overall  position  is 
still strong, imbalances are evident. 

The trade deficit  has been  increasing: it reached  4.6  billion  ECU(11% of  GDP)  in  1996, 
and  was  1.3  billion  ECU  for  the  first  quarter  of  1997.  Although  a  deficit  is  to  be 
expected  in a rapidly  growing  economy, the current  level  is particularly  high, and there 

21 

is  a  limit  to  the  economy's  ability  to finance it  in  spite  of  high  tourist  receipts.  As  a 
result,  there  is  a  current  account  deficit,  which  reached  3.5  billion  ECU  in  1996.  In 
1995, when a large current account déficit first emerged, it was fully financed by very 
large capital inflows.  However, in  1996, this was no longer the case: as a result  foreign 
exchange  reserves  fell  by  over  1.2  billion  ECU  in  the  year.  Reserves  remained 
reasonably strong in the first part of  1997, at the end of March they stood at 10.2 billion 
ECU,  but it  is  estimated  that up to  2.6  billion ECU  of  these  were  used  by  the  Czech 
National Bank to defend the currency when it came under attack in May 1997. 

The external  debt  of the Czech Republic  is moderate  and represents  less  than 40% of 
GDP. The majority of it is medium and long term debt and the debt service is equivalent 
to under  15% of exports of goods and services. 

Main economic trends 

1994 

1995 

1996 

Real GDP growth rate 

per cent 

2.6 

4.8 

4.0 

Inflation  rate 

annual average 
December 

percent 
on  per cent 

Unemployment rate, end-year,  per cent 

ILO definition 

General  government  budget 

balance 

per  cent of GDP 

Current account balance 

per  cent of GDP 

Debt/export ratio 

per cent 

Foreign 

direct 

investment  per cent of GDP 

10.0 
9.7 

3.8 

9.1 
7.9 

3.6 

8.8 
8.6 

3.4 

1.0 

0.6 

0.0 

-0.1 

-2.9 

-8.6 

51.3 

59.1 

69.3 

2.1 

5.5 

2.4 

Source:  Commission services, national sources,  EBRD 

Structural  Change 

Foreign Trade 

As with other countries in the region, there has been a re-orientation  of trade away  from 
eastern  Europe  and  towards  the  EU. Since  the  Czech  Republic  became  an  independent 
nation at the beginning of  1993, the value of its trade with the EU has risen  substantially, 
and the EU is now the country's main trading partner:  in  1996 the EU accounted  for 59% 
of Czech exports and 63% of imports. 

The goods traded  are also highly concentrated.  Two categories accounted  for  more than 
half  of  all  exports:  machinery  and  transport  equipment  accounted  for  33%  and 
manufactured  goods  accounted  for  29%.  In  1996,  exports  of  manufactured  goods 
actually  contracted,  having  been  one  of  the  main  growth  areas  before.  Apart  from  a 
in 
temporary  weakening  of  demand  in  the  EU,  this  may  reflect  either  a  fall 

22 

competitiveness or a lack of capacity to produce. The same two categories are the most 
important for imports as well: machinery 38% and manufactured  goods  19%. The main 
growth area was beverages but this is closely followed by fuels. 

The re-orientation  of trade and the  ability  of Czech exports to penetrate new markets 
suggests that the quality of goods has been improving. However, the value-added of the 
goods exported to the West is relatively  low. The competitive advantage of the Czech 
Republic certainly  comes from low wages and a highly qualified  labour force.  Before 
the  recent  depreciation  of  the  currency  this  had  been  largely  eroded  by  high  wage 
growth.  Productivity  gains  and  quality  improvements  will  become  increasingly 
important if the Czech Republic is to maintain its markets over the medium term. 

The economy is open: exports plus imports of goods and services account for  107% of 
GDP. Exports have been growing steadily, despite the real appreciation of the currency 
and the rising unit labour costs. However, the pattern, composition and extent of trade 
make  the  Czech  Republic  very  vulnerable  to  external  shocks.  For  example,  it  is 
dependent on energy imports - particularly oil. 

labour Market 

One of the most remarkable features of the transition in the Czech Republic, which sets 
it  apart  from  all  other  countries  in  the  region,  is  that  it  has  suffered  virtually  no 
unemployment. Unemployment initially rose as a result of transition, but it only reached 
5% at its highest  point and remained  around  3% from  early  1995 to the end of  1996. 
The main reasons for this were that many working pensioners withdrew from the labour 
force, and that employment opportunities in the private sector developed rapidly. There 
is still overstaffing,  especially in the remnants of old state industry and the public sector, 
including the railways, which has also contributed to keeping unemployment down. At 
the beginning of 1997, unemployment increased to over 4% and looks set to rise further 
as  lay-offs  have been  increasing  in certain  industries, e.g.,  steel. However,  it remains 
low relative to most other European countries. 

The labour market is very tight and there is said to be a shortage of skilled labour, as a 
result, wage pressure is high. Until July  1995, with the agreement of the unions, there 
was an explicit incomes policy - an excess-wage tax - which sought to limit real wage 
growth to a maximum of 5% above productivity growth. However, it appeared to have 
counter-productive  effects  -  the  maximum  was  used  as  the  norm  -  and  it  was  thus 
abolished.  There  was  no  surge  in  wage  demands  after  it,  which  suggests  it  did  not 
artificially  contain  increases.  The  fact  that  real  wage  growth  is  above  productivity 
growth  is  one  of  the  main  sources  of  concern  for  macroeconomic  policy  because  it 
contributes to inflationary pressure, by increasing producer costs and boosting consumer 
demand. In  1996, wages grew by 8.5% in real terms, compared to overall productivity 
growth of 4%. 

There is a minimum wage. In January  1996 it was set at 2,500 crowns per month (based 
on a 42'/2-hour week), which was then 27% of the average wage. The nominal value is 
being deliberately capped so that, as inflation persists, its real value will be eroded. The 
wage distribution is still much narrower than in current Member States. 

23 

The  payroll  tax,  which  was  used  to  fund  unemployment  and  pension  benefits  under 
command  planning,  was  removed 
in  1993  and  replaced  with  social  security 
contributions.  These  also  cover  state  employment  policies,  social  assistance  and 
sickness  insurance,  and  are consolidated  into the  state budget.  Health  care  is  separated 
from  the  state budget  and  is run as a funded  insurance  system, rather than on a pay-as-
you-go basis. 

Employers'  federations  and unions exist, but they do not appear to play a very  dominant 
role in areas of macroeconomic importance, such as wage setting. 

Public  Finances 

The role of the state had to change significantly  when central planning  was  abandoned. 
To support the new role of government, fundamental  fiscal  reform  was required. On the 
expenditure  side, this began  in  1990 with a reduction  in current  transfers  to  enterprises 
and households.  On the revenue  side it took place mainly  in January  1993 when value-
added  tax,  personal  income  tax  and  corporate  profits  tax  were  introduced  and/or 
streamlined. 

As  a result  of the  reforms,  both the  size  and the  structure  of the  budget  have  changed. 
The  importance  of  indirect  taxation  has  increased,  and  government  expenditure  as  a 
percentage  of GDP has been reduced to below the levels prevailing  in most  EU Member 
States. The  guiding  principles  for  fiscal  policy  have been  to  balance  the  budget  and  to 
reduce the share of expenditure  in GDP; this means that fiscal  policy  is not used  actively 
to affect  the macroeconomics  situation. Up until  1996, the Czech Republic ran surpluses 
on the  state budget.  However,  in  1996, a shortfall  in revenue  led to  a very  small  deficit 
despite the emergency cuts in investment implemented during the year. 

There  are separate  budgets  for  the state, municipalities  and the various  funds  providing 
social security. To contain costs, the general income support for the economically  active 
population  was  abolished  in  1993  and  unemployment  benefits  were  trimmed.  Social 
security  is  financed  through  employer  and  employee  contributions  (26%  and  8% 
respectively of the gross wage). 

Enterprise  Sector: Privatisation  and Enterprise Restructuring 

The  move  to  a market  economy  is clearly  intimately  linked  with  privatisation  of  state-
owned  property  and  the  restructuring  of  the  production  processes.  The  privatisation 
process in the Czech Republic has been rapid and comprehensive.  Privatisation  of small 
state-owned  enterprises  took  place  in  1991-92.  Large  enterprises  have  been  sold  off 
under  the  mass  privatisation  programme  which  took  place  in two  waves:  1992-93  and 
1994-95.  The  majority  of  the  vouchers  for  the  mass  privatisation  distributed  to 
individuals  were  placed  with  investment  funds  which  then  bought  up  the  shares.  As  a 
result,  the  role  of  the  investment  funds  in  firms'  management  is  extensive.  Since  the 
investment  funds  are largely owned by banks, there are questions  over the ability of the 
funds  to  manage  companies  objectively  -  there  are  potential  conflicts  of  interest  as 
banks  are  both  owners  and  creditors. In  addition,  bankruptcies  tend  to  propagate  more 
rapidly  because  of  the  existence  of  such  links:  there  was  indeed  a  series  of  failures 
across banks and  investment  funds  in  1996 and in early  1997. The main assets yet to be 
privatised are the main state-owned banks and the utilities. 

24 

Industrial  production  has  diversified  since  1990  but  it  is  still  dominated  by  metal 
production.  Although  small  enterprises  have  increased  their  share  of  the  market,  large 
firms  dominate:  in  1995,  81% of  output  was  produced  by  large  firms  (with  over  100 
employees)  and  20%  by  very  large  firms  (with  over  5000  employées).  The  most 
dynamic  enterprises  are  the  very  small  and  the  very  large;  medium-sized  firms  with 
100-5,000  employees  are  below  average.  There  is  no  evidence  on  the  profitability  of 
firms  but  there  is  some  concern  that  only  firms  with  foreign  ownership  have  been 
investing. In  1995 most investment went to telecommunications  and the banking sector, 
rather than  manufacturing. 

Productivity  growth  and  restructuring  are  crucial  if  production  is- to  become  efficient 
and  able  to  cope  with  competition.  The  speed  of  restructuring  depends  in  part  on  the 
access to new investment.  Investment  finance  can come from  retained  earnings or from 
domestic  borrowing,  from  sales  of  shares  or  brought  in  from  abroad.  Investment  in 
general  has  been  strong  but  this  has  mostly  come  from  government  and  gone  to 
infrastructure  projects,  as  has  a  large  proportion  of  the  FDI.  Corporate  restructuring 
needs to progress  further.  Productivity  growth has been relatively  slow considering  the 
share  of  investment  in  GDP  and  the  low  rate  of  unemployment.  Also,  corporate 
governance  is  still  not  sufficiently  strong,  partly  as  a  result  of  the  method  of 
privatisation  used.  Further,  since  1996  strikes  and  protests  by  workers,  including 
railway and other public sector workers, have taken place against restructuring plans. 

Financial  Sector 

The authority responsible  for monetary policy  is the Czech National Bank  (CNB)  which 
was  created  on  1  January  1993,  taking  over  from  its  federal  predecessor.  Its  main 
objective was to ensure stability of the national currency. It was made independent  from 
the government, but is accountable to Parliament. Its independence  is guaranteed  by the 
Act  on  the  CNB  and  by  the  Czech  Constitution.  The  CNB  does  not  set  targets  for 
inflation,  but has a target range for  money  supply  growth. Although  inflation  has  come 
down  and  the  currency  remained  stable,  the  targets  for  money  have  generally  been 
missed. 

The two-tier  banking  system,  in which  the  central  bank  is  separated  from  commercial 
banking,  was  well  established  by  1993.  Initially,  the  main  instrument  of  monetary 
policy  was  quantity  limits  on  the  amounts  banks  could  lend  and  borrow.  The  use  of 
indirect  instruments,  such as open-market  operations  (treasury  bills  and  bank  bills)  and 
regulation (e.g., setting minimum reserve requirements, discount and Lombard rates), to 
manage the money  supply  and the exchange  rate became  common  only  gradually  after 
1993. 

The  formal  reform  of  the  banking  sector  is  essentially  complete,  but  further 
restructuring  is both necessary and expected.  State participation  accounted  for  31.5% of 
banks'  capital  by  the  end  of  1995. Domestic  banks  accounted  for  91.5% of  deposits  at 
the end  of  1995; banks  with  state  participation  accounted  for  about  70% of  total  bank 
assets..  Banks  only  fulfil  their  role  of  financial  intermediation  to  a  limited  extent,  and 
there are problems  facing  the  sector  at present.  Firstly, there  are too  many  small  banks 
that are inefficient  and therefore  will not be able to survive as they are. During  1996, the 
rate at which banks ran into problems increased.  Secondly, there is a significant  amount 

25 

of inter-ownership  of banks  and  cross-ownership  between  investment  funds  and  banks. 
Finally, the bad loans problem for banks, though it has improved, is still present.  There 
are  still  wide  spreads  between  interest  rates  on  credits  and  on  deposits.  At  present, 
therefore,  the  banking  system  cannot  be  considered  sufficiently  efficient  or  able  to 
compete, but the  system  is stable: 80% of banking  business  is concentrated  in the  four 
main  state-owned  banks,  and  they  currently  are  relatively  healthy.  As  a  result  of  the 
unease  in  the  sector,  the  government  is  concentrating  on  privatising  each  of  the  main 
four banks, one at a time. 

The  capital  market,  in  particular  the  Prague  stock  exchange,  has  developed  partly 
because  of  mass  privatisation.  The  basic  legal  and  institutional  frameworks  have  been 
set  up.  It  is  the  largest  stock  exchange  in  the  region,  by  number  of  stocks  and' 
capitalisation,  but trading  has not  increased  rapidly, probably  because  the  market  lacks 
transparency.  The  stock  exchange  is  not  yet  a  significant  way  of  raising  finance  for 
enterprises.  The  capital  markets  have  been  criticised  by  observers  and  investors  for 
being poorly  regulated  and  confusingly  complicated.  Illegal  activity  was  discovered  in 
some  investment  funds. 
In  addition,  there  currently  exist  multiple  markets  for  the 
trading of shares and securities, so that several prices can prevail for the same stocks. In 
response  to  these  criticisms,  considerable  changes  in  the  rules  of  the  stock  exchange, 
aimed  at  enhancing  investor  protection  and  market  transparency,  were  introduced  in 
July  1996.  Also,  the  Ministry  of  Finance  aims  to  set  up  an  independent  Securities 
Commission to improve supervision and regulation of the financial markets, as well as a 
clearing house to centralise the activity of the multiple markets. The  governing  body  of 
the  Stock Exchange has also proposed tackling the transparency  problem  by  increasing 
reporting  of  financial  results,  and  by  limiting  the  number  of  markets  on  which  stocks 
can be simultaneously  quoted. 

The insurance market is still under-developed but competition is increasing. 

Economic and Social  Development 

Social  Indicators 

The  Czech  Republic  has  a  population  of  10.3  million.  As  with  many  countries  the 
population  is ageing: birth rates are low and life expectancy  is increasing.  Some 60% of 
the population  is of working  age. This is set to increase  slightly  in the  short to  medium 
term as the retirement age is raised. 

In  general,  there  has  always  been  broad  consensus  on  reforms  and  little  social  unrest. 
However, in  1996 and early  1997 a number of strikes was held in the public sector. 

The  labour  force  is  skilled  and  educated:  in  1995,  32%  of  the  employed  had  higher 
secondary  education,  including vocational training. In addition, 40% had  apprenticeship 
qualifications  and  a  further  11%  had  university  education.  The  educational  system 
produces a high percentage of science and engineering graduates . 

26 

Regional and Sectoral Différences 

The various regions of the Czech Republic were formerly  fairly  homogenous but,  since 
the  "velvet  revolution",  have  begun  to  show  increasing  heterogeneity  in  terms  of 
unemployment rates, wages and  inflation. 

Prague  has  developed  more  rapidly  than  any  other  area,  and  its  economy  is  showing 
signs  of  overheating: very  low unemployment,  and high  and rising  costs  both  in  terms 
of wages and  rents. Meanwhile  the fortunes  of other regions have  depended  largely  on 
the  existing  industrial  base  and  on  whether  they  could  expand  tourism  and/or  exploit 
proximity to Germany and Austria and the capital. 

Under  the  former  regime  there  was  an excessive  concentration  of  industry,  so  that  not 
only  were  firms  very  large  but  also,  due  to  specialisation,  the  areas  were  sensitive  to 
changes  in  the  fortunes  of that  industry. Northern  Bohemia  and Northern  Moravia  are 
the  industrial  heartland.  Employment  has  changed  little,  suggesting  there  is  still  a 
substantial  amount  of restructuring  to be undertaken. Nevertheless,  in November  1996, 
they  had  the  highest  unemployment  rates  at  7.2%  and  6%  respectively  (compared  to 
Prague  at  0.4%  and  the  national  average  of  3.3%).  The  Southern  regions,  although 
dominated  by  agriculture,  have  developed  their  tourist  industry  significantly  and 
therefore have kept unemployment rates down to 2-3%. 

The  aim  of the regional  policy  now being developed  will be to redress  imbalances  and 
facilitate  development  in  less  favoured  regions.  It  will  aim  also  to  enhance  growth  by 
preventing the over-concentration of activity and thus limit congestion and pollution. 

2.2  The  E c o n o my  in  the  Perspective  of  Membership 

Introduction 

The European Council in Copenhagen in  1993 defined  the conditions that the associated 
countries  in  central  and  eastern  Europe  need  to  satisfy  for  accession.  The  economic 
criteria are: 

.  the existence of a functioning  market economy; 

.  the capacity to cope with competitive pressure and market forces within the Union. 

These  criteria  are  linked.  Firstly,  a  functioning  market  economy  will  be  better  able  to 
cope  with  competitive  pressure.  Secondly,  in the context of  membership  of the  Union, 
the  functioning  market  is  the  internal  market.  Without  integration  into  the  internal 
market,  EU membership would  lose its economic meaning, both for  the Czech  Republic 
and for its partners. 

The  adoption  of  the  acquis,  and  in  particular  the  internal  market  acquis,  is  therefore 
essential  for  a  candidate  country,  which  must  commit  itself  permanently  to  the 
economic  obligations  of  membership.  This  irreversible  commitment  is  needed  to 
provide  the certainty  that  every  part  of the enlarged  EU market  will  continue  to  operate 
by common rules. 

27 

The capacity to take on the acquis has several dimensions. On the one hand, the  Czech 
Republic  needs to be capable of taking  on the economic obligations  of membership,  in 
such a way that the single market functions  smoothly  and fairly.  On the other hand,  the 
Czech Republic's capacity to benefit  fully from the competitive pressures of the internal 
market  requires  that  the underlying  economic  environment  be  favourable,  and  that  the 
Czech  economy  have  flexibility  and  a  sufficient  level  of  human  and  physical  capital, 
especially  infrastructure.  In  their  absence,  competitive  pressures  are  likely  to  be 
considered too intense by some sections of society, and there will be a call for  protective 
measures, which, if implemented, would undermine the single market. 

The  capacity  and  determination  of  a  candidate  country  to  adopt  and  implement  the 
acquis  will be crucial, since the costs and benefits  of doing  so may be unevenly  spread 
across  time,  industries  and  social  groups.  The  existence  of  a  broad  based  consensus 
about  the  nature  of  the  changes  to  economic  policy  which  membership  of  the  Union 
requires,  and  a  sustained  record  of  implementation  of economic  reforms  in the  face  of 
interest  group  pressure  reduce  the  risk  that  a  country  will  be  unable  to  maintain  its 
commitment to the economic obligations of membership. 

At  the  level  of  the  public  authorities,  Membership  of  the  Union  requires  the 
administrative  and  legal  capacity  to  transpose  and  implement  the  wide  range  of 
technical  legislation  needed  to  remove  obstacles  to  freedom  of  movement  within  the 
Union  and  so  ensure  the  working  of  the  single  market.  These  aspects  are  examined  in 
later  chapters.  At  the  level  of  individual  firms,  the  impact  on their  competitiveness  of 
adopting  the  acquis  depends  on  their  capacity  to  adapt  to  the  new  economic 
environment. 

The Existence of a Functioning Market  Economy 

The existence of a market economy requires equilibrium between supply and demand  to 
be established  by the free  interplay  of market  forces.  A market  economy  is  functioning 
when the legal system, including the regulation of property rights, is in place and can be 
enforced.  The  performance  of  a  market  economy  is  facilitated  and  improved  by 
macroeconomics  stability  and  a  degree  of  consensus  about  the  essentials  of  economic 
policy.  A  well-developed  financial  sector  and  an  absence  of  significant  barriers  to 
market entry and exit help to improve the efficiency  with which an economy works. 

The  framework  for  a  functioning  market  economy  is  largely  in  place  in  the  Czech 
Republic.  Market  mechanisms  dominate:  only  a  minority  of  administered  prices  still 
have  to  be  adjusted,  and  trade  and  the  foreign  exchange  regime  have  been  broadly 
liberalised. Private ownership has been extended, and the privatisation process is almost 
complete with only the main banks and some 60 strategic enterprises  left  in state hands. 
The  legal  and  institutional  features  of  a market  system  have also  largely  been  adopted: 
property  rights  are  well-defined;  a  commercial  code  has  been  introduced  along  with 
contract  and  consumer  laws;  there  are  no  significant  administrative  controls  blocking 
entry to the market; and the banking sector has been reformed  to some extent. 

However,  it  is  not  clear  that  all  market  institutions  are  as  yet  sufficiently  strong  or 
completely operational. Two main examples are the financial  and capital markets, which 
are  an essential  feature  of a modern  market  economy, and public  administration.  These 
clearly  need  to  develop  further.  The  regulation  of  the  financial  markets,  which  to  date 

28 

has proved  inadequate, is under review at present. More specifically,  the banking  sector 
is not strong and is undergoing the structural reform necessary for it to fulfil  its  financial 
intermediation role effectively.  Tax administration has been relatively weak. 

Substantial  progress  has  been  made  in  stabilising  the  economy:  inflation  is  in  single 
digits,  unemployment  is  exceptionally  low,  and  public  finances  are  sound.  This  has 
boosted  the  development  of  the  market  system,  as  it  created  a  stable  macroeconomics 
environment  necessary  for  agents  to  plan  their  activity  with  reasonable  certainty.  The 
basis  and  sustainability  of  growth  appear  sound.  However,  in  1996  economic  growth 
slowed,  unemployment  and  inflation  edged  up,  public  finances  came  under  some 
pressure, the current  account deficit  soared, and  in May  1997 the currency  band  had  to 
be  abandoned.  Two  factors  behind  the  slowdown  were  the  decline  in  exports  to  the 
Union and tighter monetary policy. The current situation suggests two things. First, that 
macroeconomics  stability  cannot  be taken  for  granted,  and  in particular  that  ways  may 
need to be found to contain consumer spending so as to limit the size of the trade  deficit. 
Second,  that  for  longer-term  solid  growth  further  substantial  restructuring  at  the 
enterprise level is still needed. 

One indicator  of how  successful  the  Czech Republic was  at adapting  and  managing  its 
economic  development  during  the  first  few  years  of  transition,  is  that  it  was  the  first 
central  European  country  to  become  a member  of  the  Organisation  for  Economic  Co 
operation and Development in  1996.  In the coming months continued firm commitment 
to stabilisation and reform  will need to established  in order to build upon the  substantial 
progress that the  Czech Republic has made in recent years.  In addition,  good  progress 
in implementation  of the Europe Agreement  should help to ensure that the transition  to 
membership of the Union is relatively smooth. 

The Capacity  to Cope with  Competitive Pressure and  Market  forces 

It  is  difficult,  some  years  ahead  of  prospective  membership,  and  before  the  Czech 
Republic  has  adopted  and  implemented  the  larger  part  of  Community  law,  to  form  a 
definitive  judgement  of  the  country's  ability  to  fulfil  this  criterion.  Nevertheless,  it  is 
possible  to  identify  a number  of  features  of  the  Czech  Republic's  development  which 
provide  some  indication  of its probable capacity  to cope with  competitive  pressure  and 
market forces within the Union. 

This  requires  a  stable  macroeconomics  framework  within  which  individual  economic 
agents  can  make  decisions  in  a climate  of  a reasonable  degree  of  predictability.  There 
must  be  a  sufficient  amount  of  human  and  physical  capital  including  infrastructure  to 
provide  the  background  so  that  individual  firms  have  the  ability  to  adapt  to  face 
increased  competitive  pressure  in  the  single  market.  Firms  need  to  invest  to  improve 
their efficiency,  so that they can both compete at home and take advantage of economies 
of  scale  which  flow  from  access  to  the  single  market.  This  capacity  to  adapt  will  be 
greater, the more firms have access to investment  finance,  the better the quality  of their 
workforce, and the more successful  they are at innovation. 

Moreover, an economy  will be better  able to take on the obligations  of membership  the 
higher the degree of economic integration it achieves with the Union ahead of accession. 
The  more  integrated  a  country  already  is  with  the  Union,  the  less  the  further 
restructuring  implied  by  membership.  The  level  of  economic  integration  is  related  to 
29 

both  the  range  and  volume  of  goods  traded  with  member  states.  Direct  benefits  from 
access  to  the  single  market  may  also  be  greater  in  sectors  where  there  are  a  sizeable 
proportion  of  small  firms,  since  these  are  relatively  more  affected  by  impediments  to 
trade. 

One indicator of the Czech Republic's competitiveness  is its degree of trade  integration 
with the  EU. Indeed, the  Czech  economy  has re-oriented  its trade toward  the  West  and 
increased  trade turnover  dramatically.  As a result  the economy  is quite  integrated  with 
the  Union:  the  Union  accounts  for  some  60% of  exports  and  of  imports  to  the  Czech 
Republic.  However,  they  are  not  currently  exporting  and  importing  a  similar  range  of 
products,  which  would  be  an  even  clearer  indicator  of  competitiveness  on  the EU 
market.  The  structure  of  trade  (using  narrow  categories  of  goods)  between  the  Czech 
Republic and Germany, its main trading partner,  shows this and therefore  suggests  that 
integration  still  has  some  way  to  go.  Given  the  rising  labour  costs,  further  structural 
changes,  productivity  growth,  and  quality  improvements  are  still  necessary  if  Czech 
firms are to be able to compete with European suppliers. 

Another  indicator  of  competitiveness  is the  ability  of  enterprises  to  adjust  to  changed 
circumstances  and  for  managers  to  restructure  enterprises  and  adopt  internationally 
accepted norms and practices. For example, in order to meet technical norms implied by 
the  acquis  ,  firms  may  need  to  be  able  to  adopt  modern  technologies.  The  indirect 
evidence  of restructuring  has been  mixed  so far.  The weak  management  camablility  of 
industry  has  an  important  negative  effect  on  industry  competitiveness.  The  number  of 
redundancies  in the  past  has  been  relatively  limited,  suggesting  that  working  practices 
may  not  have  changed  and  there  may  still  be  over-staffing.  There  are  signs,  from  the 
steel industry for example, that this is beginning to change, but in other areas such as the 
railways resistance to change is strong. In addition, because the ownership of enterprises 
is often  not transparent, there is no single clear entity to which managers are responsible 
or  accountable,  so  they  are  not  necessarily  always  being  prompted  to  restructure  the 
firms. There is a significant  amount of inter-ownership across the banks and  investment 
funds,  which hold shares in the enterprises to which the banks lend. Banks have built up 
some bad  loans as a result  which  have not been cancelled  because  of the  links  through 
the investment  funds. 

Enterprise  restructuring  also  depends  on  the  level  of  investment  and  firms'  access  to 
capital. The share of investment  in  GDP is very high, foreign  direct  investment  has  been 
relatively  strong,  and  R&D  spending  as  a percentage  of  GDP has  been  increasing  since 
1993:  it  stood  at  1.14%  in  1995. To  date, the  majority  of  the  investment  has  gone  to 
infrastructure  and  the  banking  sector,  while  investment  in  manufacturing  has  been 
relatively  weak.  There  is  indirect  evidence  that  this  is  changing:  the  amount  of  bank 
lending to firms has been increasing and productivity  growth in manufacturing  has been 
accelerating. Increased  access to capital can be expected to help Czech industry adapt to 
the requirements of the  acquis. 

The costs of adjusting  to greater  competition depends in part on the degree of  industrial 
and  enterprise  concentration  and  on  labour  mobility.  In  the  Czech  Republic  industrial 
production  is  fairly  concentrated  in  metal  production  but  diversity  has  been  increasing 
and  enterprise  concentration  has  been  falling.  However,  labour  mobility  is  very 
restricted by the lack of housing. 

30 

The  agricultural  sector  is  relatively  small  in  terms  of  its  share  of  GDP.  However, 
significant  modernisation  would  be required  upon  accession.  More or  less  substantial 
price adjustments  could be necessary, depending on price trends in the country as well 
as in the EU, and on real exchange rate movemerlts. 

At  present,  the  banking  sector  is  not  competitive  or  strong.  The  sector  has  been 
reformed but is dominated by the four major banks, which are still partly state-owned; a 
large number  of unviable  small banks  still  exist. During  1996, the weaknesses in the 
bank sector have came to the fore as a number of banks failed. The main problems in the 
sector are the existence of bad loans, lack of competitiveness, lack of transparency and 
inter-ownership  of banks and investment  funds,  and, finally, under-capitalisation. The 
State may have to intervene to solve the problem of bad loans for some banks. For the 
sector  to  develop,  it  needs  to  consolidate,  and  for  banking  practice  on  lending  to 
improve further.  Progress in this area is essential for the Czech economy to achieve the 
competitiveness required for the European market. 

Prospects and Priorities 

The main policy debates currently are on the trade deficit,  inflation,  the exchange rate, 
enterprise  restructuring  and  banking  sector  reform.  Underlying  them  are  some 
fundamental problems which will need addressing in the medium term. 

A trade deficit  is a normal feature  of a rapidly developing economy. There is no cause 
for concern as long as the deficits are generated by productive investment and  financed 
by long-term capital inflows. However, large persistent imbalances across the balance of 
payments  suggest  that  there  are  more  fundamental  problems.  Imports  still  largely 
consist  of  investment  goods but  imports  of consumption  goods  are growing  strongly. 
The  problem  is  therefore  likely  to  be  related  to  the  very  low  domestic  savings  rate, 
despite  the  high  wage  and  non-wage  income  growth  -  in  other  words, the  very  high 
propensity to consume rather than to save. 

Inflation  has been brought down to  single digits, but in  1996 it stopped  slowing. The 
two  sources  of  inflationary  pressure  are  rapid  wage  growth  and  strong  domestic 
demand,  and  the  recent  depreciation  of  the  Czech  crown  is  likely  to  exacerbate  the 
situation.  As there will be further price liberalisation and deregulation, which will boost 
inflation  in  the  near  future,  some  very firm action  is  needed  to  contain  the  existing 
pressures. The labour market is clearly very tight. This may be in part because there is 
hidden unemployment and access to jobs is costly because job information  services are 
still limited. On the other hand, productivity growth has not been as high as one might 
have expected with such low unemployment. All over-staffing  needs to be shaken out 
and investment in labour-saving technology is necessary. This investment is more likely 
to take place if real interest rates are lower and bank lending is less restricted. The latter 
would  require  better  collateral  and risk  assessment.  In turn  this  requires  stronger  and 
more  transparent  capital  markets:  they  are  not  a  source  of  finance  for  enterprises  at 
present, which have to turn to the banking sector for loans. 

Bank privatisation  and reform  are high on the agenda at present; the recent  difficulties 
are  largely  due  to  inadequate  legislation  and  supervision,  bad  practice  and  cross-
ownership between investment funds and banks. It is important for the banking sector to 
be cleaned up. 

31 

The  instruments  of  monetary  and  fiscal  policy  have  been  transformed  to  be  more 
compatible with a market system. Until recently they were achieving their objectives: a 
stable currency, a balanced budget and a reduction of government expenditure as a share 
of GDP. Public finances have been reformed along Western lines: for example, VAT and 
income tax have been introduced.  However, tax collection  could  be  strengthened  and 
there  are  growing  deficits  on  pension  and  social  security  funds  which  will  cause 
problems in the medium term. 

The  economic  policies  of  the  Czech  Republic* to  date, have  not  been  guided  by  an 
elaborated medium-term  strategy. Certain guiding principles for policy have been laid 
down. Firstly, to achieve "stability of the currency": the central bank has responsibility 
for  ensuring  low inflation  and a stable exchange rate. Secondly, to.reduce the size of 
government and to set a balanced budget. Thirdly, to create a market economy through 
the privatisation of state assets and the liberalisation of economic relations. 

The ability of the government to implement the strategies and maintain a credible policy 
course  set  is  less  certain  than  before  the  June  1996  elections.  Therefore  action  on 
legislation and implementation may be slower. 

Economic policies  should  now give greater  emphasis to micro-economic  measures. It 
may take longer for the impact of these to be felt but they are of paramount importance 
if stability is to be maintained and competitiveness strengthened. 

2.3  General  Evaluation 

The  Czech  Republic  can  be  regarded  as  a  functioning  market  economy.  Market 
mechanisms operate widely and the role of the state in the economy has been completely 
the  economy. 
changed.  Substantial  success  has  been  achieved 
Unemployment  is  among  the  lowest  in  Europe. However,  as  the  recent  emergence  of 
macroeconomic  imbalances  has shown, further  progress will need to be made over the 
next few years, notably in strengthening corporate governance and the financial system. 

in  stabilizing 

The Czech Republic should be able to cope with competitive pressure and market forces 
in  the  Union  in  the  medium  term,  provided  that  change  at  the  enterprise  level  is 
accelerated.  The  country  benefits  from  a  trained  and  skilled  workforce,  and 
infrastructure  is  relatively  good.  Investment  in the  economy  has  been  high  in  recent 
years, with foreign  direct investment also strong. It has successfully  reoriented its trade 
towards the West. However, although the quality of exported goods is improving, their 
value-added  is still low. The banking sector is dominated by a few, partly  state-owned 
banks  and  its  competitive  position  is  not  strong.  The  main  challenge  for  the  Czech 
Republic  is to press  on with  enterprise  restructuring  in order to  improve  the medium 
term performance of the economy, and as a way of redressing the external imbalances. 

32 

3.  Ability to Assume the Obligations of Membership 

3.1  Internal Market Without Frontiers 

Article 7a of the Treaty  defines  the Union's  internal  market as an area without  internal 
frontiers in which the free movement of goods, persons, services and capital  is ensured. 
This  internal  market,  central  to  the  integration  process,  is  based  on  an  open-market 
economy in which competition and economic and social cohesion must play a full  part. 

Effective  implementation  of  the  liberties  enshrined  in  the  Treaty  requires  not  only 
compliance  with  such  important  principles  as,  for  example,  non-discrimination  or 
mutual recognition of national regulations - as clarified  by Court of Justice rulings - but 
also  concomitant,  effective  application  of  a  series  of  common  specific  provisions. 
These  are  designed,  in  particular,  to  provide  safety,  public  health,  environmental  and 
consumer  protection,  public  confidence  in  the  services  sector,  appropriately  qualified 
persons  to practise  certain  specialist  occupations  and,  where  necessary,  introduction  or 
coordination  of  regulatory  and  monitoring  mechanisms;  all  systematic  checks  and 
inspections  necessary  to  ensure  correct  application  of  the  rules  are  carried  out  on  the 
market, not at frontier  crossings. 

It is important to incorporate Community  legislation into national legislation  effectively, 
but  even  more  important  to  implement  it  properly  in  the  field,  via  the  appropriate 
administrative  and  judicial  structures  set  up  in  the  Member  States  and  respected  by 
companies.  This is an essential  precondition  for creating the mutual trust  indispensable 
for smooth operation of the internal market.  ' 

This chapter  must  be read  in conjunction  with,  inter alia, the chapters  on social  policy, 
the environment, consumer protection and sectoral policies. 

The Four Freedoms 

A  step-by-step  approach  is  being  taken  to  absorption  of  the  acquis  by  the  candidate 
countries: 

-  The  Association  Agreement  between  the  Community,  its  Member  States  and  the 
Czech  Republic  was  signed  in  1995  and  is  being  ratified.  With  regard  to  the  four 
freedoms  and  approximation  of  legislation,  the  Agreement  provides,  in  particular,  for 
immediate  or  gradual  application  of a number  of obligations,  some  of them  reciprocal, 
covering,  in  particular,  freedom  of  establishment,  national  treatment,  free  trade, 
intellectual property and public procurement. 

-  The  Commission's  1995  White  Paper  (COM  (95)  163  final),  guidelines  intended  to 
help  the  candidate  countries  prepare  for  integration  into  the  internal  market,  gives  a 
closer  definition  of  the  legislation  concerned.  It  identifies  the  "key  measures" with  a 
direct  effect  on the  free  movement  of  goods, services, capital  and  persons  and  outlines 
the  conditions  necessary  in  order  to  operate  the  legislation,  including  the  legal  and 
organizational  structures.  Twenty-three  areas  of  Community  activity  are  examined, 
dividing the measures into two stages, in order of priority, to provide a work programme 
for the pre-accession phase. The Technical Assistance and Information  Exchange  Office 
(TAIEX)  was  set  up  with  the  objective  of  providing  complementary  and  focused 
33 

technical  assistance  in the areas of legislation  covered  in the White Paper.  A  legislative 
database has recently been established by the  Office. 

-  The candidate countries will have to implement all the acquis  .  The "Action plan  for 
the  single  market"  submitted  to  the  Amsterdam  European  Council  gives  details  of  the 
priority  measures  necessary  to make the single market work  better between  the  Fifteen 
in  preparation  for  introduction  of  the  single  currency.  This  will  inevitably  entail 
changes to the  acquis. 

General  Framework 

Whatever  their  field  of  activity,  undertakings  must  be  able  to  operate  on  the  basis  of 
common  rules.  These  are  important  since  they  shape  the  general  framework  within 
which  economies  operate  and,  hence,  the  general  conditions  of  competition.  They 
include  the  rules  on  competition  (on  undertakings  and  State  aid)  and  tax  measures 
discussed  elsewhere in this opinion, the opening-up of public works, supply and  service 
contracts,  harmonisation  of  the  rules  on  intellectual  property  (including  the  European 
patent),  harmonisation  of  the  rules  on  company  law  and  accountancy,  protection  of 
personal  data,  transfer  of  proceedings  and  recognition  of  judgments  (  Article 220 
conventions). 

Descriptive  Summary 

Public  Procurement  is  regulated  by  a  1994  Act  which  entered  into  force  in  1996.  An 
independent  agency,  the  Office  for  the  Protection  of  Competition,  is  in  charge  of 
monitoring the public procurement policy. 

In the area of protection of intellectual and industrial property rights the Czech Republic 
adopted  a new  Patent  Law  in  1990, a Trademark  Law  in  1995, whereas  the  Copyright 
Law was slightly amended in  1996.  The country is a party to all conventions referred  to 
in  Article  67  of  the  Europe  Agreement  and  submitted  an  application  to  accede  to  the 
Munich  Convention  of  1973. The  Czech  Republic  is  a  member  of  the  Agreement  on 
Trade Related of  Intellectual Property Rights (TRIPs). 

Company  law  is  mainly  governed  by  the  Commercial  Code,  last  amended  on  1 July 
1996,  which  brought  close  to  the  First  and  second  Directives.  A  variety  of  different 
types  of  enterprises  are  recognised  under  Czech  law,  including  public  and  private 
limited  companies.  Currently  some  115,000 companies  are  registered.  They  may  issue 
shares  and  recent  legislation  has  improved  shareholder  protection.  Minimum  capital 
requirements are laid down by law. There is a basic level of protection for creditors. The 
courts  operate  a  company  register  which  contains  all  relevant  information  about  each 
company, which can be freely  consulted. 

The  Accounting  Act  of  1991  brings  Czech  accounting  regulations  in  line  with  the  4th 
Directive.  There  are  no  accounting  standards, procedures  are  given  by  the  Ministry  of 
Finance.  Methodological  recommendations  are  issued  by  the  Union  of  Accountants. 
Rules on consolidated accounts are given in Ministry declarations. 

The  right  to the  protection  of personal  data is enshrined  in the  Charter  of  Fundamental 
Rights  and  Freedoms  and  ensured  by Act 256/1992  on the  Protection  of  Personal  Data 
34 

as well as a number of sectoral acts. There does not exist an independent control body to 
supervise compliance. 

Current and Prospective Assessment 

Czech procurement  legislation has moved considerably  into the direction  of the  acquis. 
Most  of  the  White  Paper  Directives  are  incorporated  into  Czech  law.  The  Czech 
authorities  themselves  admit,  however,  that  full  conformity  does  not  exist  yet.  This  is 
the case for tendering procedures in the utilities sector - which is not yet covered by the 
legislation  -  and  the  existence  of  preferences  and  some  other  discriminatory  measures 
towards non-residents. 

Serious efforts  have been made to bring public procurement legislation into line with the 
acquis.  Although  the  Czech  Law  is  in  general  of  good  quality,  a  number  of  gaps 
continue to exist. In particular, the scope of the law would need to be extended to all the 
utilities  sectors  (water,  energy,  transport  and  telecommunications).  For  the  time  being 
the  Czech  Republic  maintains  a  system  of  domestic  preferences  as  allowed  by  the 
Europe Agreement.  Firms  located  in the EU will  get equal  access only  after  the  expiry 
of the transition  period  set out  in the Europe Agreement.  The  Office  for  the  Protection 
of  Economic  Competition  seems  to  meet  the  infrastructure  requirement  for  a  correct 
implementation  of  legislation.  Although  it  is  too  soon  to  adequately  judge  the 
effectiveness  of  the  public  procurement  procedures  in  practice,  the  legal  remedies 
system  seems  to be rapid  and  effective,  and  is in line with  most  of the requirements  of 
the directives. 

Further  amendments  to  the  Act  on public  procurement  are  expected  to  be  in  force  by 
1998-2000, so as to achieve complete harmonisation  in the field of public  procurement 
by the date of accession. 

Good  progress  has  been  made  in  the  adaptation  of  legislation  concerning  industrial 
property rights (patents, trademarks, designs). 

In intellectual property rights (copyrights and  neighbouring rights) important gaps have 
to  be  filled  (for  computer  programmes,  rental  and  distribution  rights  and  duration  of 
protection  of copyrights). The existing Patent Law is intended to be  revised  in order  to 
ensure  total  compatibility  with  the  Munich  Convention.  At  the  same  time  the  Czech 
Republic  intends  to  introduce  the  SPC  (supplementary  protection  certificate)  for 
pharmaceutical  products.  Border  enforcement  will  be  introduced  by  1.1.1998.  Piracy 
remains  important.  Considerable  efforts  have  been  made  to  ensure  an  appropriate 
enforcement  for industrial property. 

As to company  law, according  to the  information  provided  by the  Czech  Republic,  the 
Commercial Code was amended as of  1  July  1996 to bring it substantially  into line with 
the First and  Second  Directives, though certain gaps  still need to be filled, for  example 
as  regards  creditor  protection.  It  is  understood  that  the  Twelfth  Directive  has  been 
transposed  into  Czech  law,  but  there  is  not  yet  full  compatibility  with  the  Third  and 
Eleventh Directives. 

As  regards  Accounting  the  1991  Act  already  goes  a  good  distance  towards  alignment 
with  the  4th  Directive  and  amendments  to  the  Act  which  will  become  effective  on 

35 

1.1.1999 are expected  to result  in full  conformity.  Amendments  to the Act  on  Auditors 
implementing  the  8th Directive  will  become  effective  on  1.1.1998.  Certain  transitional 
problems  are  in  evidence  relating  to  the  implementation  in  practice  of  the  new  rules, 
including a shortage of qualified  accountants and auditors, but these can be solved in the 
medium term. 

The Czech authorities recognise that  Czech legislation  does not yet sufficiently  comply 
with  European  standards  concerning  data protection.  The  Czech  Republic  is  still  not  a 
party  to  Convention  108  of  the  Council  of  Europe.  It  is  necessary  to  establish  an 
independent  body  responsible  for  the  supervision  of  the  application  of  the  law  and  to 
introduce sanctions to be taken vis-à-vis persons making illegal use of data. 

As regards civil  law, the Czech Republic has recently  been invited by the  States parties 
to  the  Lugano  Convention  on jurisdiction  and  enforcement  of judgements  in  civil  and 
commercial  matters  to  adhere  to  that  Convention.  Such  development  gives  a  good 
indication of confidence  in the Czech Republic's judicial system. 

Conclusion 

The Czech Republic  has already taken on the most  important  Directives  for  the  sectors 
described  above.  Implementation  of  the  provisions  of  the  Europe  Agreement  and  the 
White Paper covering the sectors reviewed has generally been good. 

Further work is required, notably in the area of public procurement, intellectual  property 
protection  and  the  implementing  structures  for  personal  data  protection.  Efforts  of  a 
lesser  degree  are required  in the field of company  law, and  accounting  to  bring  Czech 
legislation  fully  into  line  with  EC  legislation.  In  all  these  fields,  assuming  the 
continuation  of  the  present  harmonisation,  there  should  be  no  major  difficulties  for 
approximation in the medium term. 

Free Movement  of Goods 

Free  movement  of  goods  can  be  achieved  only  by  removing  measures  which  restrict 
trade  -  not  only  customs  duties  and  quantitative  restrictions  but  all  measures  with 
equivalent,  i.e. protectionist,  effect,  irrespective  of  whether  or not  they  are  specifically 
aimed  at domestic  or imported products. Where technical  standards are not  harmonised, 
the  free  movement  of  goods  must  be  ensured  by  applying  the  principle  of  mutual 
recognition of national rules and accepting the rule that national specifications  should be 
no  more  stringent  than  is required  to  achieve  their  legitimate  objectives.  This  rule  was 
established in the Cassis de Dijon judgment. 

For  the  purpose  of  harmonisation,  the  European  Community  has  developed  the  "New 
Approach"  which  introduces  an  approach  carefully  balanced  between  government  and 
private  autonomous  bodies  and  in  which  European  Community 
legislation  and 
European  standards  play  a  distinct  complementary  role.  Thus,  instead  of  imposing 
technical  solutions,  European  Community  legislation  is  limited  to  establishing  the 
essential requirements which products must meet. Products manufactured  in  accordance 
with  European  standards  are  presumed  to  meet  such  essential  requirements,  but 
European  standards  are  not  the  only  way  to  prove  such  conformity.  The  "New 
Approach"  works  in  conjunction  with  the  "Global  Approach"  on  product  certification 
36 

which governs the apposition of the "CE Mark" on the product. For other products such 
as  pharmaceuticals,  chemicals,  motor  vehicles,  and  food  products,  European 
Community  directives  follow  the  traditional  regulatory  pattern  of  providing  fully 
detailed rules. 

The free movement  of goods also  dictates that a number  of  Community  harmonisation 
measures  be  transposed  into  national  law.  Implementation  of  health  and  safety 
harmonisation  rules  is  particularly  important  and  requires  the  establishment  of 
appropriate mechanisms and oTganisations, both for businesses and the authorities. 

Two of the "horizontal" directives essential to smooth running  of the  single market  are 
the  Directive  on  general  product  safety  and  the  Directive  on  liability  for  defective 
products. The regulations  concerning  general  product  safety  are covered  in  the  section 
on consumer protection. 

The  rules  on  agricultural  products  (compliance  with  veterinary  and  plant-health 
standards) are explained in detail in the section on agriculture. 

Descriptive  Summary 

Levels of tariff  protection  are  low and there are relatively  few  discriminatory  measures 
still  in  place.  All  prices  have  been  liberalised,  with  the  exception  of  those  for  public 
utilities,  and  household  gas, water,  electricity  prices  and  rents.  The  introduction  of  an 
import  deposit  scheme  on  21  April  1997  and  the  planning  of  restrictive  measures  for 
agricultural  imports  deviate  from  the  free  trade  approach  followed  by  the  government 
until now.  These matters are presented in other parts of the opinion. 

The process  of  approximation  of technical  legislation to the  EU acquis  has  made  good 
progress. The envisaged entry  into force  on  1 September  1997 of the "Act on Technical 
Requirements  for  Products"  should  pave  the  way  for  the  adoption  of  technical 
regulations,  standards  and  conformity  assessment  procedures  which  are  virtually 
compatible  with  the  EU's  New  Approach  tc  technical  harmonisation  and  the  Global 
Approach to conformity  assessment.  In the major  sectors regulatory  alignment  seems to 
progress  quite  satisfactorily:  new  legislation  on  foodstuffs  has  just  been  adopted; 
globally  compatible  draft  legislation  exists  for  chemicals;  concerning  the  automotive 
sector,  the  Czech  Republic  is a signatory  of the UN-ECE  1958 Agreement  and  applies 
more  than  two  thirds  of  UN-ECE  regulations.  On  pharmaceuticals  draft  legislation  is 
likely  to  reflect  progress  being  made  in  rendering  legislation  consistent  with  the  EU. 
The  new  Law  on  Medicinal  Products,  with  the  necessary  application  measures,  is 
expected to be in line with the relevant Community acquis. It needs to be borne in mind, 
in  any  case,  that  secondary  legislation  is  often  necessary  in  order  to  implement  the 
general legislative  framework. 

The Czech Office  for  Standards, Metrology and Testing (COSMT), a subsidiary body to 
the Ministry  for  Trade  and Industry,  is responsible  for  standardisation  and  certification 
matters. 

The co-existence  of different  functions  under the same umbrella body is a feature  of the 
transition  towards  a  new  system  based  on  the  New  Approach.  The  latter,  however, 

37 

prescribes  independent  conformity  assessment  bodies,  a  compatible  accreditation 
system, and voluntary  standardisation. 

More  than  80%  of  EU  standards  have  been  implemented  into  the  Czech  national 
standards  system  and  a  100%  implementation  rate  should  be  attained  by  the  end  of 
1997. COSMT, which became a full  member of the Comité Européen de Normalisation 
(CEN)  earlier  this  year  and  is  an  affiliate  member  of  the  Comité  Européen  de 
Normalisation  Electrotechnique  (CENELEC), 
technical 
supervisory authority under the new system. 

to  remain 

is  likely 

the 

Until  recently  there  were  no  examples  of  technical  barriers  to  trade.  Earlier  this  year, 
however,  there  have  been  occasional  reports  about  products  originating  in  the 
Community and complying with EU standards not being allowed on the Czech market. 

Current and Prospective Assessment 

The  Czech  Republic  is  well  advanced  in  applying  the  EC  rules  regarding  the  free 
movement  of  goods.  However,  market  access  for  products  originating  in the  European 
Union which are in conformity  with EU standards needs to be guaranteed. 

Good  progress  has  been  made  in  regard  of  the  safety  of  industrial  products.  Work  is 
proceeding  on  the  implementation  of  the  "Act  on  the  Technical  Requirement  for 
Products"  and  the  subsequent  implementation  of  the  transposed  New  Approach 
directives. 

The  Czech  Office  for  Standards,  Metrology  and  Testing  has  a  staff  which  looks 
sufficient  while the technical competence seems assured. 

The  draft  "Act  on  Technical  Requirements  for  Products" provides  for  the  privatisation 
of the  state testing  bodies within  a year.  Inspection bodies in the  area  of  standards  and 
technical  norms  currently  fall  under  different  ministries.  The  same  applies  to 
certification  bodies, which are envisaged to be privatised. 

The Czech standardisation and certification  system looks rather well prepared to comply 
with  the  acquis  within  the  medium  term,  on  the  condition  that  current  efforts  are 
continued. Questions remain, however, about the implementation of market  surveillance 
(legislation  and  administrative  structure);  the  separation  between  the  regulatory, 
standardisation  and  certification  functions;  the  resolution  of  the  issue  of  professional 
secrecy  for  testing  laboratories  and  the  exact  intentions  of  Ministries  concerning  the 
privatisation  of  certification  bodies).  Monitoring  of  developments  seems  therefore 
necessary.  This  also  applies  to  the  quality  and  staffing  of  the  bodies  and  institutions 
competent  for  the  implementation  of  the  relevant  legislation,  although  also  here 
developments are encouraging. 

A  bill  on  civil  product  liability  is  due  to  go  before  Parliament  soon  and  should  come 
into force next January. 

In  the  areas  subject  to  national  rules  but  not  covered  by  Community  harmonisation 
there is not enough  information  available to assess whether Community  legal  principles 
on the free movement of goods are properly applied in The Czech Republic. 

38 

The reporting  procedures  which form  part  of the internal-market  machinery  are not  yet 
operational  and  so  cannot  be  used  in  the  pre-accession  period.  The  most  important 
instruments  in  this  connection  are:  Directive  83/189,  requiring  governments  to  report 
draft  national  technical  standards  and  regulations;  Decision  3052/95  on  measures 
derogating  from  the  principle  of  the  free  movement  of  goods;  procedures  by  which 
complaints can be submitted to the Commission; and Article  177 of the Treaty, enabling 
Member  States to  request  preliminary  rulings  in the  Court  of  Justice.  It  is  also  hard  to 
assess  whether  the  Czech  Republic  complies  with  the principle  of  mutual  recognition; 
more  information  is  required  on  its  national  rules,  and  on  administrative  practices, 
which can affect  product sales. 

Conclusion 

Significant progress has been made. The Czech Republic has progressed very well in the 
taking on of the acquis related to the free  movement  of goods and has already taken  on 
the  most  important  directives.  Implementation  of  the  provisions  of  the  Europe 
Agreement  and  the  White  Paper  has  generally  been  good.  However,  there  must  be 
Certainty that products conforming  to EC standards are allowed onto the  Czech  market. 
Developments  concerning  the  safety  of  industrial  products  need  to  be  monitored,  both 
concerning  legislation  and  implementing  structures.  Provided  current  efforts  are 
maintained, free circulation of goods should be made possible in the medium term. 

The  Czech  authorities  should  also  ensure  that,  in  areas  not  covered  by  Community 
harmonisation,  their  own  national  laws  do  not  hinder  trade.  In  particular,  they  should 
check that measures are proportionate to their objectives. 

Free Movement of Capital 

The  Europe  Agreement  establishes  the  principle  of  the  free  movement  of  capital 
between  the  Czech  Republic  and  the  EU.  This  as  far  as  the  obligations  of  the  Czech 
Republic  are  concerned  applies  from  the  entry  into  force  of  the  EA  as  regards  direct 
investments  made  by  companies  already  established  in the  Czech  Republic  as  regards 
branches  or  agencies  of  Community  Companies  (as  well  as  the  self  employed), 
gradually  during the transitional period. The parties shall consult each other with a view 
to facilitate  the movement of capital between the Community and the Czech Republic in 
order to promote the objectives of the Agreement (Article 61 of the EA). 

The  White Paper highlights the link between the free  movement  of capital  and  the  free 
movement  of  financial  services.  It  suggests  a  sequence  of  capital  movements 
liberalisation,  starting from  medium  and long term  capital  movements  and those  linked 
to commercial operations, to short-term capital. 

Descriptive  Summary 

The  Czech  Republic  has  been  able  to  attract  a  considerable  amount  of  foreign  direct 
investment  (FDI) since  1990. The total figure for  the period  1990-1996  stands  at  5,300 
MECUS.  This  FDI  has  played  a  positive  role  in  the  restructuring,  privatisation  and 
modernisation  of  Czech  industry.  In  addition,  there  was  significant  inflow  of  foreign 

39 

capital in the form of bank deposits and portfolio  investment. These developments are in 
part due to the country's liberal policies concerning the movement of capital. 

The  Foreign  Exchange  Law  in  force  since  1 October  1995  introduced  current  account 
convertibility.  The  same  law  introduced  also  extensive  liberalisation  of  capital 
movements. 

Following  these  measures,  most  of  capital  inflows  have  been  liberalised.  The  main 
restrictions  on  the  inflow  of* capital  concern  the  acquisition  by  non-residents  of  real 
estate (for purposes other than direct investment) and the admission of foreign  securities 
to the domestic capital and money markets. 

In contrast to capital  inflows,  much wider is the range of restrictions  on the  outflow  of 
capital.  However,  among  the  liberalised  outward  capital  movements  are  direct 
investment,  acquisition  of  real  estate  by  residents  abroad,  commercial  credits  and 
personal capital movements. 

The capital movements already liberalised by the Czech Republic exceed the obligations 
undertaken by this country under the Europe Agreement. 

Current and Prospective  Assessment 

According  to  the  Czech  authorities,  the  abolition  of  the  remaining  restrictions  will  be 
gradual and is expected to be realised within a period of three to five years. 

The  Foreign  Exchange  Law  already  in  place  enables  further  liberalisation  steps  to  be 
taken  by  adopting  governmental  decrees  and orders  of the  Minister  of  Finance  and  the 
National  Bank,  without  a  need  to  change  the  Law.  However,  for  the  acquisition  of 
domestic real estate by non-residents the Law will have to be amended. 

Conclusion 

The  degree  of  capital  movements  liberalisation  already  achieved  is  very  substantial, 
with  liberalisation  of  inward  capital  movements  much  more  rapid  than  outward  capital 
flows.  The  Czech  Republic  is  expected  to  be  able  to  eliminate,  without  major 
difficulties,  the  remaining  restrictions  on the movement  of  capital  in the  medium  term 
and assume fully  the Community acquis in this area. 

Free Movement of Services 

The  basis  of  the  free  movement  of  services  is  the  prohibition  of  discrimination,  in 
particular  on  grounds  of  nationality,  and  rules  on  the  alignment  of  divergent  national 
legislation.  These  rules  often  concern  both  the  right  of  establishment,  which  comes 
under the heading of the free  movement of persons, and the freedom  to provide services. 
Their  implementation  implies  the  establishment  of  administrative  structures  (banking 
control  boards,  audio-visual  control  authorities,  regulatory  bodies)  and  greater 
cooperation  between  Member  States  in  the  area  of  enforcement  (mutual  recognition 
arrangements). 

40 

A  substantial  amount  of  the  legislation  applicable  to  the  free  movement  of  services 
relates to  financial  services. It also concerns the problems relating to the opening-up  of 
national  markets 
traditionajly  dominated  by  monopolies,  e.g. 
telecommunciations and, to a certain extent, energy and transport. These subjects will be 
dealt with in the sections of the Opinion specifically  referring to them.  v 

the  sectors 

in 

Descriptive  Summary 

Based  on  the mono-bank  system  until  1989, the hanking sector  of the  Czech  Republic 
experienced  a  high  demand  for  financial  services  during  the  transitional  period  of  the 
division of the former  Czechoslovak Republic in  1993. As a consequence, more than 50 
new  banks  were  set  up.  The  following  3  years  were  a  period  of  consolidation  of  the 
banking  sector. This  stage required  in particular  to enhance the  stability  of the  two-tier 
banking sector which had emerged  and to secure the implementation  of prudential  rules 
and  a  system  of  banking  supervision.  The  current  stage  may  be  identified  as  one  of 
adjustments  to  EU  standards,  and  up-grading  of  efficiency  and  competitiveness  of  the 
banking sector. 

Seven banks are partly owned by the  State; five of them are controlled  by it and have a 
share  within  the  banking  market  of  around  70%.  Currently,  a  project  for  the 
privatisation of some of the banks partly owned by the State is under preparation. 

The  conditions  under  which  foreign  banks  can  operate  on  the  Czech  market  are 
generally  compatible  with  the  First  and  Second  Banking  Directives.  The  requirements 
for  solvency ratios and large exposure are also in line with the acquis.  Differences  with 
Community  legislation  exist  concerning  deposit  guarantee  schemes,  capital  adequacy 
and  consolidated  supervision.  Difficulties  in the banking  sector over the past  few  years 
led to new government  initiatives to further  consolidate the sector by stricter  regulation 
and  privatisation  of  the  four 
increased 
participation by foreign  capital. 

largest,  state  owned,  banks,  including 

Banking  supervision  lies  with  a  specialised  department  of  the  Czech  National  Bank. 
New  legislation  has brought  anti-money  laundering  policy  more  in line with the  Union 
requirements,  but  important  gaps  remain.  The  responsible  policy  authority  is  the 
Ministry of Finance. 

The Securities and Stock Exchange Act and the Act 248/1992 on investment  companies 
and  funds  are  serious  efforts  to  bring  Czech  legislation  in  line  with  Stage  I  measures. 
Approximation  of  Stage II measures  is envisaged  within three to four  years. Investment 
activities  can  be  undertaken  by  companies  which  have  been  granted  a  license  by  the 
ministry  of  Finance  as  well  as  by  credit  institutions.  Foreign  companies  providing 
investment  services  are  granted  the  same  rights  as  domestic  firms.  Securities  issued 
abroad  may  be  traded  on  Czech  markets  provided  that  the  foreign  markets  on  which 
they  are  listed  are  approved  by  the  Ministry  of  Finance.  The  financial  sector  has  been 
playing  a  key  role  in  the  privatisation  programme.  The  heavy  involvement  of 
institutional  investors  in this area together with the large number of transactions  carried 
out off  market  urge  strict provisions  with regard to market  manipulation.  In addition,  a 
wide  cross-ownership  between  banks  (heavily  exposed  to  privatised  and  privatising 
companies)  and  institutional  investors  give  rise  to  conflict  of  interest  which  should  be 
addressed by strengthening minority shareholders' rights and disclosure requirements. 

41 

A first move  in  this  direction  was the adoption  of  an  amendment  to  the  Securities  and 
Stock  Exchange  Act  in  April  1996  and  the  decision  in  early  1997  to  establish  a  new 
supervisory  authority,  which  is still  not, however,  an  independent  commission  since  it 
continues to operate within the Ministry  for  Finance, with the National  Bank  playing  a 
minor role. 

Serious problems  with a number  of investment  funds  in early  1997 seem to have  made 
the authorities more aware of the need for stricter regulation. It is not yet clear to which 
concrete results this will lead. 

The insurance sector is regulated by a 1991 act bringing Czech legislation fairly  close to 
Stage I compatibility.  Important  differences  with the acquis that remain  to  be  resolved 
are the deposit requirements, which are far  stricter than those applied in the Union, and 
the continued  predominance  of the  former  state  insurance  monopoly  and  its  monopoly 
of motor insurance. 

The  supervisory  authority  rests  with  the  Ministry  of  Finance.  It  has  a  specialised 
department. 

Current and Prospective Assessment 

Progress in adopting the acquis in the banking  sector has been satisfactory.  Differences 
which  still  need  to  be  overcome  relate  to  the  deposit  guarantee  schemes,  capital 
adequacy  and  consolidated  supervision.  It  is  planned  to  remove  these  remaining 
restrictions and to propose the stage I and II directives in 1997/1998. 

According to the Government's  legislative programme the full  transposition  of EU laws 
on banking and banking supervision will be achieved by the year 2000 including acts on 
co-operation  and  information  exchange  with  the  Commission  and  other  EU  Member 
States  and  mutual  recognition  of  bank  supervisions.  The  implementation  of  the  new 
policy  of  stricter  regulation  which  developments  in  recent  years  have  shown  to  be 
necessary, needs careful  monitoring. 

As far  as  Securities  are concerned, the Directives on public offer  prospectus, on  insider 
dealing  on  collective  investment,  on  investment  services  and  on  capital  adequacy  for 
market  risks  (as  regards  non bank  investment  companies)  are planned  to  be  transposed 
over the next two years. 

The Securities  and  Investment  Funds Acts seem to reflect  Stage I measures  in the field 
of  Securities.  Approximation  of  Stage  II  measures  is  envisaged  in  the  medium  term. 
This  will  imply  the  adoption  of  EU  standards  regarding  authorisation  conditions  and 
prudential  requirements  of  investment  firms  as  the  basis  for  granting  the  European 
passport,  it  will  also  result  in  safer  operational  conditions  for  EU  investment  firms 
operating  in  the  Czech  Republic.  Other  necessary  adaptation  of  existing  legislation 
concerns  the  imposition  of  stricter  requirements  on  managers  and  shareholders  of 
investment firms and issuers whose securities are offered  to the public. 

The  Securities  Supervisory  Commission  recently  established  within  the  Ministry  of 
Finance has to gain experience in its supervisory role. 

42 

In the  insurance  sector, the  implementation  of the  Stage  I and  II  directives  has not  yet 
been achieved.  According  to the  Government  published  plans, the main  features  of  the 
following directives will be transposed into the amendment to the existing insurance law 
and will become effective  as of 31 December  1998: the first directive on insurance other 
than life  assurance, the insurance agents and brokers directive and the tourist  assistance 
directive  The  following  directives  will  be  transposed  into  a  new  insurance  law:  the 
directive  on legal  expenses  insurance, the second  directive  on insurance  other  than  life 
assurance,  the  second  directive  on  life  assurance,  the  third  generation  directives;  they 
will become effective  in 2002. The various directives  on compulsory  insurance  against 
civil liability in respect of use of motor vehicles will be transposed in a new specific  law 
in order to become effective  in year 2000. 

Conclusion 

While the Czech Republic has made considerable progress  in other economic  areas, the 
situation in the financial sector is not  satisfactory. 

In the banking  field,  the very  important  market  share of banks  controlled  by  the  State, 
cast a doubt on the transparency and the free competition in the market. The crisis of the 
major  privatised  banks  gives  the  impression  that  the  banking  supervision  needs  to  be 
strengthened. 

In  the  securities  field  the  recent  scandals  and *the difficulties  to  set  up  an  independent 
Securities  Commission  show  that  the  condition  of  a  free,  competitive  market  with 
adequate supervision are not yet present. 

In the insurance field, the delay  in the implementation  even of the  first  stage  directives 
has not contributed to the development of a competitive and efficient  insurance market. 

Freedom of Movement of Persons 

logical 
The  free  movement  of  persons  encompasses  two  concepts  with  different 
implications  in  the  Treaty.  On  the  one  hand,  Article 7a  in  Part  One  of  the  Treaty  on 
'Principles'  mentions  the  concept  in  connection  with  the  establishment  of  the  internal 
market  and  implies  that  persons  are  not  to  be  subject  to  controls  when  crossing  the 
internal  frontiers  between the Member  States. On the other hand, Article 8a in Part  Two 
of  the  Treaty  on  'Citizenship  of  the  Union'  gives  every  citizen  of  the  Union  the 
individual  right  to  move  and  reside  freely  within  the  territory  of  the  Member  States, 
subject  to  certain  conditions.  The  abolition  of frontier  checks  must  apply  to  all  persons, 
whatever  their  nationality,  if  Article 7a  is  not  to  be  meaningless.  While  the  rights 
deriving  from  Article 8a  apply  in  all  Member  States,  those  stemming  from  Article 7a 
have never been fully  applied throughout the Union. 

(a)  Free  Movement  of  Union  Citizens.  Freedom  of  Establishment  and  Mutual 
Recognition of Diplomas and Qualifications 

The Europe Agreement provides for  the non-discriminatory  treatment  of workers that  are 
legally  employed  (as  well  as  their  families).  It  covers  the  possibility  of  cumulating  or 
transferring  social  security  rights,  and  encourages  Member  States  to  conclude  bilateral 

43 

agreements  with  the  Czech  Republic  on  access  to  labour  markets.  During  the  second 
phase  of  the  transitional  period,  the  Association  Council  will  examine  further  ways  of 
improving the movement of workers. 

The White Paper considers the legislative requirements in order to achieve a harmonious 
development  of  the  labour  market,  whilst  simultaneously  preventing  distortions  of 
competition. 

The  free  movement  of  workers  is  one  of  the  fundamental  freedoms  enshrined  in  the 
Treaty;  freedom  to practise  certain  professions  (e.g. in the  legal  and  health  fields)  may, 
however,  be  subject  to  certain  conditions',  such  as  qualifications.  These  may  be  dealt 
with either through coordination or by applying the principle of mutual recognition. 

Freedom  of  establishment  is also  guaranteed  under  the  Treaty  and  covers  the  economic 
activity of self-employed  persons and companies. 

The  free  choice  of place  of  residence  may thus  be  subject  to  minimum  conditions  as  to 
resources  and  health  insurance  where  the  person  does  not  practice  a  profession  in  the 
country  concerned. 

Descriptive  Summary 

Generally  foreign  workers  can  enter  into employment  if they  have  a residence  permit 
and  a  work  permit,  which  are  subject  to  certain  conditions.  An  employment  permit  is 
not  required  for  Slovak  citizens  on  the  basis  of  the  treaty  concerning  reciprocal 
employment.  A foreigner  would be refused  a work permit  in cases where the  vacancies 
can be filled by  Czech citizens. 

Members  of the foreign  worker's  family  obtain a residence permit on condition that the 
worker ensures material security and housing. 

the  foreigner's  employment, 

including,  unemployment,  means 
Termination  of 
termination  of  the  work  permit.  Nor  is  the  period  of  validity  of  the  work  permit 
automatically  extended  in  the  case  of  sickness,  accident  or  other  impediments. 
Foreigners working on the basis of an employment permit have no right to be registered 
as job seekers nor do they get unemployment  benefits. 

Members  of  the  family  of  the  foreign  worker  have  access  to  education,  although  in 
many cases costs for education are considerably higher than those for Czech citizens. 

Progress  has  been  achieved  in  the  taking  over  of  the  acquis  concerning  mutual 
recognition  of  diplomas  and  qualifications.  Full  approximation  is  expected  in  the 
medium term. 

Current  and  Prospective  Assessment 

The application  of the principle of equal treatment to those EU workers already  legally 
residing in the Czech Republic should not be a problem. 

44 

In the field of mutual recognition of diplomas and qualifications  the Czech republic has 
already  made  progress.  However,  some  adaptations  are  still  necessary.  The  Czech 
Republic  should  be  able  to  take  up  the  acquis  in  the  medium  term.  The  existing 
implementing structures seem to be able to enforce the legislation. 

Training, where coordinated by directives for seven professions,  is rather broadly in line 
with the  acquis,  but  a number  of  adaptations  are still  necessary.  As regards  structures, 
Ministries  and  public  bodies  (professional  organisations,  public  offices  and  agencies) 
exist  for  many  professions,  but  will  probably  need  to  be  reinforced.  Integration  in  EU 
associations  is  progressing  for  certain  professions,  for  example  engineering  diplomas 
meet the minimum European standards. 

Conclusion 

The  necessary  structures  in  this  area  seem  to  be  in place,  but  it  is  not  always  easy  to 
assess their real effect  and enforcement.  The Czech Republic is aware of the outstanding 
issues  that  need  to  be  resolved  with  regard  to  the  free  movement  of  persons.  From  a 
technical  point  of  view,  adaptations  of  regulations  will  be  necessary  in  the  medium 
term. 

(b) Abolition  of Checks on Persons at Internal Frontiers 

The free  movement  of persons within the meaning of Article 7a of the EC Treaty, i.e. the 
abolition of checks  on all persons, whatever their nationality, at the internal  frontiers  has 
not  yet  been  fully  implemented  in  the  Union.  Doing  away  with  checks  on  persons  is 
conditional  on  the  introduction  of  a  large  number  of  accompanying  measures,  some  of 
which  have  yet  to  be  approved  and  implemented  by  the  Member  States  (see  separate 
section  on  Justice  and  Home  Affairs).  However,  that  objective  has  been  achieved  by  a 
limited  number  of  Member  States  in  accordance  with the  Schengen  Convention  (seven 
Member States already apply it and another six are working towards implementation). 

The  draft  Treaty  aims  to  make  that  objective  easier  to  achieve  within  the  Union  by 
including  a new chapter on freedom,  security and justice and incorporating  the  Schengen 
acquis into the EU. 

The  Czech  Republic  has  stated  its  intention  to  become  party  to  the  Schengen 
Agreement.  It has  called  for  institutional  and technical  cooperation  notably  in the  field 
of  border  control  to  the  upgrading  and  modernisation  of  which  significant  financial 
resources are being  devoted. 

General  Evaluation 

1.  The  Czech  Republic's  progress  in  the  implementation  of  legislation  relating  to  the 
White  Paper  is  summarised  in  a table  in the  Annex.  According  to the  table, the  Czech 
Republic  considers  that  by  30  June  1997  it  will  have  adopted  national  implementing 
legislation  for  417 of the  899 directives and regulations  in the White Paper.  That  figure 
covers  provisions  for  which  the  Republic  considers  it will  have  adopted  implementing 
legislation,  or which  it will  have checked  for  compatibility  with  Community  rules, and 

45 

does not prejudge  actual compatibility  as such, on which the Commission  is not able at 
this stage to state an opinion. 

2.  For  most  of  the  single-market  areas,  especially  company  and  accounting  law,  and 
technical  rules  and  standards,  the  basic  Community  laws  are  mostly  in  place.  Most 
measures  have  been  partly  or  fully  incorporated  according  to  the  Czech  authorities 
although  the  Commission  cannot  at  this  stage  say  whether  they  comply  wholly  with 
Community  law. In certain other fields particularly  in the financial services sector, there 
are still considerable  shortcomings  to be overcome  and further  efforts  need  to be  made 
to ensure the acquis is fully  adopted. 

3. Despite the efforts-made,  real progress in incorporating those legal texts adopted very 
recently  must  go  hand  in  hand  with  practical  implementing  measures  and  an  effective 
administrative  infrastructure.  Some  of  this  infrastructure  works  reasonably  well  (for 
example,  despite  the  partial  alignment  of  public  procurement  legislation  it  must  be 
noted that legal remedies  in this field seem to be working  satisfactorily).  In the field of 
technical  rules  and  standards,  the  technical  structures  needed  to  implement  the  "New 
Approach" are on the right path. However, major efforts  are still required in a number of 
areas  such  as  financial  services,  securities,  intellectual  property  protection  and 
protection of personal data. 

At  this  stage,  the  Commission  cannot  say  how  well-equipped  businesses,  particularly 
SMEs, are to implement the acquis. 

4.  Leaving  aside  certain  specific  aspects  relating  to  agriculture,  checks  at  the  internal 
frontiers  of the Union can only be abolished once sufficient  legislative harmonisation has 
been  achieved.  This  calls  for  mutual  confidence,  based  in  particular  on  sound 
administration  (e.g.  the  importance  of  safety  checks  on  some  products  at  the  place  of 
departure). 

With respect to goods, the completion of the internal market on  1  January  1993 was only 
achieved  by  removing  all the  formalities  and checks performed  by  the member  states  at 
the internal borders of the Union. In particular these checks covered particularly  technical 
points (product safety), veterinary, animal-health  and plant-health matters, economic  and 
commercial  matters  (e.g. prevention  of counterfeiting  of goods), security  (weapons, etc.) 
and  environmental  aspects  (waste, etc.). In most  cases, the  abolition  of checks  was  only 
made possible  by the adoption and application  of Community  measures harmonising  the 
rules  on movement  and placement  on the market  (particularly  as regards product  safety) 
and,  where  applicable,  by  shifting  the  place  where  controls  and  formalities  within  the 
member states or on their markets are conducted (in particular as regards VAT and excise 
duties,  veterinary  and  plant-health  checks,  and  the  collection  of  statistics).  Were  the 
Czech Republic's present borders to become the Union's external  frontier,  border  checks 
would have to be stepped up (see separate section on customs). 

In view of the overall  assessment  that can be made of progress  achieved  to date and  the 
rate  at  which  work  is  advancing  in  the  various  areas  concerned,  there  is  no  reason  to 
believe  that  the  Czech  Republic  would  not  in  the  medium  term  be  able  to  adopt  and 
implement  all  the  legal  acts  needed  for  the  abolition  of  internal  border  controls  or  the 
transfer  of these controls to the Union's external  frontier. 

46 

5. The Czech Republic has already adopted significant  elements of the acquis relating to 
the Single Market; however, the Commission  is not yet able to take a position  on every 
measure  whose  transposition  has been reported  t>y the  Czech Republic.  In many  areas 
enforcement  needs  to  be  strengthened.  Provided  that current  efforts  continue,  it can  be 
expected  that  in  the  medium  term  the  Czech  Republic  will  have  adopted  and 
implemented  the  legislation,  and  made  the  necessary  progress  on  mechanisms  of 
enforcement,  in order to be able to participate fully  in the Single Market. 

Competition 

European Community  competition policy derives from Art. 3 (g) of the» Treaty  providing 
that the Community  shall have a system ensuring that competition  in'the internal  market 
is not distorted.  The main areas of application are anti-trust and state aid. 
The Europe Agreement provides for a competition regime to be applied  in trade relations 
between the  Community  and the Czech Republic based  on the criteria of articles  85  and 
86 of the EC Treaty  (agreements between undertakings/abuses  of dominant position) and 
in article  92 (state  aid), and  for  implementing  rules  in these  fields  to be  adopted  within 
three  years  of  the  entry  into  force  of  the  Agreement.  Furthermore  it  provides  that  the 
Czech  Republic  will  make  its  legislation  compatible  with that  of the  Community  in  the 
field of competition. 

The White  Paper  refers  to the progressive  application  of the  above provisions  and  those 
of  the  Merger  Regulation  (4064/89)  and  of  Art.  37  and  90  (Monopolies  and  Special 
Rights). 

Descriptive  Summary 

Competition  legislation  is  based  on  Act  n°  63/1991  on  the  Protection  of  Economic 
Competition  and  was  drafted  on  the  basis  of  the  model„of  EC  competition  law.  The 
Czech  competition  law covers  all the different  sectors  of the economy  as well  as  public 
and private enterprises. 

The  Authority  responsible  for  competition  policy  is  the  Office for  the  Protection  of 
Economic  Competition.  Officials  from  this body  have  a  good  general  understanding  of 
competition law principles and have gained experience in the antitrust field. 

As  to  sectors  traditionally  subject  to  monopolies,  the  Czech  Republic  has  started  its 
policy  of  liberalising  and  opening  up  to  competition  certain  sensitive  sectors  such  as 
telecommunications  and postal services. 

The  Ministry  of  Finance  has  been  appointed  as  the  monitoring  authority  for  state  aid. 
However,  for  the  moment  the  system  for  the  monitoring  of  state  aid  does  not  give  the 
monitoring  authority  the possibility  to assess the compatibility  with the  state aid rules of 
all  aid  measures  granted  by  all  public  authorities  or  bodies  appointed  by  the  State  to 
administer  the  aid.  In  particular,  at  present  the  monitoring  authority  does  not  monitor 
state aid granted by local authorities. 

The latest  aid  inventory  submitted  in  1997 represents  a significant  step towards  creating 
the transparency  required  in the granting of state aid to the industry.  It  shows that  most 
of the objectives  pursued are in line with those the EC rules.  However,  it includes  solely 

47 

aid  financed  by  the  state  Budget  and  does  not  give  any  information  on  aid  granted  by 
regional or local authorities. 

Current and Prospective  Assessment 

The  Czech Act  on the  Protection  of Economic  Competition  represents  a  significant  step 
towards  greater  harmonisation  with  EU  competition  law  and  the  outstanding  issues  are 
currently  being  discussed  between  the  Commission  and the  Office  for  the  Protection  of 
Competition. 

The  Office for  the  Protection  of  Economic  Competition  seems  to  have  sufficiently 
qualified  staff to enforce the law and the law is also applied in concrete cases. 

Further  information  on measures  which have been taken to liberalise  telecommunication 
services  need  to  be  provided  in  order  accurately  to  assess  the  situation  in  this  sector. 
Progress  is  still  also  expected  in the  liberalisation  of  telecommunication  infrastructures. 
Further  information  should  also  be provided  on procedures  for  the  licensing  of  services 
and  infrastructures. 

The Czech Republic has made significant  progress in creating the transparency  necessary 
for  an  efficient  state  aid  control.  The  1997 aid  inventory  for  state  aid  granted  in  1995 
applies  a  methodology  sufficiently  close  to that  of  the  Community  and  contains  almost 
all  relevant  information  to  get  a  good  overview.  However,  the  future  inventory  should 
cover  all  measures  granted  by  the  State,  regional  or  local  authorities  or  through  public 
resources. 

It  is  not  yet  entirely  clear  whether  the  monitoring  authority  on  state  aid  has  sufficient 
resources  and  powers  to  control  the  compatibility  of  all  aid  granted  by  all  public 
authorities  or bodies  appointed  by  the  State to  administer  the aid.  Further  clarifications 
are needed. 

In  addition  to  the  adoption  of  legislation  sufficiently  approximate  to  that  of  the  EC, 
credible  enforcement  of competition  law requires  the  establishment  of well  functioning 
anti-trust  and  state  aid  monitoring  authorities. 
It  requires  moreover  that  the  judicial 
system,  the  public  administration  and  the  relevant  economic  operators  have  a  sufficient 
understanding of competition law and policy. 

Conclusion 

Considerable progress has been made in terms of approximation of legislation in the field 
of  anti-trust.  The  Office  for  the  Protection  of  the  Economic  Competition  seems  to  be 
sufficiently  skilled  to  ensure  the  enforcement  of  the  law  and  the  efforts  made  so  far  by 
the  Office  represent  an  important  step  forward  for  a  credible  competition 
law 
enforcement. 

In the field of state  aid significant  progress has been made as regards transparency  in the 
granting of state aid.  It is to be welcomed, moreover, that the Czech Government  intends 
to  limit  the  granting  of  state  aid  and  to  pursue  a  horizontal  rather  than  a  sectoral  aid 
policy.  However, the powers of the monitoring authority to examine the compatibility  of 
all aid measures with the state aid rules need to be somewhat clarified  and  improved. 

48 

3.2 

Innovation 

Information  Society 

Present Situation 

The  economic  and  social  effects  made  possible  by  the  combination  of  information 
technology  and telecommunications  are great.  In the  Czech Republic  these  possibilities 
were  neglected  before  1989 although education generally  was not. The result  is that  the 
size of the  information  technology  (IT) market has recently  spurted  well beyond  normal 
expectation  deduced  from  GDP  per  capita.  The  existence  of  host  computers  on  the 
Internet  (4.0  per  1000  inhabitants  in  Jan  1997),  as  a  relative  measure  of  development 
towards  the  information  society  (IS),  suggests  that  the  country  has  passed  the  position 
which the  average  EU  country  reached  two  years  ago.  The present  telecommunications 
infrastructure  may  be  operating  as  a  brake  on  IS  developments  but  the  rapid  rate  of 
telecommunications modernisation should soon remove this problem. 

Conclusion 

Because of the positive approach to telecommunications liberalisation combined with the 
excellence of the national education  system we can expect the Czech Republic to  realise 
potentialities of the Information  Society earlier than the average CEEC. 

Education. Training  and Youth 

Articles  126 and  127 of the EC Treaty provide that the Community  shall contribute to the 
development  of  quality  education  and  implement  a  vocational  training  policy  aimed  at 
promoting  the  European  dimension  in  education  and  at  enhancing  industrial  adaptation 
and the responsiveness of the labour market through vocational training policies. 

The  Europe  Agreement  provides  for  co-operation  in  raising  the  level  of  education  and 
professional  qualifications.  The White Paper includes no measures in this field. 

Descriptive  Summary 

The Czech Republic spending on education amounts to 5.9 % of GDP.  It takes  14.6 % of 
the state budget. 

There  are  1,900,000  pupils,  190,000  students  and  155,000  teachers  in  the  Czech 
Republic. 

There  are  23  recognised  universities,  which  depend  on  the  Ministry  of  Education,  and 
three Military Academies, which depend on the Ministry of Defence. 

The Czech education system has reacted rapidly to the democratic changes in society and 
to the transformation  of the economy.  The changes  in Czech education  and training  can 
be characterised  by dépolitisation, recognition  of the right of pupils  and  adults to  choose 

49 

their own education  and training, breaking  down of the state monopoly;  decentralisation 
in management and reform of the funding  system. 

The  Federal  Act  of  1990  on  Higher  Education  Institutions  has  given  considerable 
independence  and  autonomy  to  faculties.  However,  university  budgets  are  still 
exclusively covered by state budget. The Act does not allow for the development  of non-
state higher education. 

Many changes were introduced in the vocational training policy since  1990.  The general 
objectives  for  the  forthcoming  years  include  creation  of  a  flexible  system,  creation  of 
new  skills  (language,  communication,  information  technologies),  ongoing  adaptation  of 
curricula  to  labour  market  needs,  and  development  of  standards  comparable  to  the 
Member States. 

The  Tempus  programme  has  contributed  to  the  achievement  of  the  goals  of  higher 
education  reform  and  created  the  basis  for  cooperation  with  the  EU  higher  education 
institutions. 

The  Ministry  of  Education,  Youth  and  Sports  implements  in  co-operation  with  other 
ministries the programme  for the Support and Protection of Children  and  Youth.  This is 
the main instrument to support children and youngsters and their role in society. 

Current  and  Prospective  Assessment 

Dépolitisation  of  education  and  training  has  been  achieved.  The  legal  framework  now 
needs to be strengthened and refined.  Some of the priority areas for higher education are : 
diversification  of  financing  of  higher  education  institutions;  improvement  of  university 
strategic management; diversification  of higher education  supply (private  education,  life 
long learning, etc.); development of the non-university  sector; integration of research and 
education; development of new curricula in key areas to increase awareness on EU issues 
(e.g.  European  Studies),  adaptation  of  curricula 
in  EU  regulated  professions, 
accreditation and quality  evaluation. 

Although  moving  in  the  right  direction,  the  vocational  training  system  has  developed 
towards  démocratisation  and  EU  education  standards  in  a  rather  deregulated  way.  A 
more strategic approach to be translated into legal reforms has still to be set up. 

The  Czech  higher  education  and  vocational  training  system  is  expected  to  meet  EU 
standards  in  the  medium  term.  The  participation  of  Czech  Republic  in  Community 
programmes will have positive effects  and represent a good preparation for  integration. 

Conclusion 

In the perspective of accession, no major problems should be expected in these fields. 

Research  and  Technological  Development 

Research and Technological  Development  activities at Community  level, as provided  for 
by the Treaty and in the Framework Programme, aim at improving the competitiveness of 

50 

European  industry,  the  quality  of  life,  as  well  as  supporting  sustainable  development, 
environmental protection, and other common policies. 

The  Europe  Agreement  and  its  additional  protocol  provides  for  co-operation  in  these 
areas,  notably  through  participation  in  the  Framework  Programme.  The  White  Paper 
includes no direct measures in this field. 

Descriptive  Summary 

The Research and Development Council was established in  1992 under the Law on  'State 
Support  of  Scientific  Activities  and  Technology  Development'  (amended  in  1995), as a 
consultative body to the Government. Budget suggestions are passed through the Council 
from  the different  agencies to the Government  and the Parliament.  The law regulates  the 
state  funding  of  programmes  in  this  sector,  and  defines  the  role  of  private  research 
partners and of the state organs. The Grant Agency of the Czech Republic operates  since 
1993. It selects projects  for grants on the basis of competitive peer evaluation. The  Czech 
Academy  of  Sciences  has  undergone  significant  restructuring.  Staff  has  been  reduced 
from  14,000 to  5,000 and the number  of institutions  from  over  100 to  59 plus  6  service 
institutions. 

Expenditure  for  RTD represented  1.14%  of GDP  in  1995 and  1.21% in  1996 (cf.  2.12% 
in  1991).  The  share  in  the  state  budget  expenditures  for  universities  has  risen 
considerably, from  26% in  1993 to 35% in  1996. This is now equivalent to what is spent 
for  the  Czech  Academy  of  Sciences.  An  estimated  0.75% of  GDP  is  spent  on  RTD  by 
private enterprises. Research-industry relations are still  fragile. 

The  general  priorities  of  the  government  for  this  area  are:  intensification  of  research  at 
universities,  international  co-operation,  and  improvement  of  the  infrastructure.  Priority 
subjects  are: transfer  of production  technology  to  SMEs, protection  of  the  environment, 
nuclear  energy,  transport  infrastructure.  Efforts  are  currently  being  made  to  improve 
infrastructure  (7.5  % of the total  state budget  allocated  has to be  spent  on the  support  of 
infrastructure). 

Regular cooperation with the European  Union  started  in  1992 with the 3rd Research  and 
Technology  Development  Framework  Programme.  So  far,  cooperation  has  mainly 
concentrated  on  COPERNICUS  (Specific  Programme  for  Cooperation  with  CECs  and 
NIS)  and  remains  rather  low  for  participation  in  the  4th  Framework  Programme.  The 
Czech  Republic  is  a  member  of  COST  (European  cooperation  in  the  field  of  scientific 
and technical research) and EUREKA (European Research Coordination Agency). 

Since  1995, the statistics in this field are compatible with OECD standards. 

Current and Prospective  Assessment 

As  one  of  the  early  industrialised  countries  in  Europe,  the  Czech  Republic  has  had  a 
long-standing  tradition  of  research  and  technological  development,  particularly  in  the 
field of  engineering  (machinery).  It  has  invested  much  effort  to  restructure  its  scientific 
and  technological  institutions  and  expenditure.  Now  the  Czech  Republic  will  have  to 
consolidate  this  sector  to  enable  it  to  serve  industrial  innovation.  The  problem  of  the 
massive drop out from university  (only  15% of the students enrolled achieve an academic 

51 

qualification)  will  have  to  be  addressed,  as  well  as  the  upgrading  of  laboratory 
equipment. 

An increased participation in Community programmes should help consolidate this sector 
and better serve the industrial innovation. 

Conclusion 

In the perspective  of accession, no major  problems are expected  in this  field.  Accession 
would be of mutual  benefit. 

Telecommunications 

The  objectives  of  EC  telecommunications  policy  are the  elimination  of  obstacles  to  the 
effective  operation  of the  Single Market  in telecommunications  equipment,  services  and 
networks,  the  opening  of  foreign  markets  to  EU  companies  and  the  achievement  of 
universally  available  modern  services  for  EU  residents  and  businesses.  These  are 
achieved  through harmonisation  of the standards and conditions for  service offerings  the 
liberalisation  of  the  markets  for  terminals,  services  and  networks  and  the  adoption  of 
necessary regulatory instruments. The Directives and policies needed to achieve this have 
now  been  established,  but the  liberalisation  of public  voice  telephony  and  operation  of 
related  infrastructure  will  be  deferred  for  a  year  or  two  after  1998  in  certain  Member 
States. 

The  Europe  Agreement  provides  for  co-operation  aimed  at  enhancing  standards  and 
practices  towards  EC  levels  in  telecommunication  and  postal  policies,  standardisation, 
regulatory  approaches and the modernisation  of infrastructure.  The White Paper  focuses 
on  the  approximation  of  regulation,  networks  and  services,  followed  by  further  steps 
ensuring gradual sector liberalisation. 

Descriptive  Summary 

The  penetration  of  telephone  lines  in  the  Czech  Republic  has  expanded  to  over  25  per 
100  by  the  end  of  1995.  The  Czech  Government's  target  is  to  reach  a  telephone  lines 
penetration rate of 45 per  100 by the end of 2000. 

After  long internal debate, the Czech government had adopted  in a comprehensive  policy 
for  the  telecommunications  sector  in  August  1994. 
It  consists  of  (i)  the  partial 
privatisation  of  the  existing  (state-owned)  Czech  operating  company  (SPT)  with  a 
strategic  partner  and  a voice  monopoly  until  the  year  2000, (ii)  licensing  of  two  mobile 
telephone networks using the pan-European digital standard (GSM) and (iii) the licensing 
of new local operators in sixteen localities.  The privatisation was designed  in such a way 
that the proceeds were used entirely to expand the capital  stock of SPT.  This enabled the 
company to reform  to reform  its management  structure and practices, and to implement a 
comprehensive  investment  programme.  The  2nd  GSM  licence  was  awarded  so  as  to 
reinforce  the  competition  resulting  from  the  earlier  reorganisation  of  the  sector  into 
separate cable and radio operators. 

The Telecommunications  Act of  1964 was amended  in  1992 so as to separate clearly  the 
regulatory  role  of  the  government  from  the  operational  role  of  SPT.  The  regulatory 

52 

authority  is well  staffed  and  functioning  (the  Czech  Telecommunications  Office  but  the 
responsible minister exercises ownership rights over the principal  operator. 

The  Postal  Act  of  1946, defines  written  communications  and  (temporarily)  parcels  and 
money  orders  as universal  service  obligations.  New  services,  like  international  courier 
services, are now provided by international private operators in the Czech Republic. 

Current and Prospective Assessment 

Degree of  Liberalisation 

its 

published 

comprehensive,  pro-competitive 

According  to  the  commitments  at  the  WTO  negotiations  in  1997, the  Government  will 
liberalise  the market  for  the  fixed  network  and voice telephony  by  1 January  2000. The 
Government 
the 
telecommunications  sector  in  August  1994.  It consists  of  (i) the partial  privatisation  of 
the state-owned operating company (SPT) which holds a monopoly for  long distance and 
international  traffic,  with  a  strategic  partner,  (ii)  licensing  of  two  mobile  telephone 
networks  using  the pan-European  digital  standard  (GSM)  and  (iii)  the  licensing  of  new 
local  operators  in  sixteen  localities.  The first two  items  of this policy  programme  have 
been carried through successfully.  The 2nd GSM licence was awarded  so as to  reinforce 
the  existing  competition  resulting  from  the  long  standing  division  of  the  sector  into 
separate cable and radio operators. 

policy 

for 

Approximation  to EC Law 

The  Telecommunications  Act  of  1964  was  amended  in  1992  (by  the  former  Federal 
Government)  so  as  to  distinguish  regulatory  functions  from  operational  ones.  The 
changes  also  abolished  the  statutory  monopolies,  permitted  privatisation,  imposed 
licensing requirements  on existing  operators  and thereby  empowered  the  Government  to 
adopt  a  policy  of  liberalisation.  The  policy  of  the  Government  is  to  complete  their 
planned  systematic  transposition  of  EU  Directives  by  the  end  of  2000.  The  regulatory 
authority 
to  complete 
transposition of EC legislation. 

is  operational  and  administrative  structures  are  sufficient 

A  more  effective  separation  of  the  regulatory  and  policy  body  from  any  operating 
company  will  be  necessary  to  enable  the  Government  to  administer  successfully  a pro-
competitive  policy.  Tariff  rebalancing  is  well  in  hand  although  pricing  policy  is 
complicated  by  the  division  of  powers  between  two  Ministries.  The  difficulty  of 
providing  a service  in the less advanced regions has been recognised  by the  Government 
and  some  measures  have  been  taken.  Stronger  measures  will  be  needed  if  universal 
service is to be achieved. 

Infrastructure 

The  principal  objective  of  Government  policy  has  been  to  expand  and  modernise  the 
public  telecommunications  networks  and  to  improve  the  quality  of  services  available. 
The  privatisation  of  SPT  was  designed  in  such  a way  that  the  foreign  capital  was  used 
entirely to increase the stock of the company. A reform  of its management  structures and 
practices has started. A comprehensive  investment programme,  including  a new national 
digital  "backbone"  network,  is  underway  .  Completion  will  help  introduce  advanced 

53 

services especially  in cities.  Between  1991 and early  1997, the fixed network grew  from 
16.6  to  29.0  lines  per  100  inhabitants  compared  to  an  average  of  43.9  lines/100 
inhabitants  for  Greece, Portugal  and  Ireland.  The  Government  target  is to reach 45  lines 
per  100 inhabitants  by  the  end  of  2000. The  Government  decided  early  on  that  all  new 
equipment  added  would  be  digital.  The  network  is  about  38% digitised  as  of  January 
1997 and the plan is to reach 60% by 2000 (compared to an average of 62.4%» for Greece, 
Portugal  and  Ireland)  and  100%  by  2003.  New  GSM  services  commenced  operations 
during  1996 and the number  of cellular  mobile users grew over 200% during the year to 
reach  183,000,  ie  1.78  per  100  inhabitants.  There  is  competition  in  both  data  services 
and  satellite  services. There were  also  15.7 cable  TV  subscriptions  and  7.4  PCs per  100 
households in 1995. 

Competitiveness  of the Sector 

At  the  beginning  of  1997,  there  were  8.6  employees  per  1000  lines  compared  to  an 
average  of  6.2  for  Greece,  Portugal  and  Ireland.  Even  at  today's  high  rate  of  network 
expansion,  it  will  take  a  few  more  years  before  basic  telephone  services  can  be  made 
universally  available.  Revenue  per  line  (about  260  ecu  in  1996),  although  among  the 
highest  in the  region,  will  have to  be  sustained  if the network  is to  be  further  expanded 
and the  new  operator  to remain  profitable.  Provided  that tariff  rebalancing  is  continued, 
the telecommunications  services sector should be able to face full  liberalisation.  SPT has 
already  been  able to  obtain  long  term  loans  from  EU commercial  banks  at  interest  rates 
lower than  the  EBRD's.  The Dutch  and  Swiss operating  companies paid  ECU  1.24  Bn 
jointly  for  27%  of  SPT,  the  main  Czech  operator.  The  first  mobile  operator  is  51% 
owned  by  SPT  and  49% by  a  US  consortium.  The  second  operator  is  51%  owned  by 
Ceske Radiokomunikace  and 49% jointly by STET and a Germany  company. 

Conclusion 

The  Czech  Republic  should  have  little  difficulty  in  complying  with  the  acquis  in  the 
medium 
their 
implementation  are continued.  Tariffs  must  be further  rebalanced  in order to  enable  the 
public operator to take up competition. 

that  current  efforts 

in  transposition  of 

term  provided 

laws  and 

Audio-visual 

The audio-visual  acquis aims, in the context of the Internal  Market, for the provision and 
free  movement  of  audio-visual  services  within  the  EU  as  well  as  the  promotion  of  the 
European  programme  industry.  The  Television  Without  Frontiers  Directive,  which  is 
applicable  to  all  broadcasters  regardless  of  the  modes  of  transmission  (terrestrial, 
satellite, cable) or their private  or public nature, contains this acquis,  setting  down  basic 
rules  concerning  transfrontier  broadcasting.  The  main  points  are:  to  ensure  the  free 
movement  of television broadcasts throughout member  states; to promote  the  production 
and distribution  of European  audio-visual  works (by  laying down a minimum  proportion 
of  broadcasting  time  for  European  works  and  those  by  independent  producers);  to  set 
basic  standards  m  the  field  of  television  advertising;  to  provide  for  the  protection  of 
minors and to allow for the right of reply. 

54 

The Europe Agreement provides for co-operation in the promotion and modernisation of 
the  audio-visual  industry,  and the harmonisation  of  regulatory  aspects  of  audio-visual 
policy. 

The Television Without Frontiers Directives is a Stage I measure in the White Paper. 

Descriptive Summary 

The  legal framework for  the  audio-visual  sector  is determined  by  Act No. 468/1991, 
which provides for a dual system of broadcasting based on democratic principles. 

The  two  main  terrestrial  television  broadcasters  are  the  national  public  service 
broadcaster Czech Television, and the commercial national broadcaster TV Nova. 

The Czech film industry was privatised in the early  1990s and all direct State subsidies 
to the film production industry were cut.  The film distribution sector is mainly made up 
of US programming. 

Current and Prospective Assessment 

The audio-visual  sector  in the  Czech  Republic  is  attempting  to reestablish  itself  after 
major  upheavals  in  recent  years,  and  is  characterised  by  rapid  growth  and  constant 
change.  Its  ability  properly  to  adhere to the acquis presupposes  an upgrading  of the 
capacity  of  the  programme-making  industry  to  meet  the  important  challenges  of  an 
adapted regulatory  framework. 

Czech  audio-visual  legislation  is  not  compatible  with  EC  requirements;  there  are 
deficiencies remain in the areas of freedom of reception, the promotion of European and 
recent works, independent producers and isolated advertising spots. 

In recent years the Czech Republic has made no progress in moving toward compliance 
with EC requirements in the audio-visual sector. 

Conclusion 

A  major  and  concerted  effort  to  adapt  both  the  regulatory  framework  and  industry 
structures will be needed if the Czech Republic is to meet EC requirements in the audio 
visual sector in the medium term. 

3.3  Economic  and  Fiscal  Aaffairs 

Economic and Monetary Union 

By  the  time  of  the  Czech  Republic's  accession,  the  third  stage  of  EMU  will  have 
commenced.  This  will  mark  important  changes  for  all member  states, including  those 
that do not participate in the Euro area. All member states, including the new ones, will 
participate fully  in the economic and monetary union.  Their economic policies will be a 
matter  of  common  concern  and they  will be involved  in the coordination  of economic 
policies  (national  convergence  programmes,  broad  economic  guidelines,  multilateral 
surveillance, excessive deficit  procedure).  They will be required to respect the stability 

55 

and growth pact, to renounce any direct central bank financing  of the public sector  deficit 
and privileged access of public authorities to financial  institutions, and to have completed 
the liberalisation of capital movements. 

Accession  means  closer  monetary  and  exchange  rate  co-operation  with  the  European 
Union.  This  will  require  strengthening  structural  reforms  in  the  area  of  monetary  and 
exchange rate policies.  Member  states not participating  in the Euro area shall be able to 
conduct  an  autonomous  monetary  policy  and  participate  in  the  European  System  of 
Central Banks (ESCB) on a restricted basis.  Their central banks have to be  independent 
and have price stability  as their primary  objective.  Monetary policy has to be  conducted 
with market-based instruments and has to be "efficient"  in transmitting its impulses to the 
real  economy.  Therefore,  reforms  need  to  be  pursued  to  tackle  factors  that  hinder  the 
efficiency  of monetary  policy,  such as the lack of competition  in the banking  sector,  the 
lack of development  of financial  markets  and the problem of "bad  loans" in the  banking 
sector.  Finally  all  Member  states  shall  treat  their  exchange  rate  policy  as  a  matter  of 
common interest and be in a position to stabilise their exchange rates in a mechanism  yet 
to be decided. 

As  membership  of  the  European  Union  implies  acceptance  of  the  goal  of  EMU,  the 
convergence  criteria  will  have  to  fulfilled  by  the  Czech  Republic,  although  not 
necessarily  on  accession.  While  the  fulfilment  of  the  convergence  criteria  is  not  a 
precondition  for  EU  membership,  they  remain  key  points  of  reference  for  stability 
oriented macroeconomics policies, and must in time be fulfilled  by new member states on 
a  permanent  basis.  Hence  the  successful  conclusion  of  systematic  transformation  and 
market oriented  structural reforms  is essential. The Czech Republic's  economic  situation 
and progress has already been analysed in preceding chapters of this Opinion. 

Current  and Prospective  Assessment 

The central  bank  is largely  independent  from  the  government  in terms  of the  conduct  of 
monetary policy and the appointment procedure of the Governor. The statutory  objective 
of the Czech National Bank is to ensure the stability of the national currency, but this has 
been  always  interpreted  in  terms  of  price  stability.  The  provisions  concerning  the 
possibility  of the  Central  Bank to  finance  the budget  deficit  are  still not  in  line  with  the 
Treaty  requirements  of  explicit  and  complete  prohibition.  The  Czech  authorities  are 
expected  to reform  the  Law of the  Central  Bank  to make  it compatible  with  the  Treaty 
requirements.  In practice  the  Central  Bank  has  never  financed  the  budget  deficit  due  to 
the sound fiscal record of the Czech government to date. 

Monetary  policy  in  the  Czech  Republic  has  certainly  been  able  to  slow  down  inflation 
substantially.  As  the  transition  process  gradually  gained  credibility  from  international 
markets,  the  tight  monetary  policy  combined  with  a  fixed  exchange  rate  peg  caused 
massive capital inflows  in  1994-1995. These inflows  were only partially  sterilised  and in 
1995 money supply growth was well above the target, with inflation  stuck at the previous 
year's  level. The February  1996 widening of the bands around the central parity  reduced 
the  incentive  for  speculative  capital  inflows  and  since  November  1996  inflation  has 
resumed  its downward  path. The currency  crisis of mid-May  1997 has  led to  a switch  of 
the  exchange  rate  regime  from  a  currency  peg  to  a  managed  float.  There  are  still 
unresolved  issues  hindering  the  efficiency  of monetary  policy.  The privatisation  and  the 

56 

restructuring of the banking sector has to continue and bankruptcy  procedures have to be 
enforced  properly. 

• 

Between  May  1993 and May  1997, the exchange rate was pegged to a basket  consisting 
of USD and DM. Since May  1997, the central bank allows the exchange rate to float  with 
an exchange rate target for the CZK-DM of  17-19.5 crown/mark. In the first phase of the 
transition, the exchange rate regime has proven to be successful  in providing  the  system 
with  a nominal  anchor  and  bringing  down  inflationary  expectations.  When  the  progress 
of the transition led to a surge "of speculative capital inflows  (1994-1995), the  authorities 
responded  by  widening  the  fluctuation  band  around  the  central  parity  (February  1996). 
The move helped to stop the capital  inflows.  However, the rising current account  deficit, 
while not being an immediate threat for the stability of the exchange rate, has provoked  a 
currency  crisis  of  which  the effects  on the  Czech  economy  are  still  unclear.  In  the  new 
context,  the  fiscal  authorities  should  take  decisive  action  to  sustain  the  disinflationary 
process  by  reducing  public  spending,  and  the  pace  of  structural  reforms  should  be 
increased. 

Conclusion 

It is premature to judge whether the Czech Republic will be in a position, by the time  of 
its  accession,  to  participate  in  the  Euro  area;  that  will  depend  on  the  success  of  its 
stnictural  transformation  permitting  to  attain  and  to  adhere  permanently  to  the 
convergence criteria, which are not however a condition of accession. 

The Czech Republic's  participation  in the third  stage of EMU as a non-participant  in the 
Euro  area  should  pose  no  problems  in  the  medium  term.  Nonetheless  Central  Bank 
legislation should be made compatible with EC rules. Privatisation and competition in the 
banking sector has to be strengthened, as well as supervision in the financial markets. 

Taxation 

The  acquis  in  the  area  of  direct  taxation  mainly  concerns  some  aspects  of  corporation 
taxes  and  capital  duty.  The  four  freedoms  of  the  EC  Treaty  have  a  wider  impact  on 
national tax systems. 

The  indirect  taxation  acquis  consists  primarily  of  harmonised  legislation  in  the  field  of 
Value  Added  Tax  and  excise duties.  This  includes the application  of  a  non-cumulative 
general  tax  on  consumption  (VAT)  which  is  levied  on  all  stages  of  production  and 
distribution  of  goods and  services.  This implies  an equal tax treatment  of domestic  and 
The  VAT  acquis  also  contains  transitional 
non-domestic  (import)  transactions. 
arrangements for the taxation of transactions within the European Union between taxable 
persons.  In the  field  of excise duties the acquis  contains  harmonised  tax  structures  and 
minimum  rates  of  duty  together  with  common  rules  on  the  holding  and  movement  of 
harmonised  excisable  goods (including  the use of fiscal warehouses).  As a result  of the 
introduction of the Single Market, all fiscal controls at the Community's  internal  frontiers 
were abolished  in January  1993. 

The  mutual  assistance  between  member  state  tax  authorities  is  an  important  feature  of 
administrative  cooperation  in  the  Internal  Market;  the  respective  Directive  covers  both 
direct and indirect taxation. 

57 

The Europe Agreement  contains provisions on approximation of legislation  in the area of 
indirect taxation. 

The  White  Paper  contains  as  Stage  I  measures  those  which  make  up  the  main 
requirements  of  the  indirect  taxation  acquis  (essentially,  those  measures  applied  in  the 
Community  up to  1993), and as Stage II measures those which are in addition  necessary 
to implement the full  indirect taxation acquis. 

Descriptive  Summary 

Direct  taxation 

The  two  company  taxation  Directives  and  the  Arbitration  Convention  provide  for  a 
mechanism which applies on the basis of reciprocity. Respective provisions can  therefore 
by definition  not be expected to exist before  accession. 

Indirect  Taxation 

The  overall  contribution  of  VAT  and  excise  duty  revenue  to  the  Czech  Republic  state 
budget  was  about  22%  and  13% respectively  in  1995. More  recent  statistics  indicating 
trends in these figures  are not currently available. 

Value Added  Tax 

The current Czech VAT system was introduced on  1  January  1993 replacing the previous 
Single-Stage  Turnover  Tax.  The  Czech  Republic  applies  a  dual  VAT  rate  system:  a 
standard  VAT  rate  of 22% and  a reduced  VAT rate of  5%.  The  standard  rate  applies  in 
principle to all supplies of goods and certain specific  services; whereas the reduced rate is 
applicable to most services and certain specific  goods.  With certain exceptions, imported 
goods are liable to VAT at the same rate as those supplied within the Czech Republic.  In 
contrast,  "imported" services are not liable to any VAT. 

Certain  activities  are  exempt  from  VAT  without  the  right  to  claim  the  input  credit  on 
such  supplies.  These  exemptions  relate  mainly  to  activities  in  the  public  interest, 
financial  and  insurance  services,  property  and  lotteries  and  similar  games.  Taxable 
persons  are  in principle  entitled  to  deduct  VAT incurred  on their  purchases  for  business 
purposes  of  goods  and  services.  The  Czech  Republic  VAT  Act  does  not  at  present 
contain  any  provisions  enabling  tax  to  be  refunded  to  taxable  persons  not  established 
within the country.  However, as of  1  January  1998 such a refund  scheme is planned to be 
introduced  for  supplies in relation to international transport, exhibitions and trade fairs. 

Excise 

The current system of excise duty in the Czech Republic was introduced  at the same time 
as  the  VAT  system.  Excise  duties  are  applicable  to  mineral  oils,  alcohol  and  alcoholic 
beverages  and  manufactured  tobacco.  For  each product  category,  the  duty  is specific  in 
nature. 

58 

Mutual Assistance 

The tax administration  has not yet had to develop  its capacity  for  mutual  assistance  with 
the  tax  authorities  of  member  states,  since  mutual  assistance  is  a  feature  which  would 
only become applicable on accession. 

Current and Prospective Assessment 

Value Added Tax 

The current VAT system in the Czech Republic has been based on the main principles of 
the VAT legislation of the Community.  It is a solid starting point in its future  alignments 
on  the  Community  VAT  acquis.  However,  it  is  characterised  by  being  relatively  brief 
and general in its application. 

Foreign traders who  are not permanently  established  in the Czech Republic  and  listed  in 
the  Commercial  Register  cannot be registered  for  VAT in the country.  Since the  Czech 
Republic  does  not  operate  any  arrangements  for  the  refund  of  VAT  to  non-registered 
foreign  traders, VAT represents  an increased cost to such traders.  The application  of the 
reduced VAT rate is notably broader in scope compared to the Community  approach. 

The  Czech  Republic's  membership  of the  European  Union  would  require  adjustment  to 
bring the VAT legislation into line with the requirements of the Community acquis.  This 
is in particular the case as regards the system of taxation necessary in a Community  with 
no internal frontier controls. 

The Czech Republic national  strategy plan for implementing the recommendations  of the 
White  Paper  regarding  VAT  is  planned  to  give  priority  to  the  elimination  of  the 
differences  in the scope of VAT, including a narrowing of the scope of the application  of 
the  reduced  VAT  rate,  a  decrease  of  the  registration  threshold,  provisions  for  VAT 
refunds  to  foreign  taxable  persons  not  established  in  the  Czech  Republic  and  a  refund 
scheme for tourists.  These changes are to be implemented gradually during  1998 - 2000. 

Excise 

There  are  significant  discrepancies  between  the  Czech  excise  regime  and  EU 
requirements. 

Firstly,  there  exists  no  excise  suspension  system  where  goods  can  move  between 
authorised tax warehouses without payment of duty. 

Secondly,  differences  between  the rates  of the excise  duty  levied  in the  Czech  Republic 
on similar products could lead to some distortion of competition between these products. 

In order to ensure a correct application  of the Community excise legislation it is essential 
that the Czech Republic  sets up a warehousing system based on the Community  model as 
soon  as possible,  and  adapts the  structure  and  level  of  its excise  rates  in such  a way  that 
they  comply  with  the  Community  principle  of  non-discrimination  between  national 
products and those originating in other member states. 

59 

The  Czech  national  strategy  plan  for  implementing  the provisions  of  the  White  Paper 
does not provide a clear and detailed timetable for future adjustments of the Czech excise 
legislation.  A  short  term  objective  consists  of  a  gradual  approximation  of  Czech 
legislation and the duty rates is not planned for the next 3-5  years. 

Mutual Assistance 

There would also be a need, on accession, to implement the appropriate arrangements for 
administrative  cooperation  and  mutual  assistance  between  Member  States.  These 
requirements are essential for the functioning of the Internal Market. 

Conclusion 

The acquis in respect of direct taxation should present no significant  difficulties. 

As  regards  indirect  taxation,  provided  a  sustained  effort  is  made, the  Czech  Republic 
should  be  able  to  comply  with  the  acquis concerning  VAT  and  excise  duties  in  the 
medium term. 

It should be possible to start participating in mutual assistance as the tax administration 
develops its expertise in this respect. 

Statistics 

The  main  principles  of  the  Community  acquis relate  to  the  impartiality,  reliability, 
transparency,  confidentiality  (of  individual  information)  and  dissemination  of  official 
statistics. 
In  addition  there  exists  an  important  body  of  principles  and  practices 
concerning  the  use  of  European  and  international  classifications,  systems  of  national 
accounts, business registers, and various categories of statistics. 

The  Europe  Agreement  provides  for  co-operation  to  develop  effective  and  reliable 
statistics, in harmony with international standards and classifications. 

The White Paper includes no provisions in this field. 

Descriptive Summary 

The  Czech  Statistical  Office  (CSO)  is  the  central  body  charged  with  co-ordinating 
official  statistics in the Czech Republic. 

The legal basis for  Czech official  statistics consists of the  1995 State Statistical Service 
Act. 

Current and Prospective Assessment 

Czech  legislation  is,  with  a  few  exceptions,  compatible  with  the  current  standards 
applied within the European Union. 

60 

Some  issues  of  transparency  and  confidentiality  need  attention,  and  there  are 
deficiencies  in  sectors  such  as  the  business  register,  and  regional,  financial  and 
agricultural statistics. 

Conclusion 

Provided  that  continuing  progress  is  made,  the  Czech  Republic  should  be  able  to 
comply with EU requirements for official  statistics within the next few years. 

3.4  Sectoral  Policies 

Industry 

EC  industrial  policy  seeks  to  enhance  competitiveness,  thus  achieving  rising  living 
standards and high rates of employment.  It aims at speeding up adjustment  to structural 
change,  encouraging  an  environment  favourable  to  initiative,  to  the  development  of 
undertakings  throughout  the  Community,  and  to  industrial  co-operation,  and  fostering 
better  exploitation  of  the  industrial  potential  of  policies  of  innovation,  research  and 
technological  development.  EU  industrial  policy  is  horizontal  by  nature.  Sectoral 
communications  aim  at  transposing  horizontal  concepts  into  specific  sectors.  EU 
industrial policy results from an articulation of instruments from a number of Community 
policies;  it  includes  both  instruments  related  to  the  operation  of  markets  (product 
specification  and  market  access, trade  policy,  state  aids  and  competitions  policy)  and 
measures  related  to  industry's  capacity  to  adapt  to  change  (stable  macro-economic 
environment, technology, training etc.). 

In  order  to  cope  with  competitive  pressure  and  market  forces  within  the  Union,  the 
industry of applicant countries needs to have achieved a certain level of competitiveness 
by the time of accession.  The applicant countries need to be seen as pursuing policies 
aimed at open and competitive markets along the lines set out in Article  130 ("Industry") 
of the Treaty.  Co-operation between the EC and the candidate countries in the fields of 
industrial co-operation, investment, industrial standardisation and conformity  assessment 
as provided for in the Europe Agreement is  also an important indicator of development 
in the right direction. 

Descriptive Summary 

The Czech Republic has a long industrial tradition. Its industrial structure was one of the 
most  sophisticated  in pre-war  Europe.  Before  the transition prior  to  1990 the country 
had become one of the most centrally-planned economies.  The structure of the economy 
was  dominated  by  industry  (in  particular  mechanical  engineering)  and  showed 
exceptional rigidity. 

The transition since  1990 was accompanied by a sharp drop in industrial production.  By 
1995 the share of industrial production in GDP had dropped from a remarkably high 58% 
to 41% and stood at about 15 bn ECU, comparable to the industrial production of Greece. 
Total  industrial  employment  has been  declining  and  now  stands  at  about  2mn.  Small 
firms  account for  more than 98% of all industrial firms, but only for  2.5% of industrial 

61 

employment  while  the  rest,  medium-sized  and  large  firms,  provide  the  lion's  share  in 
employment. 

Czech Industry, Main Production Sectors in 1995 

Sector 

Raw material processing 
(incl.  metallurgy,  cement,  glass, 
ceramics, paper & wood) 
Metal,  mechanical  &  electrical 
products 
Agri-food 
Construction 
Chemicals 
Automotive Industry 
Information  technology 
Textiles, clothing and leather 
Pressure equipment, medical & 
meteorological  equipment 
Pharmaceuticals 

%-share 
industrial 
production 
(value added) 
21 

15 

12 
12 
12 
6 
4.5 
3.5 

2.5 
2 

Total of the above 
Other  industries 
Total  Industry 
pm: 
lndustr.pro duct. (excl. construct.) 
GDP 
% 
as 

90.5 
9.5 
100 

34 

%-share 
industrial 
employment 

22 

20 

8 
16 
5 
6.5 
2 
10 

2.5 
0.5 

92.5 
7.5 
100 

Machinery  and  equipment  industry  has  a  long  tradition  in  production  of  standard 
medium and low-range machines. It is highly specialised and an important  manufacturing 
sector  within  industry,  with  close  links  to  German  and  Austrian  producers.  Despite  low 
productivity  the  industry  is  able  to  export  over  half  of production,  especially  to  the  EU 
(mainly Germany), largely because of low labour costs. 

Agri-food  industries:  Except  for  some  large  firms  the  sector  has  been  completely 
privatised  and  attracted  FDI  coming  mainly  from  the  EU.  The  steel  sector  essentially 
consists  of  three  large  firms.  Despite  positive  first  steps privatisation  halted  and  a  large 
part  of  the  shares  are  still  in  state  ownership.  Since  the  government  decided  not  to  take 
further 
fundamental 
restructuring  is  overdue.  The  industry  is  considerably  oversized  in  relation  to  internal 
consumption and the demand for public aid or for capacity closure may rise. 

restructuring  steps  before 

full  privatisation, 

the  necessary 

The  non-ferrous  metals  sector  is  much  smaller  and  most  domestic  demand  is  met  by 
imports. The chemical sector is a relatively  large sector. Restructuring  is in full  progress: 
80 per cent of production now originates from  the private sector. 

62 

The automotive  industry is second only to the Polish industry  in terms of production  in 
the  CEECs.  The passenger  car  market  is dominated  by  one  single  car  maker,  majority-
owned  by  a  German  manufacturer.  Through  FDI  product  quality  has  improved  and  EU 
suppliers  are  shifting  production  to  take  advantage  of  low  production  and  labour  costs. 
Car production in  1995 reached 200,000of which nearly half was exported, mainly to the 
EU. Production is expected to double after  1997, directed partly to EU markets. 

The  metal  products  industry  is  specialised  in  high  value  products  and  has  a  skilled 
workforce.  To attain economies  of scale most firms need exports to  survive and, despite 
low productivity  levels, low labour costs permit the industry  to export more than half of 
its  low-price  production  to  the  EU.  Imports  are  also  mainly  from  the  EU,  underlining 
close links of the industry with EU industry. 

The  textiles,  clothing  and  leather  sectors  were  hard  hit  by  the  reform  shocks  and 
production  fell  steeply.  Privatisation  of  large  firms  in  the  textiles/clothing  sector  has 
been completed  and foreign  investment  is directed toward modernisation.  Relatively  low 
labour  costs  allow  trade  with  the  Union  with  around  half  of  textiles  and  clothing  trade 
and  production  directly  linked  to  further  processing  for  EU  firms  (outward  processing 
trade  or  OPT).  However,  further  structural  adjustments  will  become  inevitable  once 
labour costs rise. 

The  mining  industry  is  a  net  exporter  and  is  considered  competitive.  Privatisation  is 
nearly  completed  and  has  attracted  significant  participation  of  a  number  of  EU  firms, 
notably in the cement sector. 

The  pharmaceutical  industry  is  small  but  relatively  strong  and  modern  and  did  not 
experience  decline during transformation  despite pressures from  sector liberalisation  and 
imports.  Privatisation  is  progressing  well  and  the  industry  has  succeeded  in  attracting 
foreign  capital.  The  many  licensing  agreements  with  Western  manufacturers  and 
successful  R&D  programmes  show high  standards  and  technical  competence.  However, 
relatively  low investment  levels  in basic R&D  seem unlikely  to yield  significant  results 
levels. The industry thus relies on the production of (branded) generics. 

The paper and wood sector is of modest size and relies on small but well  located  forest 
resources. The  graphical  and printing  industry  is a driving  force  due to  foreign  demand, 
and the sector has attracted foreign  investment. 

Multinational  companies  have  established  a  presence  in  the  small 
information 
technology  sector,  concentrating  on a small  range  of products  and  electronic  parts.  The 
Czech  Republic  is  considered  one  of  the  most  dynamic  IT  markets  among  the  CEECs. 
Production  growth  is  lagging  far  behind  domestic  demand  expansion  but  considerable 
production growth is expected. 

It  appears  that  most  of  Czech  industry,  based  on  a  well  trained  labour  force  and  an 
advantageous  location  in the centre of Europe has comparative  advantages, with  lacking 
productivity  levels  being  compensated  by  low  wage  levels  thus  assuring  their  current 
price  competitiveness.  Foreign  direct  investment  has  aided  restructuring  efforts,  which 
have  varied  according  to  sectors.  Typically  competitiveness  appears  assured  as  long  as 
current low cost conditions for wages and other production costs in sectors of high labour 
intensity  in  a  wide  low  to  medium  range  of  industrial  technology:  machinery  and 

63 

equipment,  non  ferrous  metals,  fabricated  metal  products,  building  materials,  mineral 
mining,  chemicals,  pharmaceuticals,  passenger  cars,  railway  equipment,  textile  and 
clothing,  pressure  equipment,  paper,  wood  and  printing.  High  tech  industries,  such  as 
information  technologies and medical equipment are clearly import dominated  and heavy 
industries,  like  steel,  remain  state  owned,  mostly  unrestructured  and  in  manifest  crisis 
with excess capacities overdue for restructuring. 

Current and Prospective Assessment 

According to most indicators the Czech Republic is no longer in transition. 

There are a number of positive factors for Czech industry. There are few barriers to trade. 
large  share  of  the  economy  (over  50%)  and  industrial  output. 
Exports  account  for  a 
Further, the share of investment in GDP (30%) is as large as that of  some of the ASEAN 
tigers. The  infrastructure  should  thus  improve  rapidly.  The acquis  is  being  adopted  at  a 
satisfactory  pace,  and  the  prospects  for  effective  implementation  are  relatively  good. 
Provided  that  rising  wage  and  other  production  costs  do  not  erode  these  advantages 
within  this  promising  environment,  Czech  industry  should  be  able  to  grow  quickly  and 
gain in competitiveness.  Within  the next  5 years it may reach  a level  that  is  comparable 
to that of Portugal. 

The  main  problems  lie  in  the  area  of  corporate  governance.  Banks  face  conflicts  of 
interests  as  the  owners  of  the  investment  funds  that  own  large  parts  of  industry  and  as 
creditors to the same enterprises they often  also dominate. This combination  has reduced 
restructuring  and might explain the current low level of unemployment  and bankruptcies. 
Moreover,  given  the  weak  balance  sheets of  many  banks  they  are not  likely  to  provide 
the financing  required  for adjustment.  All this weakens the capacity  of Czech  industry  to 
change  and  adapt  to  its  two  main  challenges:  adoption  of  the  acquis  and  competition 
from  low wage producers as Czech wages increase. 

Another  handicap  for  industry  is the  dominant  role  of  large  enterprises  and  their  heavy 
consumption  of  energy.  Over  the  next  decade  many  of  the  large  energy  intensive 
enterprises in heavy industry will have to undergo radical  adjustment. 

Conclusion  on Industrial  Competitiveness 

Provided  that  past  and  current  efforts  at restructuring  and  modernisation  are  continued  -
and reinforced  in case of heavy industries - most sectors of Czech industry  should face no 
major  problems to integrate into the enlarged EU market  in the medium term.  Yet in the 
long run, efforts  towards  enhanced  non-price competitiveness  and  productivity  of  Czech 
industry  need  to  be  undertaken  to  maintain  competitiveness  in  view  of  likely  increased 
wage and production costs. 

An  evaluation  of  the  acquis  specific  to  the  free  circulation  of  industrial  goods  is  to  be 
found  in the separate section on the internal market. 

Agriculture 

The  Common  Agricultural  Policy  aims  to  maintain  and  develop  a  modern  agricultural 
system ensuring a fair  standard of living for the agricultural community  and the supply of 

64 

food  at  a  reasonable  price  for  consumers,  and  ensuring  the  free  movement  of  goods 
within  the  EC.  Special  attention  is  given  to  the  environment  and  rural  development. 
Common market organisations exist to administer the CAP.  These are complemented  by 
regulations  on  veterinary  health,  plant  health  and  animal  nutrition  and  by  regulations 
concerning  food  hygiene.  Legislation  also  exists  in  the  area  of  structural  policy, 
originally  developed  primarily  to  modernise  and  enlarge  agriculture,  but  more  recently 
with  an  increasing  emphasis  on  the  environment,  and  the  regional  differentiation  of  the 
policy.  Since reforms  in  1992, increasing contributions to farm  support have come from 
direct aid payments increasingly compensating for reduced market support prices. 

The Europe Agreement  provides the basis for agricultural  trade between  Czech  Republic 
the  Community  and ' aims  to  promote  co-operation  on  the  modernisation, 
and 
restructuring  and privatisation  of Czech Republic's  agriculture sector as well as the agro-
industrial  sector  and  phyto-sanitary  standards.  The  White  Paper  covers  the  fields  of 
veterinary,  plant  health  and  animal  nutrition  controls, as well  as marketing  requirements 
for  individual  commodities.  The  purpose  of  such  legislation  is  to  protect  consumers, 
public health and  the health of animals and plants. 

Descriptive  Summary 

Agricultural  Situation 

The value of the agricultural  production  in  1995 was approximately  1.79%  of that of the 
Union. 

In  1995, agriculture  accounted  for  6.3% of  employment  and  5.2%  of  the  GDP.  Of  the 
total  area  of  7.9  million  ha,  4.3  million  ha is used  for  agricultural  purposes,  with  arable 
land taking up 3.1 million ha, whilst forests  cover 2.6 million ha.  Half of the arable land 
is  under  cereals  (about  1.6  million  ha  in  1995), mainly  wheat  and  barley.  However,  in 
recent years there has been a shift  to cereals, while oilseeds have doubled their share over 
the period. 

Total agricultural  output  has diminished  by about 28% since  1989.  The livestock  sector 
has been the most  affected  over the transition period, with output  dropping  by over 30% 
(cattle - 40%; sheep - 50%).  Crop output has decreased by about 20%. 

In  1995,  however,  agriculture  recorded  a  turnaround.  Gross  output  was  up  by  4.2%, 
following  a  continuous  fall  in  output  since  1989.  Production  in  1995  reached  around 
85% of its  1989 level.  As to land ownership, the main objectives  of the reform  policy of 
1991-1994  were  to  re-establish  private  property  rights  in  agriculture  through  restitution 
of  land, transformation  of the agricultural  co-operatives  and the land  law.  98.8  % of the 
claims were settled by the end of 1995. 

Individual  private  farms  manage  about  one  third  of  the  agricultural  land.  In  1994  most 
individual  private  farms  (40,000  out  of  50,000)  were  of  less  than  10  hectares,  mainly 
producing  for  own  consumption  or  local  markets.  The  remaining  individual  farms 
(10,000)  could  be  considered  as  professional  farms,  with  the  largest  (over  100  ha) 
farming  on mainly  leased  land  and  with  equipment  rented  from  the  State on the basis of 
annual contracts.  The transformed  co-operatives (over  1,300) were still managing half of 
the agricultural  land with an average  size of  1,600 ha.  Several reasons contributed  to the 

65 

fact that many of the old collective farms have continued as co-operatives  (fragmentation 
of  ownership  into  small  plots  of  land,  the  general  atmosphere  of  uncertainty  in  the 
transitional  years  and  lack  of  entrepreneurial  skills  and  financial  resources).  Other 
agricultural  enterprises  (nearly  1,300  in  number  with  an  average  size  of  600  ha)  were 
managing over  15% of the agricultural land. 

In  1995,  the  Czech  Republic  produced  6.6  Miot  cereals,  1.3  Miot  potatoes,  662,000t 
oilseeds,  550,000t  vegetables;  in  1994  it  produced  3.2  Miot  milk,  184,000t  beefmeat, 
465,000t porkmeet and  121,000t poultry meat. 

Ownership  changes  have  taken  place  in the  agrofood  industry,  but  restructuring  to  deal 
with overcapacities is still underway. 

The  Czech  Republic  is a net importer  of food  and  agricultural  products; in  1995  exports 
reached  ECU  1,213  Mio (ECU  264 mio to EU) and imports ECU  1,690  Mio  (ECU  753 
Mio  from  EU).  The  main  export  market  for  agricultural  products  (1996)  is  the  EU 
(36.4%)  and  the  Slovak  Republic  (27.3  %).  14.9%  of  exports  went  to  the  New 
Independent  States,  0.8% to  EPTA  and  9.7%  to  other  CEECs.  Main  exported  products 
are dairy products, beverages, beer, livestock, hops, malt, and meat and meat products. 

Agri-food  imports mainly  come from  the EU (54.3% of total  agri-food  imports in  1996) 
and  the  Slovak  Republic  (8.9%).  1.3%  of  imports  came  from  EFTA,  6.9%  from  other 
CEECs  and  0.3%  from  the  NIS.  Imports  include  fruits,  coffee,  tea,  cocoa,  vegetables, 
soya cakes, and grain. 

Agricultural  Policy 

The  PSE  (producer  subsidy  equivalent)  calculated  by  the  OECD  was  14%  in  1995, 
compared to 49% for the EU. 

The Czech Republic's  agricultural  policy has four  main principles: (i) price  stability;  (ii) 
food  security;  (iii)  environmental  quality;  and  (iv)  foreign  market  access.  In  1996, total 
expenditure  on  agriculture  increased  by  12%  compared  to  the  previous  budget  (net 
expenditure of the State on agricultural support amounted to CZK 8.9 bio in 1995). 

Agricultural  policy  in  the  Czech  Republic  is  relatively  liberal  and  market  regulations 
exist  for  only  a  few  essential  products  (wheat,  dairy  products).  Measures  include 
intervention buying and in particular export subsidies. 

Price  levels  are  generally  significantly  lower  than  EC  prices.  The  current  price  gap  at 
producer level for the main crop products lies at  15 to 20% and is somewhat smaller than 
the  price  gap  for  the  main  livestock  products,  milk  and  beef,  which  can  be  assessed  at 
around  30% (partially  due to quality differences).  For the cereals-based  meats, pork and 
poultry, the price gap is non-existent or much smaller than could be expected on the basis 
of the cereals price  differential. 

Rural  development  and  environmental  policies  are  receiving  increasing  attention  and 
funding  of rural  and  structural  development  programmes  aimed  at supporting  farmers  in 
less  favoured  areas,  creating  off-farm  employment  and  promoting  environmentally 
friendly  farming, has been increased substantially in recent years. 

66 

The Czech Republic has undertaken  commitments  in the GATT Agreement  on  domestic 
support,  market  access  and  export  subsidies.  The  commitments  are  made  in  national 
currency. Minimum access quotas were opened for 27 groups of products in  1995 such as 
beef,  pork,  poultry  and  dairy  products.  Export  support,  which  is  in  particular 
concentrated  on meat and dairy products, is limited to 4.34 Mio CZK (105 Mio ECU) in 
the year 2000. 

The trade arrangements under the Europe Agreement, providing  in agriculture  for  mutual 
import tariff preferences, have been in force since 1994. 

The Czech Republic has also concluded  several bilateral  or regional  agreements with  an 
aim  to  develop  trade  :  the  Czech-Slovak  Customs  Union  from  1  January  1993;  the 
Central European Free Trade Area (CEFTA) with the Slovak Republic, Poland,  Hungary 
and  Slovenia,  which  foresees  progressive  liberalisation  of  agricultural  trade.  Free  trade 
agreements  with  EFTA  countries,  Romania,  Bulgaria,.  Estonia,  Latvia,  and  from  1 
January  1997 with Lithuania and Israel were also concluded.  Negotiations  are under way 
with  Turkey  and  a  Free  Trade  Agreement  will  be  negotiated  with  Croatia,  Morocco, 
Tunisia, Malta and Cyprus. 

The  Czech  Republic  is  in  the  process  of  harmonising  its  legislation  following  the 
recomendations of the White Paper. 

The Czech Republic has an institutional  infrastructure  with a certain number  of  agencies 
managing different  aspects of Czech agricultural policy under the central responsiblity  of 
the Ministry of Agriculture. 

Most  agricultural  organisations  and  associations  in  the  food  production  processing  and 
distribution  industries  are  associated  in  a National  Chamber  of  Agriculture,  which  was 
established in  1993 on a legal basis and with government financial support. 

Current and Prospective  Assessment 

Given  the  relatively  limited  importance  of  agriculture  in  the  overall  economy,  the 
agricultural sector is not a main priority in the government's policies. 

In  the  longer  run  (5-10  years)  agricultural  production  is  expected  to  increase  to  reach 
level  prior  to transition  and  exceed  consumption  in key  areas  like  cereals, oilseed,  dairy 
and  meat  products.  The  most  significant  problems  still  seem  to  concern  low  yields, 
quality of the products, low level of profitability,  an inefficient  agro-food  industry  still in 
the  process  of  restructuring  that  is  hampered  by  severe  financial  difficulties  and 
overcapacity, 
lack  of  adequate  market 
information  in certain parts of the marketing chain. 

insufficient  environmental  protection  and 

In  general,  the  main  market  policy  instruments  applied  in  the  ECare  not  applied  in  the 
Czech Republic.  This includes key instruments like quotas (dairy, sugar sectors) and the 
arable crop scheme  (base area, set-aside compensatory  payment  schemes), premia in the 
livestock  sector  (cattle  identification  and registration  systems), producer  organisations  in 
the  fruit  and  vegetable  sectors,  as  well  as  certain  rural  and  structural  development 
programmes. 

67 

Management  and  control  of  these  measures  would  require  relatively  sophisticated 
administrative  systems,  including  an  appropriate  land  register  and  cattle  identification 
and  registration  systems.  As  a  general  observation,  it  is  clear  that  the  administrative 
capacity  would  need  to  be  further  development  in these  areas  if these  measures  were  to 
be  applied  in  the  Czech  Republic.  Market  price  quotation  systems  would  also  be 
required for market management purposes. 

It is difficult  to foresee  at this stage what will be the development  of agricultural  support 
prices in the Czech Republic in the period before accession; this will depend on a number 
of  factors  including  the  domestic  economy,  the  situation  on  export  markets,  and  the 
development of price support levels in the Union. 

Although  progress  has  been  made  in  adapting  rural  and  structural  policies, a number  of 
measures appears to be inconsistent with EC policies. 

Negotiations are on going to solve the difficulties  which have arisen in  the application of 
the trade provisions of the Europe Agreement. 

The  Czech  Republic  is  making  progress  in  introducing  the  legislation  identified  in  the 
White Paper. 

However,  differences  with  the  acquis  still  remain  in  the  veterinary  and  phytosanitary 
field.  An  agreement  on  equivalency  in  the  veterinary  and  phytosanitary  field  is  being 
finalised  with  the  Czech  Republic.  The  annexes  to  the  agreement  identify  the  items  on 
which equivalency  can be agreed and on which further  negotiations are necessary. 

In the veterinary  field  progress on approximation to, and implementation  of the acquis  is 
depending on the progress on the adoption and implementation of the new veterinary  Act, 
which  is  envisaged  to  enter  into  force  by  December  1997.  Preparation  of  secondary 
legislation is initiated. 

The  Czech  Republic  has  a  well  established  infrastructure  for  veterinary  control  and 
inspection,  both  at  the  borders  and  internally.  The  facilities  at  border  inspection  posts 
and testing laboratories appear to be adequate to carry out appropriate  control  and testing 
according  to  internal  market  requirements.  Procedures,  frequencies  and  results  of 
veterinary  checks  at  the  external  borders  are  similar  to  those  applied  in  EC  member 
states.  There is, however, a need to upgrade testing and inspection  facilities. 

Although the legislation  under preparation  appears to a large extent to be consistent with 
the acquis,  further  adaptation  would  be needed  in particular  with  regard  to  identification 
and  registration  of  animals,  the  licensing  system,  introduction  of  HACCP  (Hazard 
Analysis  Critical  Control  Panel)  and  self-control  systems  and  veterinary  checks. 
Furthermore,  it  appears  that  some  of  the  basic principles  of the  internal  market,  such  as 
the  concept  of  safeguard  measures  and  import  rules,  have  not  been  reflected  entirely  in 
the current primary  legislation. 

There  will  be  a need  to  upgrade  certain  food  processing  establishments  in  particular  fo, 
the  national  market,  to  develop  acceptable  veterinary  audit  and  certification  procedures, 
and to maintain an adequately  structured, resourced, staffed  and trained veterinary  sector. 

68 

The  full  implementation  of  the  acquis  should  be  achievable  during  the  preaccession 
period if adequate funds  are made available from the State budget. 

With  reference  to  the phytosanitary  field  the  situation  is the  following:  as regards  seeds 
and  propagation  material  it  is  stated  that  the  legislation  and  necessary  administrative 
arrangements  are  compatible  with  EC  legislation.  No  major  problems  are  foreseen 
particularly  as  the  country  is  already  a  member  of  OECD  and  enjoys  Community 
equivalence  under  the  seed  legislation  for  the  majority  of  EU  species.  The  framework 
legislation  on  plant  health  for  approximation  to  EC  legislation  came  into  force  on  1 
January  1997.  As  regards  regulation  on  plant  protection  products,  harmonisation  of 
legislation  with  Community  legislation  is  envisaged  to  begin  in  1997.  As  regards 
legislation  on  animal  nutrition,  pesticide  residues  and  organic  farming,  it  is  difficult  at 
this  stage  to  establish  the  level  of  approximation  to  Community  rules.  The  Czech 
Republic  will  need  to  ensure  that  this  EC  legislation  is  implemented  in  national 
legislation. 

Conclusion 

Further  alignment  to the acquis is still necessary,  although  significant  progress  has  been 
made in adopting the measures mentioned in the White Paper. 

Particular efforts  are needed in relation to : 

- 

implementation  and  enforcement  of  veterinary  and  phytosanitary  requirements  and 
upgrading of establishments to meet EC standards; 

-  strengthening  of  the  administrative  structures  to  ensure  the  necessary  capacity  to 

implement and enforce the policy instruments of the CAP; 

- 

further  restructuring of the agri-food  sector to improve its competitive capacity. 

If  such  progress  is  accomplished,  accession  in  the  medium  term  should  not  be 
accompanied  by  significant  problems  in  applying  the  common  agricultural  policy  in  an 
appropriate manner. 

Fisheries 

The  Common  Fisheries  Policy  includes  common  market  organisations,  structural  policy, 
agreements  with  third  countries,  management  and  conservation  of  fish  resources,  and 
scientific  research in support of these activities. 

The  Europe  Agreement  includes  provisions  concerning  trade  in  fisheries  products  with 
the Community.  The White Paper includes no measures in this field. 

69 

Descriptive  Summary 

The Czech Republic has only inland water fisheries. In  1994 catch was 22,600 t. - mainly 
carp. No information  was provided on processing fish. 

As a trading partner of the Community, the Czech Republic represents 0.17% of EU total 
imports  (independently  of  origin)  of  fisheries  products  and  6.8%  of  EU  imports  of 
fisheries  products  from  the candidate  countries alone  (in terms of value). As regards  EU 
exports,  the Czech Republic receives  1.31% of our total exports of fisheries products and 
15.8% of our exports of these products to the candidate countries (in terms of value). 

Current and Prospective  Assessment 

Czech Republic's production and foreign  trade data, when compared to the  corresponding 
EU  figures,  are  quite  low  and  therefore  they  should  not  have  a  significant  impact  upon 
the Community as a whole. 

It will be  necessary  for  the  Czech  Republic to  ensure  compliance  with  the  EU's  health, 
hygiene and environmental  standards. 

Conclusion 

This sector should not represent a problem for accession. 

Energy 

The main EU energy policy  objectives, as reflected  in the Commission  White Paper  "An 
energy  policy  for  the  EU"  include  enhancement  of  competitiveness,  security  of  energy 
supplies and protection of the environment.  Key elements of the energy acquis  comprise 
of  Treaty  provisions  and  secondary  legislation  particularly  concerning  competition  and 
state aids, internal  energy  market  (including  directives  on electricity  price  transparency, 
gas  and  electricity  transit,  hydrocarbons,  licensing,  emergency  response  including 
security  stock  obligations,  etc.),  nuclear  energy,  as  well  as  energy  efficiency  and 
environmental  rules.  Development  of Trans-European  Energy Networks  and  support  for 
energy  R&D  are  other  important  elements  of  energy  policy.  Ongoing  developments 
include  liberalisation  of  the  gas  sector,  energy  efficiency  acquis  and  the  Auto-oil 
programme. 

In the field of nuclear  energy, the  Community  acquis has evolved  substantially  from  the 
original  EAEC  Treaty  to  a  framework  of  legal  and  political  instruments,  including 
international  agreements.  At  present,  it  addresses  issues  of  health  and  safety,  including 
radiation  protection,  safety  of  nuclear  installations,  management  of  radioactive  waste, 
investment  including  EURATOM  financial  instruments,  promotion  of  research,  nuclear 
common market, supplies, safeguards, and international relations. 

The Europe  Agreement  provides  for  co-operation  to  develop  the  progressive  integration 
of the energy  markets  in Europe and  includes provisions  on assistance  within the relate ' 
policy  areas.  The  White  Paper  preparing  CEECs  for  the  internal  energy  marke? 
underlines  the  need  for  full  application  of key  internal  market  directives  in  combination 

70 

with  EC  competition  law.  As  to  the  nuclear  sector,  the  White  Paper  refers  to  nuclear 
supply safeguards  and shipments of nuclear waste. 

Descriptive  Summary 

The  Czech energy  situation  is dominated  and will be dominated  by  domestic  solid  fuels 
(hard  coal  and  lignite),  representing  60%  of  the  energy  balance  and  causing  serious 
environmental  damage, particularly in the Northern Region (e.g.  Black Triangle).  For its 
oil and gas supplies (17.5%» respectively  14% of energy needs), the country  is  dependent 
on external  sources, particularly  on Russia.  Uranium mining  (600tU/year)  will  continue 
until 2001. 

Mine closures resulted in a decrease of hard coal production from  22 million tons in 1990 
to  16 million tons in  1995.  Lignite production decreased from  90 to 56 million tons over 
the period  1989-1995.  From  1989-1994 the labour force was reduced by more than 50% 
reaching a level of 82,000. 

The Czech Republic  is, with a view to diversification,  increasingly  inter-connected  with 
the  European  Union.  The  synchronous  test  connection  since  1995  to  the  Western 
European  UCPTE  electricity  network  as well as the  link up of the Czech  refineries  with 
Germany should be noted. 

The  energy  sector  is  two  to  three  times  less  efficient  than  the  EU-average  due  to,  for 
example, the past supply oriented policies and low prices. 

The Czech Republic has four  Russian designed VVER 213 nuclear reactors at  Dukovany 
(modernisation  programme  ongoing)  the  safety  of  which  is  considered  to  be  close  to 
safety  objectives  generally  accepted  in  the  EU  once  upgrading  programmes  are 
implemented.  There  are  two  VVER  1000  under  construction  at  Temelin  (with 
integration  of  US  technology).  Around  the year  2000 the  share  of nuclear  in  electricity 
production  may  increase from  22 to 40%).  Three research  reactors  are  also  in  operation, 
using fuel  fabricated  in Russia. 

Current and Prospective Assessment 

The  Czech  energy  policy  is  in  line  with  EC  objectives  such  as:  ensuring  security  of 
energy  supplies  including  diversification;  introducing  market  principles;  and  protecting 
the environment and increasing energy  efficiency. 

The competition  framework  in the energy  sector  is progressively  approximating  with the 
directives  of  the  internal  energy  market  in  combination  with  the  application  of  EU 
competition law.  The basic competition  legislation  is applicable to the energy  sector and 
the  1994  Energy  Act  defines  the  State's  role  in  the  energy  subsectors  and  provides  a 
framework  for sector regulation. 

Privatisation  is  underway  in  various  subsectors  but  the  State  retains  monopolies  or 
dominant  positions  in  electricity  production  and  trade,  uranium  production,  oil  and  gas 
pipeline  transport.  Independent  power  producers  and  industrial  self-producers  increase 
gradually their share in the electricity production. 

71 

Despite  considerable  increases,  gas, electricity  and  heat  prices  for  households  are cross-
subsidised  by  industry  and  do not  recover  cost.  The Government  is expected  to  decide 
in the Summer  1997 on a policy to reach cost levels by the year 2000. 

Current emergency  oil  stocks are estimated  at forty  days of consumption, well below the 
EU  target  of  ninety. 
In  the  event  of  a  rapid  adoption  of  the  necessary  legislation 
(Summer  1997) full  compliance with ECacquis is expected within six to eight years. 

Restructuring  of  the  mining  sector  (solid  fuels  and  uranium)  will  continue  beyond  the 
year 2000.  Its social and regional consequences will have to be addressed, whereas  State 
interventions  should be assessed against EC and ECSC State aid rules. 

(e.g. 

The  Czech  Republic  has  started  the  development  of  Community  conform  efficiency 
legislation 
labelling  appliances,  minimum  efficiency  norms)  as  well  as 
environmental  norms  (e.g.  fuel  quality  standards),  but  more  remains  to  be  done. 
Adoption  of  an  Energy  Saving  Law  (expected  Summer  1997)  will  underpin  future 
compliance with the efficiency  acquis.  It should be noted that the upgrading of  refineries 
to meet EC standards will require considerable investments and these refineries  will have 
to compete on a saturated European market. 

Concerning  uranium mining, the obligation for the national electricity company to buy in 
the event of nuclear fuels  import, an equivalent  amount of domestic uranium  in principle 
infringes  upon  the  rules  of the  nuclear  common  market  but  will  be phased  out  by  2000. 
Uranium  supply  (if  not  from  domestic  source),  enrichment  services  and  fuel  fabrication 
services  are  covered  by  contracts  with  various  firms  in  several  countries.  The  common 
nuclear  materials  supply  policy  of  security  through  diversification  of  sources  would 
apply  on accession  for  supply  contracts concluded  after  accession.  It would  be  desirable 
for the Czech Republic to continue with its plans to diversify  its supply sources. 

Spent nuclear  fuel  is presently  stored  on site.  A longer term  interim  is projected  to start 
around  2005  for  both  Dukovany  and  Temelin  fuels.  A decision  on whether  to  reprocess 
spent fuel  or dispose of it as waste is not expected before  2015. 

Upon  accession,  the  Czech  Republic  would  need  to  comply  with  the  provisions  of  the 
Euratom  Treaty,  in  particular  those  related  to  supply  of  nuclear  material,  the  nuclear 
common  market,  safeguards,  health  and  safety  and  international  agreements.  As  it  is 
already  party  to  all  international  nuclear  regimes  and  has  a  full-scope  safeguards 
agreement  in  force  with  the  IAEA,  no  major  difficulties 
in  applying  Community 
legislation  are  expected  in  this  and  the  other  areas  mentioned  above.  Special  attention 
has  to  be  given  to  timely  implementation  of  nuclear  safety  programmes.  The 
development  of a nuclear safety  authority should be supported. 

Conclusion 

Provided  that  current  efforts  are maintained,  the  Czech  Republic  should  be  in a position 
to  comply  with  most  of  the  EC  energy  legislation  in  the  next  few  years.  However, 
matters  such  as the adjustment  of monopolies  including  import  and export  issues, access 
to  networks,  energy  pricing,  emergency  preparedness  including  the  building  up  of 
mandatory  oil  stocks,  state  interventions  in the  solid  fuels  and  uranium  sectors,  and  the 
development  of energy efficiency  and fuel  quality  standards need to be closely  followed. 

72 

No major  difficulties  are foreseen  for  compliance  with Euratom  provisions.  The  nuclear 
safety  standards should be tackled appropriately  tin order to bring all the nuclear plants to 
the safety  level required;  and longer term solutions for waste have to be  defined. 

Transport 

Community  transport  policy  consists  of  policies  and  initiatives  in  three  fundamental 
areas: 

• 

• 

• 

Improving  quality  by  developing  integrated  and  competitive  transport  systems 
based  on  advanced  technologies  which  also  contribute  to  environmental  and  safety 
objectives; 

Improving  the  functioning  of  the  single  market  in  order  to  promote  efficiency, 
choice  and  user-friendly  provision  of  transport  services  while  safeguarding  social 
standards; 

Broadening  the  external  dimension  by  improving  transport  links  with  third 
countries  and  fostering  the  access  of  EU  operators  to  other  transport  markets  (The 
Common Transport Policy Action programme,  1995-2000). 

The Europe Agreement  provides  for  approximation  of legislation  with  Community  law 
and  cooperation  aimed  at restructuring  and  modernising  transport,  improving  access  to 
the transport market, facilitating  transit and achieving operating standards comparable to 
those  in  the  Community.  The  White  Paper  focuses  on  measures  for  accomplishing 
Internal Market conditions in the transport sector, including such aspects as competition, 
legislative harmonisation and standards. 

Descriptive  Summary 

The geographical  situation  of the  Czech Republic, bordering  on the present  frontiers  of 
the  European  Union  and  marking  an  intersection  of  North-South  and  East-West 
communication  routes,  makes  it  a  transit  country  between  the  Member  States  and  the 
applicant  countries.  It  is  traversed  by  two  pan-European  transport  corridors.  The 
political  changes  at  the  beginning  of  the  1990s  led  to  a  significant  increase  in  traffic 
flows,  including  transit  traffic.  Although  the  road  network  is,  on  the  whole,  relatively 
well  developed,  it  is  still  unable  to  cope  with  road  transport  demand,  which  almost 
doubled  between  1990  and  1995.  The  modal  distribution  has  altered  distinctly  to  the 
detriment of rail and inland waterway transport and there has been a marked decrease  in 
collective  passenger  road  transport  due  to  a  rapid  rise  in  the  ownership  and  use  of 
private  vehicles.  Air  transport  is  expanding  at  a  steady  rate  (20%  per  year  at  Prague 
Airport). 

Current and Prospective  Assessment 

As  regards  completion  of  the  internal  market,  the  Czech  Republic  has  made  relatively 
good  progress  in  adoption  of  the  acquis.  The  Czech  international  transport  sector 
already broadly applies rules similar to  those of the Community,  in particular in the air, 
maritime,  inland  waterway,  combined  transport  and  passenger  road  transport  fields.  In 
the case of rail transport,  care  should  be taken to ensure the effective  application  of the 
acquis  ; the public service aspects and standardisation  of accounts need to be monitored 

73 

over the next  few  years. The road  haulage  sector  complies with  most  of the  provisions 
of  the  acquis  with  regard  to  international  traffic  but  the  operation  of  its  domestic  arm 
poses greater potential  risks. This aspect will require close attention and  is of particular 
importance  in  the  context  of  a  future  Union  without  internal  frontiers,  when  road 
haulage cabotage will be totally unrestricted. The Czech Republic will also have to align 
itself with the Community in respect of roadworthiness tests and road taxation. 

The  development  of  an  integrated  and  competitive  transport  system  is  an  objective  of 
which  the  Czech  authorities  are  aware;  achieving  an  acceptable  level  of  safety  and 
optimal use of the transport system are likely to be the two main difficulties.  The Czech 
Republic's  progress  on  safety  is  satisfactory.  In contrast,  the  objective  of  coherence  in 
the  transport  system  appears  harder  to  attain.  The  Czech  Republic  is  likely  to  face  a 
steady rise in the share of road transport and will have to focus  its efforts  on the use of 
railways and inland waterways. 

In  order  to  improve  links  with  the  Member  States  and  its  neighbours,  the  Czech 
Republic  is planning  to invest about ECU 2.7  billion  of its own budget  over the period 
1995-99  in  transport  infrastructure  used  by  international  traffic,  primarily  trans-
European corridors. This sum amounts to a respectable  1.2% of GNP,  yet even this will 
not  necessarily  cover  needs.  Any  reduction  in  this  amount  as  a  result  of  budgetary 
constraints would only serve to exacerbate this relative shortcoming. 

Conclusion 

The  Czech  Republic  has  made  notable  progress  in  the  adoption  of  the  acquis  in  the 
transport  sector.  Provided  that  it  improves  the  operation  of  its  domestic  road  haulage 
market  (in  particular  on  market  access,  safety  rules  and  tax)  and  the  financial 
transparency of the rail sector, the transport sector is unlikely to pose major  problems as 
regards adoption of the internal market acquis. 

It  will  be  necessary,  however,  to  make  sure  that  the  resources  needed  to  lay  the 
foundations  for the future  trans-European transport network extended to include the new 
member  countries,  are  made  available.  It  would  also  be  advisable  for  the  Czech 
Republic's  administrative  structures,  and  in particular  bodies  supervising  areas  such  as 
safety, to be rapidly  reinforced. 

Small and Medium  Enterprises 

EU enterprise policy  aims at encouraging  a favourable  environment  for  the  development 
of  SMEs  throughout  the  EU,  at  improving  their  competitiveness  and  encouraging  their 
Europeanisation  and  intemationalisation. 
It  is  characterised  by  a  high  degree  of 
subsidiarity.  The  complementary  role  of  the  Community  is  defined  and  implemented 
through  a  Multiannual  Programme  for  SMEs  in  the  EU.  This  programme  provides  the 
legal and budgetary  basis for the Community's  specific  SME policy  actions.  The  acquis 
has  so  far  been  limited  to  recommendations  on  specific  areas,  although  legislation  in 
other sectors also affects  SMEs (e.g. competition, environment, company law). 

The  Europe  Agreement  provides  for  co-operation  to  develop  and  strengthen  SMEs,  in 
particular  inthe  private  sector,  inter alia through provision  of information  and  assistance 

74 

on  legal,  administrative  and  tax  conditions.  The  White  Paper  contains  no  specific 
measures. 

Descriptive Summary 

The current Czech definition of SME covers enterprises with up to 500 employees. 

The vast majority  of enterprises are SME and 87 % of them are very small.  In industry, 
all of 98.5 % of companies have less than 50 employees.  The main sectors in terms of 
number  of enterprises  are retail or wholesale trade  (ca. 30 %) and  services (ca. 30 %), 
followed by the manufacturing industry (ca. 15 %) and construction (ca. 15 %). 

Important modifications  in the employment structure have taken place, in particular the 
absorption of part of the redundant labour force from agriculture and large state firms by 
small and medium sized enterprises, especially in the service sector. 

Current and Prospective Assessment 

Since 1991 the support for the small and medium enterprises (SME) as part of the private 
sector development  has been an important key to economic and employment  growth in 
the Czech Republic. 

All  general  regulations  for  establishing  and  operating  business  apply  also  to  SMEs in 
their  entirety,  so  no  distinction  is  made  according  to  size.  An  extensive  network  of 
regional  advisory  and  information  centres  has  now  been  set  up * to  support  the 
development of small and medium size enterprises, covering most of the territory of the 
Czech  Republic.  Two  SME  funding  operations  for  loans  and  guarantees  have  been 
launched. 

The  basic  legal  and  support  structures  are  in  place,  but  there  is  a  need  for  further 
refinement and increased coherence in policy for SMEs. 

The on-going efforts  to strengthen the SMEs during the pre-accession period will therefore 
need to be continued. 

Conclusion 

There are no specific problems regarding the Czech Republic's participation in this  field. 

3.5  Economic and Social  Cohesion 

Employment and Social Affairs 

Community  social  policy  has been developed  through  a variety  of  instruments  such as 
legal  provisions,  the  European  Social  Fund  and  actions  focused  on  specific  issues, 
including  public  health,  poverty  and the disabled.  The  legal  acquis covers health  and 
safety  at  work,  labour  law  and  working  conditions,  equal  opportunities  for  men  and 
women, social  security co-ordination for migrant workers and tobacco products.  Social 
legislation  in the Union has been characterised  by laying down minimum standards.  In 

75 

addition, the social  dialogue  at European  level  is enshrined  in the Treaty  (Article  118B), 
and  the  Protocol  on  social  policy  refers  to  consultation  of  the  social  partners  and 
measures to facilitate  the social dialogue. 

The  Europe  Agreement  provides  for  approximation  of  legislation  and  co-operation  on 
improving  standards  of  health  and  safety  at  work,  labour  market  policies  and  the 
modernisation  of  the  social  security  system.  It  also  provides  for  Community  workers 
legally  employed  in the Czech Republic to be treated  without  discrimination  on  grounds 
of  nationality  as  regards  their  working  conditions.  The  White  Paper  provides  for 
measures for approximation in all the areas of the acquis. 

Descriptive Summary 

In the field of social dialogue there are a number of organisations for employees.  The most 
representative  is the Czech and Moravian Chamber of Trade Unions which is a member of 
the  European  Trade  Union  Confederation  (ETUC).  On  the  employers'  side,  the  main 
association is the Confederation  of Employers which has joined the Union of Industrial and 
Employers'  Conference  of  Europe  (UNICE).  Generally,  the  Government's  policies  have 
not  helped  to  encourage  employers  to  negotiate  within  the  framework  of  the  social 
dialogue.  The trade unions are concerned that the Government does not take account of the 
opinion of the social partners, except on questions linked to wages and working  conditions 
of a company.  The social dialogue is not yet well established. 

Since  1993,  the  Czech  Republic  has  enjoyed  a  low  rate  of  unemployment.  In  1996. 
according  to  ILO  methodology,  it  was  3.4%..  Unemployment  is  higher  in  mono-sector 
areas.  It  is disputed  whether the  statistics reflect  the real  employment  situation.  The tight 
labour  market  has been  an extraordinary  feature  of the Czech transformation  process  until 
now. But the necessary economic restructuring is expected to lead to higher unemployment. 

A  network  of  regional  and  local  employment  offices  has  been  established  to  implement 
labour  market  policies.  The  Czech  Republic  has  successfully  embarked  upon  a policy  to 
make  the  labour  market  more  flexible  and  to  develop  the  appropriate  mechanisms  for 
functioning  labour markets.  With a continued effort  to supplement this with an appropriate 
range of labour market policy measures, this should ensure an efficient  allocation of labour 
and a capacity for continuous adaptation to structural change. 

With  the  exception  of  employment  policy  (share  of total  contribution:  0.2%  of  GDP), the 
pattern of spending is similar to the EU member states: the largest share of total  expenditure 
on social  security is spent on pensions (8.8% of GDP), followed  by health care expenditure 
(8.1%) of  GDP-1995  figures).  The  rapid  growth  in  the  health  sector's  share  of  GDP  (the 
share has risen from 5.4% in  1991 to 8.1% in  1995) brings the Czech Republic close to the 
OECD  average.  This  increase  has  been  accompanied  by  improved  welfare  for  the 
population. Continued  efforts  are required to ensure that measures of social protection  are 
developed. 

The Czech health system  needs to be improved. 

76 

Current and Prospective Assessment 

The  Czech  Republic  has  agreed  a  set  of  general  principles  concerning  the  protection  of 
health and safety  at work, but improvements will need to be made on the approximation  of 
legislation  for the protection  of health and  safety  of workers in specific  areas.  The  Czech 
Republic has independent inspection structures in accordance with the ILO Convention  N° 
81.  The  means  at  the  disposal  of  the  labour  inspectorates  are  likely  to  be  sufficient  to 
permit an effective  control of the conditions of health and safety at work. 

The  main  principles  of  European  labour  law are  already  implemented  in  the  Czech  legal 
system.  However,  adaptations  are  still  necessary.  A  new  Labour  Code  is  under 
preparation, which  seeks to bring  Czech law fully  into line with the acquis in the areas of 
protection of employees in case of insolvency of the employer and collective redundancies. 
On transfer  of undertakings,  information  of employees pn  the conditions  applicable  to the 
employment relationship and on working time, there is a need  for  minor  adaptations.  The 
information  and consultation  of workers as requested  by a number  of EC Directives  must 
be further  developed. 

Concerning  equal opportunity, the basic provisions of EC non discrimination  law between 
women and men are covered. 

Concerning  the  right  to  the  free  movement  of  workers,  there  would  appear  to  be  no 
obstacles to prevent the Czech Republic from being able to implement the provisions of the 
acquis  in  this  area.  The  introduction  of  the  right  to  free  movement  will  however  require 
changes  in the national  law, particularly  as regards access to  employment  and  a  treatment 
free from discrimination on grounds of nationality. 

In  the  field  of  social  security  for  migrant  workers  accession  does  not,  in  principle,  pose 
major  problems, although certain technical  adaptations will be necessary.  More  important 
is the administrative  capacity to apply the detailed co-ordination rules in co-operation  with 
other countries.  The Czech Republic appears to have many of the administrative  structures 
required  to  carry  out  these  tasks,  but  further  preparation  and  training  will  be  necessary 
before the accession. 

The two EC directives on the warning labelling of cigarettes packages and the maximum tar 
content  have  not  yet  been  transposed  into  national  law.  An  amendment  to  an  existing 
Czech  National  Council  Act  is  under  consideration  which  would  comply  with  EC 
requirements. 

Conclusion 

Provided  the  Czech  Republic  pursues  its  efforts,  both  in  terms  of  adoption  and  of 
application  of  the  EU  acquis,  the  Czech  Republic  is  likely  to  be  able  to  take  on  the 
obligations of EC membership in the social area in the medium term. 

Regional Policy and  Cohesion 

In accordance with Title XIV of the Treaty, the Community  supports the strengthening  of 
cohesion,  mainly  through  the  Structural  Funds.  The  Czech  Republic  will  have  to 

77 

implement  these  instruments  effectively  whilst  respecting  the  principles,  objectives  and 
procedures which will be in place at the time of its accession. 

The  Europe  Agreement  provides  for  co-operation  on  regional  development  and  spatial 
planning,  notably  through  the  exchange  of  information  between  local,  regional  and 
national  authorities  and  the  exchange  of  civil  servants  and  experts.  The  White  Paper 
contains no specific provisions. 

Descriptive  Summary 

In  1995,  the  Czech  GDP/capita  amounted  to  55%  of  the  EU  average.  The  national 
unemployment  rate  stood  at  3-4%.  The  unemployment  rate  is  expected  to  increase 
somewhat  in  the  coming  years  as  a  result  of  the  necessary  restructuring  of  large 
privatised  companies.  Looking  at the regional  unemployment  rates  shows that  although 
comparatively  low in all parts of the Czech Republic, important disparities exist  between 
the  most  affected  region  (Most  -  Northern  Bohemia :  7.2  %)  and  the  best  performing 
region (Prague  : 0.4 %). 

Currently,  the  Czech  republic  has  no  regional  policy.  Indeed,  regional  development 
initiatives  are  implemented  through  sectoral  policies  at  national  level.  Economically 
weak  areas  are  selected  annually  on  the  basis  of  principally  unemployment  rates.  In 
1996,  for  example,  the  chosen  area  covered  18.4  %  of  the  population  of  the  Czech 
Republic. 

A  Ministry  for  Regional  Development  has  recently  been  established.  There  exists  no 
elected body  between the  State and the communes  although the constitution  foresees  the 
establishment  of the so-called territorial units of self-administration.  At district level (77 
units),  the  authorities  are  bodies  of  state  administration  with  general  competencies  (no 
self government). 

6233  self governing  municipalities  are responsible  for  territorial  development  (town  and 
country planning rather than local economic policy). 

The  Czech  republic's  financial  instruments  at  the  disposal  of  regional  development 
initiatives are limited. However, the share of total development related expenditure which 
could  constitute  counterpart  funds  to  EC  structural  policy  cannot  yet  be  determined. 
Therefore,  the  Czech  republic's  co-financement  capacity  cannot  presently  be  evaluated 
with sufficient  reliability. 

Current  and Prospective  Assessment 

The  Czech  Republic  lacks  an  independent  regional  development  policy.  As  mentioned 
above,  regional  development  initiatives  are  implemented  through  the  overall  Czech 
development  policy. 

Since mid  1996, a more active approach to regional  development  has been adopted.  The 
establishment  of  the  Ministry  of  Regional  Development  will  contribute  to  clarify 
responsibilities  at  government's 
interministerial  co 
ordination. 

level  and  possibly 

improve 

78 

Yet,  Czech  authorities  still  have  to  introduce  important  reforms  to  comply  with  EC's 
Structural policies.  Indeed,  the  Ministry  of  Regional  Development  has to  insure  proper 
co-ordination  mechanisms  at  national  level.  Financial  resources  at  the  disposal  of 
regional policy should be increased and efficient  instruments need to be created.  Finally, 
Czech  authorities  have to  determine  the  future  legal  basis  of  a  Czech  regional  policy  in 
order  to  provide  the  appropriate  legal  structure  for  the  actions  envisaged  to  counteract 
regional disparities and for financing structural policy expenditure. 

Conclusion 

With  the  perspective  of  accession,  the  Czech  Republic  still  needs  to, establish  a  legal, 
administrative  and  budgetary  framework  for  an integrated  regional  policy  and  ensure  its 
compliance with EU rules. Given the Czech Republic's  administrative  capacity  and  with 
the  necessary  political  awareness,  this  should  be  achieved  within  a  reasonable  time 
frame.  Therefore,  subject  to  the  introduction  of  the  necessary  reforms,  the  Czech 
Republic should be able to, in the medium-term, apply the Community rules and  channel 
effectively  the funds from the EU structural policies. 

3.6  Quality  of  Life  and  Environment 

Environment 

The  Community's  environmental  policy,  derived  from  the  Treaty,  aims  towards 
sustainability  based  on  the  integration  of  environmental  protection  into  EU  sectoral 
policies, preventive  action, the polluter pays principle, fighting  environmental  damage  at 
the source, and shared responsibility.  The acquis comprises approximately 200 legal acts 
covering a wide range of matters, including water and air pollution, management of waste 
and chemicals, biotechnology, radiation protection, and nature protection.  Member states 
are  required  to  ensure  that  an  environmental  impact  assessment  is  carried  out  before 
development consent is granted for certain public and private projects. 

The Europe Agreement  stipulates that Czech development policies shall be guided by the 
principle  of  sustainable  development  and  should  fully 
incorporate  environmental 
considerations.  It  also  identifies  environment  as a priority  for  bilateral  co-operation,  as 
well as an area for approximation legislation to that of the Community. 

The  White Paper  covers  only  a small part  of the environmental  acquis, namely  product-
related legislation, which is directly related to the free circulation of goods. 

Descriptive  Summary 

In  1989,  what  is  today  the  Czech  Republic  was  one  of  the  most  polluted  regions  of 
Central Europe.  Since then, however, the situation has improved considerably, as a result 
of the high level of environmental investment, but also due to industrial restructuring. 

The  main  environmental  challenge  in  the  Czech  Republic  is  air  pollution.  Though 
significant  progress has been made (from  1989 to  1994, sulphur dioxide emissions fell by 
36%, emissions of nitrogen oxides by 60% and particulate emissions by 49%), emissions 
of  sulphur  dioxides  and  nitrogen  oxides  remain  high  and  require  further  measures  in 
industry,  transport  and  energy  production.  Uncontrolled  landfill  with  hazardous  and 

79 

solid waste  is another  major  problem  inherited  from  the past.  Problems  in water  quality 
are  less  urgent,  but  nonetheless  very  expensive  to  address.  There  are  a  number  of 
industrial  regions in decline which are particular environmental  blackspots, most  notably 
the Black Triangle and Ostrava. 

Czech environmental  legislation comprises a framework  Environmental  Protection Act of 
1992  and  numerous  sectoral  regulations,  some  of  them  dating  back  to  the  communist 
period.  Policy priorities are set out in the State Environmental  Policy  approved  in  1995, 
which  comprises  short-,  middle-  and  long-term  priorities.  The  Czech  Republic  makes 
extensive  use  of  fiscal  and  economic  instruments.  The  level  of  public  environmental 
expenditure  in terms of percentage  of GDP exceeds the level in most  of the  EU  member 
states. 

Whereas a number of  basic environmental policies are in place, weaknesses in the Czech 
environmental  system  include  inadequate  enforcement  and  inefficiency  of  economic 
instruments  by  low  level  of  fines,  gaps  in  sectoral  and  subsidiary  legislation  covering 
implementation, and low environmental awareness and public participation. 

Current and Prospective Assessment 

Formal  compliance  with  the  EC  acquis  has  progressed  in  recent  years.  The  basic 
framework  legislation  is  present  but  there  are  gaps  in  sectoral  legislation  and  in 
secondary legislation governing economic instruments, implementation  and  enforcement. 
Particular  attention  should  be  given  to  the  quick  transposition  of  framework  directives 
dealing  with  air,  waste  and  water  and  the  Integrated  Pollution  Prevention  and  Control 
(IPPC) directive, as well as the establishment  of financing  strategies for  legislation  in the 
water,  air  and  waste  sectors  requiring  major  investments.  Assuming  that  forthcoming 
acts  (eg. waste, chemicals  and  genetically  modified  organisms)  are adopted  according  to 
legislative  plans,  formal  compliance  with  the  EC  acquis  will  increase  significantly  over 
the coming few years. 

The  Czech  Republic  has adopted  or is preparing  legislation  for  most  of the critical  areas 
contained  in  the  White  Paper.  Waste  management  is  a  somewhat  neglected  area  at 
present but proposed legislation is focusing  on plugging this gap. 

Substantive  compliance  to  the  EC  acquis  is  still  low  in  certain  areas,  and  the  Czech 
Republic  will  need  to  focus  on  efficient  implementation  and  enforcement,  including 
efficiency  of  economic  instruments.  Important  investment,  both  public  and  at  enterprise 
level,  will  be  needed.  Accompanying  mechanisms,  such  as  licensing  systems  or  public 
participation  have to be established  or improved and institutions  involved  in  enforcement 
and  implementation  need  to  be  reinforced.  The  country's  environmental  accession 
strategy  should  include  implementation  timetables  for  meeting  the  EC  environmental 
acquis  starting  amongst  others  with  implementation  of  the  framework  and  IPPC 
directives mentioned above. 

Conclusion 

With  present  commitment  maintained  and  existing  levels  of  investment  and  provided 
planned  legislation  and the comprehensive  environmental  accession  strategy  are  adopted 
and  implemented,  transposition  of  the  whole  environmental  acquis  as  well  as  effective 

80 

compliance  with  important  elements  of  it  (e.g.  aspects  of  the  air  quality  legislation, 
environmental  impact  assessment,  industrial  risks  and  chemicals  legislation)  should  be 
achieved in the medium term. However, effective  compliance with a number of pieces of 
legislation requiring a sustained high level of investment and considerable  administrative 
effort  (e.g.  urban  waste  water  treatment,  drinking  water,  aspects  of  waste  management 
and air pollution legislation) could be achieved only in the long term. 

Consumer  Protection 

The  Community  acquis  covers  protection  of  the  economic  interests  of  consumers 
(including  control  of  misleading  advertisement,  indication  of  prices,  consumer  credit, 
unfair  contract terms, distance selling, package travel, sales away from  business premises 
and timeshare property) as well as the general  safety  of goods and the specific  sectors  of 
cosmetics, textile names and toys. 

The  Europe  Agreement  provides  for  the  harmonisation  of  legislation  with  Community 
law and co-operation with a view of achieving  full  compatibility  between the systems of 
consumer protection in the Czech Republic and the Community.  Stage I measures of the 
White  paper  focus  on  improving  product  safety,  including  cosmetics, textile  names  and 
toys, and on the protection  of the economic  interests  of the consumer,  notably  measures 
on  misleading  advertising,  consumer  credit,  unfair  contract  terms  and  indication  of 
prices.  Stage II measures relate to package travel, sales away from business premises and 
time-share  property.  New  EC  legislation  which  has  been  adopted  recently  (distance 
selling) or will be adopted soon (comparative advertising, price indication) will also need 
to be taken into account. 

Descriptive  Summary 

An  act  on  Consumer  protection  was  adopted  in  1992  and  amended  in  1993  and  1995. 
There  is  no  separate  body  in  charge  of  consumer  protection,  and  none  appears  to  be 
planned.  The overall  responsibility  for  consumer  affairs  lies with the  Ministry  of  Trade 
and  Industry  although  other  ministries  or  institutions  also  play  an  important  if  indirect 
role on consumer protection issues. 

General consumer awareness is low.  The consumer movement has been slow to develop, 
and  there  is no  national  organisation  representing  all  Czech  consumers.  There  are  three 
active regional and local consumer groups. 

Current  and  Prospective  Assessment 

On  the  protection  of  economic  interests  of  consumers,, the  Czech  legislation  on  the 
indication  of  prices  is  close  to  EC  legislation,  and  a  draft  law  is  under  preparation  on 
consumer  credit..  But  the  approximation  on  misleading  advertising  is  very  incomplete 
compared to EU requirements. 

The existing legislation  on unfair  contract terms would  need to be substantially  amended 
to cover the main subject  matters of the EC directive in this area.  There is no  legislation 
in  a  number  of  fields  of  importance  to the  consumer  such  as  sales  away  from  business 
premises, distance selling, package travel and timeshare property. 

81 

Most of the major  EC concepts and obligations on general product safety  and dangerous 
imitations  have  been  incorporated  into  Czech  legislation.  In  some  cases  Czech  laws 
guarantee a better level of protection than EU standards but some important elements are 
missing.  For the specific  sectors, there is legislation on the textile names, and the first 
working proposal for a government regulation to implement the directive on the safety of 
toys  is  under  preparation.  The  legislation  on  cosmetics  is  not  in  line  with  EC 
requirements yet but a new draft decree is underway. 

The development of a strong and independent consumer movement, sustained by public 
authorities, will need to accompany the introduction of the acquis. 

Conclusion 

Considerable  work  on approximation  is needed to bring  Czech measures  on consumer 
policy into line with the EC acquis in the medium term.  Although there is a good degree 
of compatibility  with EC standards in Czech priority  areas such as the safety  of goods, 
indication of prices and textile names, there are other sectors with no legislation.  There is 
also a need to co-ordinate and organise the responsibilities  of the different  institutional 
bodies  involved  in  consumer  protection  as  well  as  to  ensure  the  implementation  of 
legislation. 

3.7 

Justice  and  Home  Affairs 

The Present Provisions 

The Justice and Home Affairs  (JHA) acquis principally derives from  the framework  for 
cooperation set out in Title VI (Article K) of the Treaty on European Union (TEU), "the 
third  pillar",  although  certain  "first  pillar"  (EC  Treaty)  provisions  and  legislative 
measures are also closely linked. 

The  EU  JHA  framework  primarily  covers:  asylum;  control  of  external  borders  and 
immigration;  customs  cooperation  and  police  cooperation  against  serious  crime, 
including  drug trafficking;  and judicial cooperation on criminal  and civil  matters.  The 
TEU  stipulates  key  principles  upon  which  such  cooperation  is  based,  notably  the 
European Convention on Human Rights and the  1951 Geneva Convention on the Status 
It  is  also  based  implicitly  on  a  range  of  international  conventions 
of  Refugees. 
concerning  its  fields  of  interest,  notably  those  of  the  Council  of  Europe,  the  United 
Nations  and  the  Hague  Conference.  The  legislative  content  of  third  pillar  acquis is 
different  from the first pillar; it consists of conventions, joint actions, joint positions and 
resolutions, (including the agreed elements of draft instruments which are in negotiation). 
A number of EU conventions  (including the  1990 Dublin Convention, and conventions 
relating to extradition, fraud  and EUROPOL) have been agreed by the Council and are 
now  in  the  process  of  ratification  by  national  Parliaments;  several  other  conventions, 
including  one  on external  frontiers  are in various  stages of negotiation  in the Council. 
The JHA acquis involves a high degree of practical  cooperation,  as well  as  legislation 
and its effective  implementation. 

82 

The New Treaty 

For  many  of  the  above  matters,  the  entry  into  force  of  the  Treaty  resulting  from  the 
Amsterdam Inter-Governmental  Conference  will mark the end of the current  cooperation 
framework. 

Reiterating the objective  of developing the Union into an "area of  freedom,  security  and 
justice",  the  new  Treaty  brings  these  matters,  including  the  free  movement  of  persons, 
asylum and immigration, into the Community's sphere of competence. 

On  the  free  movement  of  persons  in  particular,  the  new  Treaty  provides  for  the 
incorporation  of  the  Schengen  acquis  into  the  framework  of  the  European  Union  and 
binds any candidate for EU membership to accept that acquis in full. 

With  regard  to  matters  remaining  within  the  cooperation  framework,  i.e.  policing  and 
criminal justice, the new Treaty provides for the reinforcement  of the cooperation  system. 

The Europe Agreement and the White Paper 
The Europe Agreement includes provision for cooperation in the fight against drug abuse 
and money laundering. 

The White Paper does not deal directly with third pillar subjects, but reference  is made to 
first pillar matters such as money laundering and freedom of movement of persons which 
are closely related to Justice and Home Affairs  considerations.  Reference  is also made to 
the Brussels and Rome conventions. 

Descriptive  Summary 

General Preconditions for  JHA  Cooperation 

The  Czech  Republic  joined  the  Council  of  Europe  in  1993  and  has  ratified  the  most 
important  instruments  concerning  human  rights.  The  Constitution  provides  for  an 
independent judiciary according to the rule of law. 

Institutional  reform  of  JHA  institutions  is  progressing  satisfactorily.  The  Constitution 
guarantees data protection, but the  Czech Republic's domestic  legislation will need to be 
amended  if  it  is  to  fully  comply  with  Community  requirements. 
(See  also  separate 
section on Single Market). 

Asylum 

The  Czech  Republic  has  ratified  the  Geneva  Convention  and  the  1967  New  York 
Protocol.  The  Charter  of  Fundamental  Rights  and  Freedoms  guarantees  the  right  to 
asylum.  Czech  legislation  and policy  (inherited  from  the Czechoslovak  Republic, dating 
from  1990)  is  currently  being  revised  to  bring  the  Czech  Republic  into  line  with  EU 
standards  including  the  principles  of  "safe  country  of  origin"  and  "safe  third  country". 
Asylum  applications  are handled  by the Directorate  of Aliens  and Border  Police  Service 
of the  Police  Presidium.  There  were  2,100  asylum  applicants  in  1996, and  some  1,200 
temporary  refugees  from  former  Yugoslavia.  New  aliens  legislation  in preparation  will 
cover legal provisions for granting temporary protection. 

83 

Immigration/Border Control 

Since  1989  there  has  been  a  very  large  increase  in  the  number  of  foreign  nationals 
resident  in the Czech  Republic  (now approximately  200,000 ).  A current major  priority 
for  the  Czech  Government  is  to  bring  these  migration  flows  under  control.  Residence 
and  work  permits  are  required  for  employment,  but  there  are  special  rules  for  Slovaks 
given  their  close  family  and - residence  links  with  the  Czech  Republic.  The  Czech 
authorities  are preparing  new aliens legislation which will, among  other things,  stipulate 
that  all  visas  must  be  issued  abroad  and  also  cover  the  registration  of  foreign  nationals 
within  the  country.  The  Czech  Republic  is  working  to  deal  with  expulsion  of  illegal 
IOM. 
immigrants 
Readmission agreements are in place with the Czech Republic's direct neighbours as well 
as  Hungary,  Romania,  Canada  and  France.  It  is  working  to  bring  border  management 
systems up to EU standards, but is hampered by the lack of technical equipment to check 
machine-readable  documents  and the fact  that  its  internal  communication  system  is  not 
compatible with international norms. 

including  seeking  cooperation  from 

in  a  structured  manner, 

Police Cooperation 

Organised  crime  exists  in  the  Czech  Republic  in  the  fields  of  trafficking  of  arms, 
explosives  and  nuclear  materials,  trafficking  in  women,  prostitution,  money  laundering, 
tax fraud,  and smuggling of stolen vehicles; violence and extortion are used.  Specialised 
drugs  and organised  crime units have been established  in the police  force  to tackle  these 
crimes  more  effectively.  The  legal  framework  for  tackling  organised  crime  is  being 
revised  and  strengthened.  The  Czech  Republic  has  ratified  the  money  laundering 
convention and domestic legislation is also in place.  (See also separate section on Single 
Market).  The  Czech  Republic  experiences  no  specific  threat  from  terrorism,  but  the 
Government  has  taken  preventive  action  to  bar  entry  to,  and  detain,  suspected 
international terrorists. 

Drugs 

The  Czech  Republic  is  a  transit  country  for  drug  trafficking.  Domestic  demand  is 
significant.  Quantities  of heroin,  cocaine  and  amphetamines  have  been  seized  in  recent 
years.  The  Czech  Republic  has  ratified  the  main  international  drugs  conventions. 
Domestic  anti-drugs  legislation  is  largely  in  place,  with  a  new  law  on  drug  precursors 
currently  in  preparation  (manufacture,  import  and  sale  of  drugs  are  criminal  offences). 
Anti-drugs units have been established  in the police and customs and are obtaining  some 
good  results.  A  National  Anti-Drugs  Policy  has  been  in  place  since  1993,  bringing 
together  all relevant public and private bodies to tackle drug abuse and trafficking  within 
the country.  This is coordinated by the National Drugs Commission. 

Judicial  Cooperation 

The judiciary  is being  prepared  for  EU  accession.  In  general  the  level  of  expertise  and 
efficiency  of the  court  system  is relatively  low.  Steps  are  being  taken to  upgrade  them, 
but  substantial  efforts  remain  necessary.  The  Czech  Republic  has  signed  or  ratified  the 
main  international  criminal  conventions in the field of judicial  cooperation  and  is putting 

84 

in place domestic measures to operate these conventions.  On the civil  side it has  ratified 
very  few  conventions  (maintenance  and  taking  of  evidence).  The  Czech  Republic  is 
planning to apply for accession to the Lugano Convention. 

Current and Prospective  Assessment 

There are some important gaps still to be filled  in the Czech Republic's legislation but  for 
the most part the legislation is either in place or in preparation.  An important priority  for 
the  near  future  will  be  improving  communication  systems  in  the  field  of  border 
management,  and  bringing  migration  flows  under  control.  It  will  also  be  important  to 
maintain and develop effective  systems for combating organised crime. 

The  main  institutional  problems  lie  in  the  field  of  resource  constraints,  the  lack  of 
expertise with new  legislation  in the police and judiciary,  and the impact  of  institutional 
corruption.  The  Government  is  taking  active  steps  to  prepare  the  institutions  for 
participation  in the JHA process.  The Czech Republic  already  has in place  a small  core 
of  officials  who  are  gaining  experience  of  cooperation  with  EU  countries  and  it  can  be 
expected that this capacity will develop further  in the coming years. 

Conclusion 

The  Czech  Republic  is  likely  to  meet  the justice  and  home  affairs  acquis  (present  and 
future)  within  the  next  few  years, assuming  progress  continues  at  the  current  rate.  The 
judiciary  and  police  require  particular  attention,  as  well  as  the  evolution  of  the  Czech 
Republic's efforts  to combat drugs and organised crime. 

3.8 

External  Policies 

Trade and International Economic  Relations 

The  acquis  in  this  field  is  made  up  principally  of  the  Community's  multilateral  and 
bilateral  commercial  policy  commitments,  and  its  autonomous  commercial  defence 
instruments. 

The  Europe  Agreement  includes  provisions  in  several  areas  requiring  parties  to  act  in 
accordance with  WTO/ GATT principles, or other relevant international obligations. 

The White Paper includes no provisions in this field. 

Descriptive  Summary 

The  Czech  Republic  has  developed  an  open,  trading  economy  and  is  a  member  of  the 
World  Trade  Organisation  (WTO).  Upon  accession  the  Czech  Republic  would  have  to 
comply  with  the  obligations  of  the  plurilateral  WTO  agreements  to  which  the 
Community  is a party. 

At present the Czech Republic does not maintain quantitative restrictions on any textile 
or clothing products.  On accession the Community textiles policy would be extended to 
the Czech Republic; any Community restrictions still maintained at the date of accession 
would require adjustment  by an appropriate amount to take account of Czech accession. 

85 

Current and Prospective Assessment 

On  accession  the  Czech  Republic  would  have  to  apply  the  Community's  Common 
Customs Tariff,  and the external  trade provisions  of the  Common Agricultural  Policy. 
The  post  Uruguay  Round  weighted  average  levels  of  most  favoured  nation  duties  for 
industrial products will be 3.8% for the Czech Republic and 3.6% for the Community. 

In its relations with international organisations, the Czech Republic should ensure that its 
actions  and  commitments  respect  the  Europe  Agreement  and  ensure  a  harmonious 
adoption of its future obligations as a member of the Community. 

On  accession  the  Czech  Republic  would  become  party  to  the  Community's  various 
preferential  agreements.  Preferential  agreements between the Czech Republic and third 
countries would, in general, have to be terminated on accession. 

In the area of trade in services and establishment the Czech Republic has already made 
good  progress,  and  it  should  be  possible  to  resolve  any  remaining,  significant 
inconsistencies  between  the  commitments  of  the  Czech  Republic  and  those  of  the 
Community. 

In  April  1997  the  Czech  Republic  introduced  an  import  deposit  scheme  for  a  large 
number of consumer products, which is not in conformity  with the Europe Agreement. 
This scheme should be withdrawn. 

On accession the Czech Republic would have to repeal national legislation in the field of 
commercial defence instruments, and EC legislation would become applicable there. 

Experience from previous accessions has shown that the automatic extension of existing 
anti-dumping measures to new member states prompts third countries to raise problems 
in terms of the compatibility of this approach with relevant WTO provisions.  It has also 
shown  that  accession  creates  a  potential  for  circumventing  measures  adopted  by  the 
Community  under  the  commercial  defence  instruments.  This  happens  when,  prior  to 
accession, substantial  quantities of the products subject  to measures are exported to the 
territory of the future member state and, on accession, are automatically released for  free 
circulation  in  the  enlarged  customs  territory.  These  two  problems  would  have  to  be 
addressed during the Czech Republic's pre-accession phase. 

The  Czech  Republic  is  a  member  of  three  out  of  four  existing  regimes  for  the  non-
proliferation  of weapons of mass-destruction,  and is a candidate for  membership of the 
fourth.  The Czech Republic's list of dual-use goods and technologies is presently being 
updated and is expected to correspond with the Community control list of dual-use items, 
enhanced  by  the  chemicals  items  belonging  to  the  regime  of  the  Chemical  Weapons 
Convention.  Arms  export  is  also  controlled.  The  Czech  Republic  should  have  no 
problems applying EC legislation in this  field. 

86 

Conclusion 

The Czech Republic is well placed to be able to meet Community requirements  in this 
field in the medium term, provided they reinforce their efforts  to eliminate existing trade 
barriers in order to align themselves more closely with the Community trade regime. 

Development 

The acquis in the development  sector is made up principally  of the Lomé Convention, 
which runs until early 2000. 

Neither the Europe Agreement or the White Paper include provisions in this  field. 

Descriptive Summary 

The Czech Republic has no preferential trade agreements with ACP countries.  However, 
under  its GSP scheme, the Czech Republic grants preferential  treatment  in the form  of 
reduced duties to a number of ACP countries, and grants duty free access to those ACP 
countries considered as Least Developed Countries. 

The Czech Republic has a modest but well established system of development aid which 
falls  into two basic categories: development aid and humanitarian aid. Development aid 
is  provided  both  bilaterally  (US  $20.25  million  in  1996), and  multilaterally  (through 
voluntary  contributions  to the UN bodies  as well  as to the World  Bank,  including  the 
International Development Association, and the IMF). 

Current and Prospective Assessment 

On accession, the Czech Republic should apply its preferential  trade regime to the ACP 
States and participate, together with the other member states, in financing the European 
Development Fund (EDF), which provides financial aid under the Lomé Convention. 

Applying the Lomé trade regime should not generally be a source of difficulties  for the 
Czech Republic. 

Normally, new member states accede to the Lomé Convention by means of a protocol on 
the date of their accession to the EU. 

Conclusion 

The Czech Republic is well placed to be able to meet EU requirements in this field in the 
next few years. 

Customs 

The  acquis  in  this  sector  is  the  Community  Customs  Code  and  its  implementing 
provisions; the  EC's  Combined  Nomenclature;  the  Common  Customs  Tariff  including 
trade  preferences,  tariff  quotas  and  tariff  suspensions;  and  other  customs-related 
legislation outside the scope of the customs code. 

87 

The Europe Agreement covers the establishment of a free trade area with the  Community 
and the progressive removal  of customs duties on a wide range of products, according  to 
clear timetables starting from the date of entry into force of the agreement. 

The  White  Paper  includes  in  Stage  I,  measures  to  consolidate  and  streamline  the  free 
trade established  under the Europe Agreement,  including  legislation  compatible  with the 
Customs Code, Combined Nomenclature, etc.  Stage II concerns the adoption  of the  full 
Community legislation, with a view to joining the customs union upon accession. 

Descriptive  Summary 

On  accession  the  Czech  customs  authorities  would  be  required  to  assume  all  the 
responsibilities  necessary  for the protection and control  of their part of the EU's  external 
border.  (Whether  the  Czech  Republic  would  be  responsible  for  the  EU's  external  land 
frontier  would  depend  on which  other countries acceded  at the  same time).  Besides  the 
provisions  on  indirect  taxation,  the  Czech  customs  authorities  would  be  responsible  for 
the implementation  and enforcement  at the external border of the Community's  common 
commercial policy, the common agricultural policy, the common fisheries policy etc. 

The  Czech  Republic's  capacity  fully  to  apply  the  acquis  presupposes  the  possibility  to 
adopt  and implement  the Community  legislation;  and the  existence  of an  adequate  level 
in  terms  of  computerisation  and 
in  particular 
of  infrastructure  and  equipment, 
investigation  means  and  the  establishment  of  an  efficient  customs  organisation  with  a 
sufficient  number of qualified  and motivated staff  showing a high degree of integrity. 

With the support of the technical assistance provided by customs programmes, the  Czech 
Republic  has achieved  almost  full  compatibility  of the  Czech  customs  legislation  to  the 
Community's customs code. 

The  Czech  Republic  has  aligned  its  national  goods  nomenclature  to  the  Community's 
Combined  Nomenclature  as  of  1 January  1996.  In  addition,  a  Czech  Integrated  Tariff 
already  exists.  This  will  greatly  facilitate  the comparison  of the  Czech  tariff  rates  with 
the  Common  Customs  Tariff  rates.  The Czech  Republic  also  operates  a Binding  Tariff 
Information  System similar to the one applied in the Community. 

The Czech Republic  adopted on  1 January  1997 the new system of cumulation  of  origin 
between European countries. 

The  Czech  Republic  became  a  contracting  party  to  the  EC/EFTA  Common  Transit 
Convention and to the Convention on Simplification  of Formalities on  1  July  1996. 

Current and Prospective  Assessment 

The  Czech  Republic  would  need  to  adapt  its  national  procedures  to  the  Community 
legislation  regarding  suspensive  arrangements  and  customs  procedures  with  economic 
impact.  At the moment of accession,  some technical transitional  arrangements  would  be 
needed,  notably  for  operations  beginning  before  the  date  of  accession  but  which  are 
concluded after that date. 

88 

The  import  deposit  scheme  operated  by  the  Czech  Republic  is  a  measure  having 
equivalent  effect  to  a  quantitative  restriction.  Consequently  this  scheme  should  be 
abolished as soon as possible. 

Tax-free  shops at land borders have been allowed by the Czech republic* since  1991 under 
national  legislation.  At  the  moment  there  are  six  duty-free  shops  at  land  borders  with 
Germany  and  ten  duty-free  shops  at  land  borders  with  Austria.  These  shops  are  not 
allowed  at  land  borders  inside  the  EC  territory,  therefore  the  abolition  of  this  kind  of 
facility  would be a condition for accession.  The Czech authorities  should  accelerate the 
dismantling of these shops as soon as possible. 

It will be important that the Czech customs authorities can participate appropriately in the 
various  computerised  systems  necessary  for 
the  customs 
union/internal  market,  of  the  customs  and  indirect  tax  provisions,  as  well  as  the 
computerised  systems  for  mutual  administrative  assistance  in  customs,  agricultural  and 
indirect tax matters. 

the  management, 

in 

The  Czech  Republic  would  need  on  accession  to  dismantle  customs  controls  at  the 
borders with EU member  states and with other acceding  countries.  The resources  which 
could be needed for the reinforcement  of the border posts along the external land frontiers 
which the Czech Republic may  have with non-EU member  states should  be taken  it into 
account in its strategic planning. 

Finally,  a  potential  for  a  problem  exists  arising  from  the  customs  union  between  the 
Czech  Republic  and  Slovakia,  in  the  event  that  these  two  countries  do  not  accede 
simultaneously to the Community. 

Conclusion 

The  Czech  Republic  is  making  a  major  effort  to  align  its  organisation  and  staff  to  the 
duties that have to be carried out by a modern customs  administration. 

If  it  reinforces  its  efforts,  particularly  in  relation  to  project  management  in  the 
computerisation  area, the Czech Republic should be ready to fulfil  the responsibilities  of 
an EC customs administration within the next few years. 

Common  Foreign  and  Security  Policy 

Since  1989,  the  foreign  and  security  policy  of  the  Czech  Republic  (prior  to  1993, 
Czechoslovakia)  has  been  reoriented  towards  European  and  Euro-Atlantic  integration. 
The Czech Republic has been an active participant in the dialogue arrangements provided 
for  under  the  Union's  Common  Foreign  and  Security  Policy  and  whenever  invited  has 
supported EU actions within that  framework. 

The  Czech Republic  is a member  of the UN, OSCE, Council  of Europe  and  many  other 
international  organisations.  It is an associate partner of WEU, participates in the NACC, 
the  PfP  and  has  made  clear  its  desire  to  become  a  member  of  the  WEU  and  NATO  as 
soon  as possible;  it has  been  invited  to open  negotiations  for  membership  of NATO.  It 
has sent troops to participate in IFOR/SFOR.  It also participates in a number of regional 

89 

organisations  including  CEFTA  and  the  CEI,  although  it  does  not  favour  further 
institutionalisation of regional co-operation. 

There are no territorial disputes between the Czech Republic and any member state of the 
Union.  Neither does it have any territorial or other disputes with neighbouring associated 
countries.  The Czech Republic, largely within the framework of the Stability Pact, has 
signed  with  all  neighbouring  countries  new  treaties  in  respect  of  state  frontiers  or 
negotiated the succession in respect of existing treaties.  There remain some minor issues 
to be settled with the Slovak Republic. 

The Czech Republic has a sizeable diplomatic service which would permit it as a member 
of  the  Union  to  play  a  significant  role.  It  maintains  89  representations  abroad  and 
employs 785 diplomatic staff. 

The  Czech  Republic  supports  non-proliferation  of  nuclear,  biological  and  chemical 
weapons  and  is  a signatory  to  all  relevant  international  agreements.  It exercises  strict 
control concerning the dual use of technology, being a member or candidate member of 
all the major existing export control regimes.  The Czech armed forces, which are under 
democratic  control,  are  being  reorganised  to  meet NATO  requirements.  The  defence 
industrial base has suffered  from a number of major problems and is also in the process 
of re-organisation. 

The  Czech  government  has  confirmed  to the  Commission  that  it  is  ready  and  able  to 
participate fully and actively in the Common Foreign and Security Policy. 

The assessment of Czech foreign and security policy to date leads to the expectation that 
as a member it could effectively  fulfil  its obligations in this  field. 

3.9 

Financial  Questions 

Financial Control 

The implementation of Community policies, especially for agriculture and the Structural 
Funds, requires  efficient  management  and control  systems  for  public expenditure, with 
provisions to fight fraud.  Approximation of legislation is moreover needed to allow the 
system of "own resources" to be introduced, with satisfactory provision for accounting. 

The Europe Agreement provides for cooperation in audit and financial control, including 
technical assistance from  the Community  as appropriate.  The White Paper includes no 
measures in this  field. 

Descriptive Summary 

The  Supreme  Audit  Office  (SAO)  which  has  existed  since  1993  is  an  independent 
external control authority, answerable only to Parliament (which nominates the president 
and  vice-president).  The  SAO  is  responsible  for  controlling  the  management  of  State 
assets  and  the  state  budget.  It  provides  an  opinion  on  the  draft  of  the  state  closing 
account submitted annually by the Government to Parliament and on the quarterly budget 
reports.  The model of control used in the Czech Republic is based upon the principles of 

90 

the  Lima  declaration  adopted  by  the  International  Organisation  of  Supreme  Audit 
Institutions. 

The results  of  audits by the  SAO  -  "audit protocols" - are published  in its  bulletin and 
sent  to  Parliament,  the  Government  (which  should,  if  necessary,  adopt  remedial 
measures) and, upon request, the Ministries audited. The SAO is entitled to request that 
corrective measures be taken to be made by the controlled  subject, but has no power to 
impose any sanctions (exception disciplinary fines for non-cooperation during audit). 

With regard to the future control  of Community  funds,  it is  intended that the  necessary 
staffing  and training  will  take place  to ensure effective  external  control  by the  SAO  in 
relation to all Community programmes.  It is also foreseen that the jurisdiction of control 
bodies  will  cover  controls  of  financial  regularity,  legality  and  sound  financial 
management. 

The  Ministry  of  Finance  is  the  central  body  in the  State  administration  responsible  for 
internal  controls  over the State budget, taxes, fees  and customs duties, financial  control 
and  foreign  exchange  issues  and  prices.  The  Ministry  is  preparing  to  enlarge  its 
expenditure control capacities. 

The financial control  carried out by the  State  administration  is performed  by territorial 
financial  bodies (financial offices and financial directorates), subordinated to the Ministry 
of  Finance,  which  carry  out financial checks  on  the  subsidies  granted  from  the  State 
budget and specific tax collection and control activities. 

Each Minister and manager of each budgetary chapter is responsible for the management 
and  control  of  the  revenue  and  expenditure  operations  taking  place  within  their 
jurisdiction, including that all activities are legal and follow approved regulations. 

With regard to fraud, the Czech Republic has no central authority responsible for  fighting 
fraud.  However,  it  is  within  the  competence  of  the  Czech  customs  authorities,  at  all 
levels,  to  combat  fraud  (in  court  criminal  proceedings  they  have  the  status  of  a  police 
authority). 

The  Police  Service  for  Corruption  Detection  and  Serious  Economic  Offences  is 
responsible for combating financial  fraud both on a national and international level - their 
activities  cover  three  essential  areas:  (i)  corruption  in  the  government  and  local 
government;  (ii)  money  laundering; (iii)  serious  economic  offences  (especially  cases  of 
abuse of financial funds). 

Current and Prospective Assessment 

Main parts of the  Czech financial  control  system have been put in place  only  recently  -
e.g.  the  Supreme  Audit  Office  was  created  in  1993.  Further  development  of  financial 
control is necessary. 

The  current  system  of  internal  financial  control  in  the  Czech  Republic  does  not 
correspond to the provisions  foreseen  by the EC for each Member  State.  However,  the 
government has expressed its intention to improve its budgetary control. 

91 

External  control  -  done  above  all  by  the  Supreme  Audit  Office  -  seems  to  be  well  in 
place. 

Article  84  of  the  Europe  Agreement  which  states  that  an  internal  control  unit  is  to  be 
established  within  each  organisation  has not been  sufficiently  implemented.  No  special 
regulation has yet been enacted to provide for  independent,  ex-ante control  in the  Czech 
Republic. 

Concerning  "own  resources" the application  of Regulation  2913/92  does not  seem  to  be 
problematic  for  the  Czech  Republic.  Further  cooperation  with  the  Commission  will  be 
needed on the compatibility of Czech provisions with Regulation  1552/89. 

For the issue of fraud there is a need to ensure an appropriate staffing  level and a  unified 
information  system for the exchange of  information. 

Conclusion 

The  financial  control  system  in  the  Czech  Republic  is  just  being  developed.  Major 
elements  to  control  the  allocation  and  use  of  public  resources  are  not  yet  in  place. 
However, if the necessary resources are made available, the Czech Republic should be in 
a position in the medium term to fulfil  the EC requirements. 

Budgetary  Implications 

The  communication  entitled  "Agenda2000"  sets  out  the  overall  financial  framework 
which should accommodate the budget impact of any future  enlargements  in the medium 
term.  This  is  to  ensure  that  any  enlargement  is  compatible  with  proposed  Community 
policy guidelines within reasonable budget limits. 

As things stand, it would be difficult,  not to say premature, to attempt precise country-by-
country  evaluations  of  the  budgetary  implications  of  each  of  the  applicants joining  the 
Union. Exactly  what the impact would  be may vary  considerably  depending  on  a whole 
series of factors: 

the date on which the applicant country joins; 
developments  in  Community  policies  between  now  and  then,  in  particular  the 
decisions  to  be  taken  on  further  reform  of  the  common  agricultural  policy  and 
new guidelines for structural measures; 
the progress made by the applicant  countries in terms of  growth,  increasing their 
competitiveness and productivity and their ability to absorb the acquis 
the transitional measures that will come out of the negotiations. 

Only a few orders of magnitude for  certain budget categories and an overall  estimate can 
be given purely as a guide. 
Expenditure 

If the  common  agricultural  policy  were to be reformed  along  the  lines  suggested  by  the 
Commission,  once  the  reforms  were  fully  up  and  running  and  in  terms  of just  market 
intervention  measures,  the  Czech  Republic's  accession  would  give  rise  to  additional 

92 

expenditure  of  around  1 to 2% in relation to likely  expenditure  on the present  fifteen 
Member States. 

After  a  phasing-in  period,  the  allocations  for  the  Czech  Republic  under  structural 
activities would top around 4% of GNP. 

Application of the other internal Community policies in the new member countries would 
be likely to involve additional expenditure probably in excess of their relative proportion 
of Union GNP, since for certain policies the additional implementing costs also depend 
on the target population, the geographical area covered or the number of Member States 
involved  in  the  coordination  and  harmonisation  measures.  The  GNP  of  the  Czech 
Republic is currently 0.7% of total Union GNP. 

By  contrast,  the  Czech  Republic's  accession  should  not  involve  significant  additional 
expenditure as far as Union external action is concerned. 

It should not be forgotten  that when an applicant country joins, the Community  budget 
will  no  longer  have  to  bear  the  costs  of  grants  the  country  was  eligible  for  under  the 
various pre-accession programmes, such as Phare 

In light of the above, the estimated  costs in the three areas mentioned  arising  from  the 
Czech Republic's  accession should  fall  within the range of,  annually, ECU 2.6 and  3.3 
billion in 2005-06 (at constant 1997 prices). 

Revenue 

Assuming full  application of the own resources system, the new members'  contributions 
to  the  Community  budget  should,  in  terms  of  total  GNP  and  VAT  resources  (taking 
account of the capping rules applying to VAT),  be close to the proportion of the Union's 
GNP they account  for,  which in the Czech Republic's case is around 0.7%. The Czech 
Republic's portion of traditional  own resources will depend on the structure of its trade 
flows at the time of accession. 

To ensure that the own resources are established, monitored and made available  in line 
with  Community  regulations,  the  Czech  Republic  will  have  to  overhaul  its  current 
customs system. In addition, for the purposes of accurately calculating the GNP resource 
considerable improvements will have to be made to the national accounts to ensure that 
they  are  reliable,  homogeneous  and  complete.  Improving  the  statistics  will  also  be 
essential  for  drawing  up  the  VAT  own  resources  base, which  will  mean  bringing  the 
Czech Republic's VAT system fully into line with the Community directives. 

93 

4.  Administrative Capacity to Apply the Acquis 

The  European  Council  in  Madrid  in  December  1995  concluded  that  the  harmonious 
integration  into  the  EU of the central  and eastern  European  applicant  states  would,  in 
particular,  require  the  adjustment  of  their  administrative  structures.  This  chapter 
examines the current state of the public administration in the Czech Republic, including 
relevant aspects of the judicial system, and assesses the current and prospective ability to 
carry  out  the  functions  required  of  it  in  a modern,  democratic  state, with  a particular 
focus on the need to administer matters related to the acquis. 

4.1  Administrative  Structures 

A  description  of  Czech  Republic  constitutional  structures, 
their  powers  and 
responsibilities, including those of regional and local government, is given in Chapter 1. 

At the  central  level  there  are  14 ministries  and  8 so-called  state administrative  bodies 
(such  as  the  Statistical  Office,  the  Czech  National  Bank,  etc.).  The  Government 
Committee  for  European  Integration,  headed  by  the  Prime  Minister,  is  the  central 
coordinating body for EU accession related matters. 

A  draft  civil-service  law  was  elaborated  between  1992  and  1995  and  discussed  in 
parliament. Because of lack of agreement between the major parties, however, it has not 
yet been adopted. There are no set rules for recruitment or promotion. 

On  the  whole  the  civil  service  is  politically  independent.  The  position  of  Deputy 
Minister,  in effect  the highest  official  level, is usually filled with persons  who have a 
party  affiliation. 

The  total  number  of  people  employed  by  state  bodies  is  estimated  at  about  250,000, 
which includes  40,000 police  and 30,000 military.  The government's  economic policy 
packages of April and May  1997 foresee  significant  cuts in the state budget.  These are 
expected to affect  the number of persons employed by the state.  Salaries in the private 
sector are on average three times higher than those in the public sector. 

Since  1990  consecutive  Czech(oslovak)  governments  have  given  low  priority  to  the 
necessary  reform  and  modernisation  of  the  public  administration.  There  are  no 
indications that this position is changing. 

In  1994  a  Government  Committee  for  European  Integration  was  established.  In  this 
framework,  each  ministry  has  set  up a unit responsible  for  EU matters.  (See  also the 
section  of  the  Introduction  concerning  relations  between  the  European  Union  and  the 
Czech Republic). 

4.2  Administrative  and Judicial  Capacity 

Czechoslovakia  was administered  under central  planning  during the communist  period. 
The communist system rejected the primacy of the rule of law and subjugated the law and 
the administration  to the implementation of Party policy. Against this background, both 
the administration and the rule of law itself increasingly came to be seen by the public as 
instruments of political control. 

94 

The structures of the public administration are, however, broadly similar to those existing 
in many EU member states.  Some important structural weaknesses exist, most notably 
the lack of a central department with general oversight of the civil service (the Office  of 
Legislation  and  Public  Service  was  disbanded  after  the  last  elections  in  the  Czech 
Republic): this can lead to  inefficiencies  and lack of standardisation  or well  developed 
strategy in areas such as training. 

Despite  problems  which  need  to  be  addressed,  the  process  of  government  proceeds 
adequately  much  of  the time.  At the higher  levels the quality  of  officials  has  greatly 
improved.  However, in most ministries the units responsible for legal ^administration are 
poorly staffed.  There is also a shortage of able and experienced  staff  in areas such as 
banking supervision  and capital markets, and implementation and enforcement  structures 
in areas such as environmental policy require further strengthening. 

The political independence of the civil service, while not as firmly  entrenched as would 
ideally  be  the  case,  is  sufficiently  well  established  as  to  provide  a  fair  degree  of 
reassurance  that  the  functions  of  public  administration  can  be  carried  out  in  a  non 
partisan manner.  (See also Chapter 1, concerning the lustration law).  However, the lack 
of an adequate  legal  basis  for  the civil  service is a significant  problem  which  requires 
early resolution if the role and function of the civil service is to be adequately guaranteed. 

Some key  ministries,  including  the  Ministry  of  Foreign  Affairs,  show  signs  of  under-
staffing.  The availability of better paid work in the private sector has led to a significant 
number of able people leaving the civil service.  However, this has been much less the 
case at the lower levels of the public administration, so overall figures for  staff-turnover 
are not particularly high.  Nonetheless, clearly the loss of able staff is to the detriment of 
the public administration's ability effectively  to function. 

Public confidence  in  the  civil  service  is affected  negatively  by the  legacy  of  the past, 
since  a  significant  number  of  the  civil  servants  worked  under  the  communist  regime. 
Possible abuses of power, are not a major current factor affecting public confidence in the 
civil service.  Corruption is present in the system and may be increasing. 

The lack of any  substantial  or coherent plan for public administration  modernisation  is 
the single greatest cause for concern in this field. Such measures as have been taken are 
thoroughly inadequate in the face of the important problems which require resolution.  In 
addition  to the  points  already  outlined  a wide  ranging  reform  process  will  need  to  be 
instigated and sustained if the Czech Republic is to establish a civil service of the overall 
quality,  level  of  training,  motivation  and  flexibility  required  on  the  country's  path  to 
further economic and social development, and membership of the EU. 

As far as EU matters specifically  are concerned, the development and reinforcement  of a 
central  coordinating  structure  in  this  area  will  be  of  great  importance  to  the  Czech 
Republic's ability  successfully  to  handle the demands placed  on it  in the  pre-accession 
period and beyond. 

95 

Key Areas for the Implementation of the Acquis 

The uniform  application  of EC law:  The effective  application  of the acquis  presupposes 
that  the  judicial  authorities  of  member  states  are  able  to  apply  the  provisions  of  the 
Treaty  dealing  with  ensuring  the  unity  and  application  of  the  acquis,  and  are  able  to 
ensure  the proper  functioning  of the  Single  Market  and  Community  policies  in  general. 
A  high  quality  and  well  trained  and  resourced judiciary  is necessary  for  the  application 
by  the  courts  of  EC  law,  including  cases  of  direct  effect,  and  cases  of  referral  to  the 
European Court of Justice under the terms of Article  177 EC. 

The judicial  system  in the Czech  Republic  has weaknesses, concerning  expertise  and, to 
some  extent,  resources.  A  special,  and  reinforced,  effort  will  have  to  be  made  with 
urgency if the system is to be able effectively  to apply the acquis in the medium term. 

Single  market:  The  ability  of  the  Czech  Republic  to  ensure  the  correct  application  of 
Community  requirements  in  the  Single  Market,  particularly  concerning  the  free 
movement  of  goods  and  services  presupposes  the  existence  of  highly  developed  and 
effective  regulatory,  standardisation,  certification  and supervisory authorities, able to act 
fully  in  accordance  with  EC  rules.  An  analysis  of  these  points  is made  in  Chapter  3.1 
(under "The Four Freedoms"). 

Concerning  the  administrative  capacity  in  respect  of  free  movement  of  goods,  the 
situation  in the  Czech Republic is  largely  satisfactory.  The Czech  Office  for  Standards, 
Metrology  and  Testing  has  a  staff  of  60,  which  appears  adequate,  and  of  which  the 
technical  competence  is  sufficiently  high.  Questions  remain,  however,  about  the 
implementation  of market surveillance, and the proper separation between the regulatory, 
standardisation  and  certification  functions.  Concerning  the  free  movement  of  services, 
the situation is not yet satisfactory.  The Czech National Bank is responsible for  banking 
supervision and has a staff  of  86.  However, developments in the banking  sector over the 
past  few  years  point  to  the  need  for  more  effective  supervision.  The  semi-independent 
Securities  Office's  technical  competence  requires  significant  improvement.  It has  a  staff 
of  65  with  few  possessing  the  necessary  knowledge  or  skills.  Technical  equipment  is, 
however,  of  good  quality.  The  supervisory  body  for  the  insurance  sector  has  a  staff  of 
16,  presenting  it  with  an  almost  impossible  task  in  attempting  to  cope  with  it 
responsibilities in the present insurance market. 

In order to meet EU requirements  in this area some important  improvements  will  still be 
required. 

Competition:  As  explained  in  Chapter  3.1  (under  "Competition")  enforcement  of 
competition  law  requires  the  establishment  of  anti-trust  and  state  aid  monitoring 
authorities,  and  that  the  judicial  system,  the  public  administration  and  the  relevant 
economic operators have a sufficient  understanding of competition law and policy. 

In the  Czech  Republic  the central  authority  is the  Office  for  the Protection  of  Economic 
Competition  which  has  90  staff;  this  is  adequate.  The  level  of  expertise  is  good.  The 
administrative  structures  already  exist  effectively  to  implement  EU requirements  in  this 
field. 

96 

Telecommunications: 
In  order  to  formulate  and  implement  the  many  liberalisation 
regulations  contained  in the acquis in this  field it is necessary  to have  a regulatory  and 
policy making body that is effectively  separated from any operating company. 

In the Czech Republic this body is the Czech Telecommunications  Office,  which is to be 
separated  from  the transport  ministry.  It is well  staffed  and functioning,  although  the 
regulatory department should be strengthened. 

taxation:  The  effective  administration  of  the  indirect  taxation  acquis 
Indirect 
presupposes  structures  capable  of  implementing  the  EC  legislation  concerning  the 
harmonisation of Valued Added Tax and excise duties in an environment in which  fiscal 
controls at internal  EU frontiers  have been abolished; and the excise  system  is based on 
the tax warehouses,  duty  being payable at the local  rate in the member  state at the time 
the  goods  are  consumed.  This  requires  a  highly  developed  and  well  trained  and 
resourced service, with a high degree of integrity. 

In the  Czech  Republic  the relevant  authority  is the Ministry  of Finance  with  a total of 
14,000  staff  (for the financial and tax administration,  including customs). Due to a large 
turnover of staff,  resulting partly from trained  staff  being recruited by the private  sector, 
it is difficult  to estimate  the capacities of existing  staff.  In order  to ensure the  effective 
administration  of the acquis in this area it will be necessary  to consolidate  and improve 
including  training  measures  and 
the  overall  professional  standards  of  the  staff, 
improvements in pay. 

Agriculture:  The administrative  requirements  in the agricultural  area primarily  concern 
veterinary  and  phytosanitary  control,  to  protect  public  health  and  ensure  the  free 
movement  of  agricultural  goods;  and  the  ability  to  administer  the  mechanisms  and 
requirements  of  the  CAP,  including  high  standards  of  financial  control  and  official 
statistics.  These  points  are  dealt  with  in  Chapter  3.4  (under  "Agriculture");  general 
standards in the statistical field are examined in Chapter 3.3 (under "Statistics"). 

Concerning  the  administrative  capacity  in  respect  of  veterinary  and  phytosanitary 
controls,  the  situation  in  the  Czech  Republic  is  largely  satisfactory.  There  is  a  well 
established  infrastructure  for  veterinary  control  and  inspection.  But  testing  and 
inspection  facilities  need  to  be  upgraded.  The  Agriculture  and  Foodstuffs  Inspection 
employs  412  staff,  but  has  recruitment  difficulties.  The  State  Veterinary  Inspection 
employs  1,700  staff.  Concerning  the administration  of  general  CAP requirements, the 
appropriate administrative structures need further  development. 

In order to meet EC requirements in this area, some improvements  are still required, but 
much has already been achieved. 

Transport:  The application  of the  EC Internal  Market  and competition  requirements to 
the  transport  sector,  the  development  of  relevant  infrastructure  products,  and  other 
aspects  of  the  transport  acquis  will  present  administrative  challenges  to  new  member 
states. 

The responsible  government authority in the Czech Republic is the Ministry of Transport 
and  Communications.  The number of staff  is not currently  available to the Commission. 
Though  the  administration  has  taken  steps  to  improve  its  functioning,  there  are  still 

97 

problems arising from a lack of qualified staff. This raises particular concerns with regard 
to enforcement of safety controls. 

Employment  and social policy:  A central  administrative  requirement  in respect  of the 
acquis in this  area  is  adequate  inspection  capacity,  particularly  concerning  health and 
safety at work. 

In  the Czech  Republic  the labour  inspectorate  requires  considerable  reinforcement  of 
staff resources and expertise. 

Regional policy and cohesion:  The main administrative requirements in this area are the 
existence  of appropriate  and effective  administrative  bodies  , and in particular  a high 
degree of competence and integrity in the administration of Community funds. 

In the Czech  Republic  the principal  administrative  body  is the Ministry  for  Regional 
Development.  The  number  of  staff  employed  is  not  currently  available  to  the 
Commission.  The  creation  of  the  Ministry  has  helped  start  a  process  of  greater 
coordination.  The situation  concerning  financial  control  is not yet  satisfactory,  but is 
progressing reasonably well (see the section, below on "Financial control"). The effective 
administration  of  the  acquis  in  this  area  will  require  further  development  of  the 
institutional and administrative  framework. 

Environment:  Because  EC  environmental  policy,  involves  the  integration  of 
environmental  protection  into  EC  sectoral  policies  the  administrative  requirement  is 
potentially very wide, affecting many bodies not normally associated  with environmental 
protection.  However,  the  main  responsibility  lies  with  environment  ministries  and 
various subsidiary bodies. 

In  the  Czech  Republic  the  Environment  Ministry  employs  460  staff.  Monitoring  is 
carried out by sectoral authorities and enforcement is carried out by the Ministries and 9 
regional  inspectorates.  These  arrangements  are  not  yet  adequate.  The  effective 
administration of the acquis in this area will require these institutions to be reinforced. 

Consumer protection:  In this area, the effective  administration of the acquis requires the 
allocation  of  overall  responsibility  to  a  specific  State  body  through  which  the 
formulation,  implementation  and  enforcement  of  consumer  policy  and  consumer 
protection legislation can be undertaken. 

In the Czech Republic the Ministry of Trade and Industry has authority to develop and 
implement  consumer protection  policy. As regards non-governmental  consumer  bodies 
these remain too weak in the Czech Republic. There remains confusion  about the exact 
scope and objectives of consumer policy. This in part explains difficulties  in the  effective 
enforcement  of  consumer  laws;  however,  other  factors  which  need  to  be  addressed 
include a lack of expert staff, organisational deficits, and a lack of sensitivity to consumer 
questions among the judiciary. 

Justice and home affairs:  Oversight of justice and home affairs  questions falls to  justice 
and interior ministries.  The administrative structures need to be able to deal  effectively 
with  asylum  and  migration  questions,  border  management,  police  cooperation  and 

98 

judicial cooperation.  There is an overriding need for sufficient  and properly trained staff 
with a high degree of integrity. 

In the Czech Republic the justice and interior ministries are not adequately staffed  in all 
areas. The capacity to handle asylum and migration questions is not yet assured through 
the  Directorate  of  Aliens  and  Border  Police,  but  is  being  brought  into  line  with  EU 
standards. Border management is also being brought up to EU standards, but is hampered 
by procedural problems and lack of equipment. Specialist police units to tackle organised 
crime  have  been  established,  and  cooperation  with  other  countries  is  improving.  The 
court  system, however,  lacks  expertise  and  efficiency,  although judicial  cooperation  is 
generally  good.  The  effective  administration  of  the  acquis in  this  area  will  require 
improvement of communications for border management, increased financial  and human 
resources (especially specialist training), and taking steps to combat corruption. 

Customs:  Applying the acquis in this area requires  an adequate level of  infrastructure 
and  equipment,  including  computerisation  and  investigation  resources,  and  the 
establishment  of an efficient  customs organisation with a sufficient  number of  qualified 
and motivated staff showing a high degree of integrity. 

In the Czech Republic the customs service employs 8,400 staff. Due to a high turnover of 
staff,  it  is  difficult  to  estimate  their  efficiency,  and  therefore  the  adequacy  of  staffing 
levels. The effective  administration  of the acquis in this area will require improvements 
to technical equipment, and retention of qualified and experienced staff. 

Financial  control:  The  protection  of  the  Community's  financial  interests  requires  the 
development  of  anti-fraud  services,  training  of  specialised  staff  (investigators, 
magistrates)  and 
the  reinforcement  of  systems  of  specific  cooperation.  The 
implementation  of  Community  policies,  especially  for  agriculture  and  the  Structural 
Funds, requires efficient  management  and control  systems  for  public expenditure, with 
provisions  to  fight  fraud.  Administratively  it  is  essential  to  have  a  clear  separation 
between  external  and internal  control.  Police and judicial  authorities  need  to  be able 
effectively  to handle complex transnational  financial  crime (including  fraud,  corruption 
and money laundering) which could affect the Community's financial interests. 

In the Czech Republic the main external control body is the Supreme Audit Office which 
has  490  staff.  The  effective  administration  of  the  acquis in  this  area  will  require 
considerable  further  development  of  the  systems  in  place,  but  this  should  be  possible 
assuming that the necessary resources are made available. 

4.3  General  Evaluation 

The Czech  Republic's  administrative  structures  will  require  a significant  and  sustained 
effort  of  reform  if  there  is  to  be  adequate  capacity  in the  medium  term  effectively  to 
administer the acquis. 

A  definite  evaluation  at  this  stage  of  the  ability  of  the  judicial  system  in  the  Czech 
Republic effectively  to apply Community law in the medium term is difficult,  although it 
is clear that efforts  of reform are required. 

99 

C. SUMMARY AND CONCLUSION 

The Czech Republic submitted  its application for membership of the European  Union  on 
17  January  1996.  Its  request  is  part  of  the  historic  process  of  ending  the  division  of 
Europe and consolidating the establishment of democracy across the continent. 

In accordance with the provisions of Article O of the Treaty, the Commission  has, at the 
request  of  the  Council,  prepared  an  Opinion  on  the  Czech  Republic's  request  for 
membership. 

the  Europe  Agreement  which  entered 

The Czech Republic's preparation  for  membership  is going forward  notably  on the  basis 
of 
into  force  on  1  February  1995. 
Implementation  of  the  White  Paper  of  May  1995  on  the  Internal  Market,  another 
essential  element  of  the  pre-accession  strategy,  is  going  ahead  on  the  basis  of  a  Plan 
agreed  by the  government  in the spring of  1996.  The  government  has put  in place  the 
necessary mechanisms to coordinate its policies for European integration. 

In  preparing  its  Opinion,  the  Commission  has  applied  the  criteria  established  at  the 
Copenhagen  European  Council of June  1993.  The  Conclusions  of this  Council  stated 
that  those  candidate  countries  of  Central  and  Eastern  Europe  who  wish  to  do  so  shall 
become members of the Union if they meet the following  conditions: 

-  stability  of  institutions  guaranteeing  democracy, the  rule  of  law, human  rights  and 

respect for and protection of minorities; 

-  the  existence  of a functioning  market  economy,  as well  as the  ability  to  cope  with 

competitive pressures and market forces within the Union; 

- the ability to take on the obligations of membership, including adherence to the aims 

of political, economic and monetary union. 

A judgment  on these three groups of criteria - political, economic, and the ability to take 
on  the  acquis  -  depends  also  on  the  capacity  of  a  country's  administrative  and  legal 
systems  to  put  into  effect  the  principles  of  democracy  and  the  market  economy  and  to 
apply and enforce  the acquis in practice. 

The  method  followed  in  preparing  these  Opinions  has  been  to  analyse  the  situation 
each  candidate  country,  looking  forward  to the  medium  term  prospects,  and  taking  ini 
account progress accomplished  and reforms  already under way.  For the political  criteria, 

100 

* 

. 

the Commission has analysed the current situation, going beyond a formal  account  of the 
institutions to examine how democracy and the rule of law operate in practice. 

1.  Political Criteria 

The  Czech  Republic's  political  institutions  function  properly  and  in  conditions  of 
stability.  They  respect  the  limits  on  their  competences  and  cooperate  with  each  other. 
Legislative  elections  in  1992  and  1996  were  free  and  fair.  The  Opposition  plays  a 
normal  part  in the  operation  of the  institutions.  Efforts  to  improve  the  operation  of  the 
judiciary and to intensify  the fight against corruption must be sustained. 

There  are  no  major  problems  over  respect  for  fundamental  rights.  There  are,  however, 
some weaknesses  in laws  governing  freedom  of the press.  Particular  attention  will  need 
to  be  paid  to  the  conditions  governing  any  further  extension  of  a  law  excluding  from 
public  service  members  of  the  former  security  services  and  active  members  of  the 
communist  regime.  There  is  a problem  of  discrimination  affecting  the  Roma,  notably 
through the operation of the citizenship law. 

The  Czech Republic  presents  the  characteristics  of  a democracy,  with  stable  institutions 
guaranteeing the rule of law, human rights, and respect for and protection of minorities. 

2.  Economic  Criteria 

After  some  disruption  caused  by  the  separation  of  the  Czech  and  Slovak  Republics  in 
1993, economic growth resumed in  1994 and has been strongly sustained  since, though at 
a lower rate (4.0%) in  1996.  The Czech Republic has maintained tight fiscal  policies, but 
both  trade  and  current  account  deficits  grew  in  1996.  Inflation  has  gradually  declined 
over  recent  years,  and  stood  at  8.8%  in  1996.  GDP per head  is  about  55% of  the  EU 
average,  for  a population  of  10.3  million.  The  agricultural  sector  employed  6%  of  the 
labour  force  in  1995, and  accounted  for  5% of  Gross Value  Added.  The  EU's  share  of 
Czech trade has risen from  27% in  1989 (as Czechoslovakia) to 55%. 

On  the  basis  of  its  analysis,  the  Commission's  judgment  as  to  the  Czech  Republic's 
ability to meet the economic criteria established at Copenhagen is as follows: 

The  Czech  Republic  can  be  regarded  as  a  functioning  market  economy.  Market 
mechanisms operate widely, and the role of the state in the economy has been  completely 
changed. 
the  economy. 
Unemployment  is  among  the  lowest  in  Europe.  However,  as  the  recent  emergence  of 
macroeconomic  imbalances  has  shown,  further  progress  will  need  to  be  made  over  the 
next few years, notably in strengthening corporate governance and the financial  system. 

Substantial  success  has  been  achieved 

in  stabilising 

The  Czech  Republic  should  be  able  to  cope  with  competitive  pressure  and  market 
forces  within the Union in the medium term, provided that change at the enterprise  level 
is  accelerated.  The  country  benefits  from  a  trained  and  skilled  workforce,  and 
infrastructure  is  relatively  good.  Investment  in  the  economy  has  been  high  in  recent 
years, with foreign  direct investment also strong.  The country has successfully  reoriented 
its trade towards the west.  But although the quality of exported goods is improving, their 
value  added  is  still  low.  The  banking  sector  is dominated  by  a few,  partly  state-owned 
banks  and  its  competitive  position  is  not  strong.  The  main  challenge  for  the  Czech 
Republic is to press on with enterprise restructuring in order to improve the medium  term 

101 

performance  of the  economy  and  as  a way  of redressing  the  imbalances  on  the  external 
side. 

3.  Capacity to take on the obligations of membership 

The  Czech  Republic's  ability  to  take  on  the  acquis  has  been  evaluated  according  to 
several indicators: 

-  the  obligations  set  out  in  the  Europe  Agreement,  particularly  those  relating  to  the 
right  of establishment,  national  treatment, free circulation  of goods, intellectual  property 
and public procurement; 

-  implementation  of  the  measures  set  out  in  the  White  Paper  as  essential  for 

establishing the single market; 

- progressive transposition of the other parts of the acquis. 

The  Czech  Republic  has  already  adopted  significant  elements  of  the  provisions  of  the 
Europe Agreement,  and according to the timetable for  implementation  set out  in it.  Few 
serious  bilateral  problems  have  arisen,  though the  Czech  imposition  in April  1997 of  an 
import  deposit  scheme was not in conformity  with the Agreement.  The  Czech  Republic 
has  achieved  a  satisfactory  rate  of  transposition  of  the  rules  and  directives  identified  in 
the White Paper, though there is still a considerable amount of legislative work left to do. 

For  most  of the  areas  relating  specifically  to the  single  market,  the  legislative  basis  is 
more  or  less  in  place. 
financial  services  and  taxation, 
further  work is still needed. 

In  certain  fields,  particularly 

Notwithstanding  the efforts  which have been made, the real progress made in transposing 
legislation  still  needs  to  be  accompanied  by  concrete  measures  of  implementation,  as 
Overall,  the 
well  as  establishment  of  an  effective  administrative  underpinning. 
administrative  infrastructure  is either  well-established  or recently  set up  and  functioning 
normally.  But substantial further  efforts  are needed. 

As  for  the  other  parts  of  the  acquis,  the  Czech  Republic  should  not  have  difficulty  in 
applying  it  from  the  date  of  accession  in  the  following  fields:  education,  training  and 
youth; 
statistics; 
consumer  protection;  small  and  medium  enterprises;  trade  and  international  economic 
relations;  and development. 

research  and  technological  development; 

telecommunications; 

By contrast, substantial  efforts  will be needed for the Czech Republic to be able to  apply 
the acquis  in the fields of audiovisual, and customs  (though efforts  are under way  in this 
sector). 

Provided  that  past  and  current  efforts  at  industrial  restructuring  and  modernisation  are 
continued, and reinforced  in the case of heavy industries, most sectors of Czech  industry 
should face no major problems to integrate into the single market in the medium term. 

For  the  environment,  very  substantial  efforts  will  be  needed,  including  massh 
investment  and  strengthening  of  administrative  capacity  to  enforce  législation.  Partir 

102 

compliance  with  the  acquis  could  be  achieved  in  the  medium  term.  Full  compliance 
could be achieved only inthe long term. 

For  transport,  the  Czech  government  has  already  made  notable  progress  towards 
meeting  the acquis.  Efforts  need to be pursued  in respect  of road freight transport.  But 
meeting  the  acquis  relating  to  the  single  market  should  not  pose  real  problems. 
Investment  will be needed to extend the European transport network  so as to ensure that 
the single market functions  well. 

In order to apply the employment  and social affairs acquis in the medium term, work is 
needed to adapt legislation in the field of health and safety at work. 

In the  field  of  regional  policy  and  cohesion,  if the  Czech  Republic  works  to  establish 
the necessary  administrative  framework  and achieve the substantial  improvement  needed 
in the field of financial control, it should be able in the medium term to use the  Union's 
regional and structural funds  for its development  effectively. 

For  agriculture,  particular  efforts  will  be  needed  to  implement  veterinary  and 
phytosanitary  requirements  and  to  strengthen  the  administrative  structures  necessary  to 
apply  the  common  agricultural  policy  instruments.  Provided  these  targets  can  be  met, 
accession  in  the  medium  term  should  not  be  accompanied  by  significant  problems  in 
applying the common agricultural policy in an appropriate manner. 

On energy, the Czech Republic has a substantial nuclear power programme, which is due 
to  expand  further.  The  modernisation  programme  needed  to  bring the  nuclear  plants  at 
Dukovny  and Temelin up to internationally  accepted safety  standards must be completed 
within  7 - 10  years.  The  Czech  Republic  should be  able to  comply  with  the  rest  of  the 
acquis in the medium term, given further work on energy pricing, state intervention in the 
solid fuel  sector and access to networks. 

On the basis of the analysis of its capacity to apply the acquis, the Czech Republic could 
be  in  a  position  in the  medium  term  to take  and  implement  the  measures  necessary  for 
removal of controls at its borders with member states of the Union.  If part of its current 
borders  became  part  of  the  Union's  external  border,  reinforcement  of  border  controls 
would be needed. 

The Czech Republic's participation  in the third stage of economic and monetary  union, 
which  implies  coordination  of  economic  policy  and  complete  liberalisation  of  capital 
movements,  should  pose no problems  in the medium term.  But  it is premature to judge 
whether  the  Czech  Republic  will  be  in  a  position,  by  the  time  of  its  accession,  to 
participate  in  the  Euro  area.  That  will  depend  on  how  far  the  success  of  its  structural 
transformation  enables  it  to  achieve  and  sustain  permanently  the  convergence  criteria. 
These are, however, not a condition for membership. 

The  Czech Republic  is likely to comply with the justice  and home affairs  acquis  in the 
next  few  years,  provided  that  existing  progress  is  maintained,  including  in  the  fight 
against drugs and organised crime. 

The  Czech  Republic  should  be  able  to  fulfil  its  obligations  in  respect  of  the  common 
foreign  and security  policy. 

103 

In  addition,  the  Czech  Republic  has  no territorial  disputes  with  any  member  state  or 
neighbouring candidate country.  All its state frontiers  are regulated  by Treaty.  There 
remain some minor issues in its relationship with Slovakia. 

4.  Administrative and legal capacity 

For  the  Czech  Republic  to  have  in  the  medium  term  the  administrative  structures 
necessary  for the essential work of applying and enforcing  the acquis effectively,  there 
will need to be a significant and sustained effort of reform. 

It is not yet possible to judge when the Czech Republic's judicial  system, which has an 
equally  important  role  to  play,  will  acquire the  capacity  to  play  it  effectively,  though 
reform will clearly be required. 

CONCLUSION 

In the light of these considerations, the Commission concludes that: 

-  the  Czech  Republic  presents  the  characteristics  of  a  democracy,  with  stable 
institutions guaranteeing the rule of law, human rights and respect for and protection of 
minorities; 

- the Czech  Republic can be regarded  as a functioning  market  economy,  and  it 
should be able to cope with competitive pressure and market forces  within the Union in 
the medium term; 

- if the Czech Republic continues its efforts  on transposition of the acquis relating 
to the single market,  , and  intensifies  work on its  implementation,  the  Czech  Republic 
should  become  capable  in  the  medium  term  of  applying  it  fully.  The  import  deposit 
scheme will need to be resolved within the terms of the Europe Agreement.  Particular 
effort,  including  investment,  will  be  needed  to  meet  the  acquis in  sectors  such  as 
Further  administrative  reform  will  be 
agriculture,  environment 
indispensable  if the  Czech  republic  is to  have the  structures  to  apply  and  enforce  the 
acquis fully. 

and  energy. 

In the light  of these  considerations, the Commission  recommends that negotiations  for 
accession should be opened with Czech Republic. 

The reinforced pre-accession strategy will help the Czech Republic to prepare itself better 
to meet the obligations of membership, and  to take action to improve the shortcomings 
identified  in this Opinion.  The Commission will present a report no later than the end of 
1998 on the progress it has achieved. 

104 

ANNEX 

COMPOSITION OF PARLIAMENT 

PRESENT COMPOSITION OF THE PARLIAMENT OF THE CZECH 
REPUBLIC 

Political Party 
Civil Democratic Party 
Civic Democratic Alliance 
Christian Democratic 
Party 
Social Democratic Party 
Republican Party 
Communist Party of 
Bohemia and Moravia 
Democratic Union 
Independents 

ODS 
ODA 
KDU-CSL 

CSSD 
SPR-RSC 
KSCM 

DEU 

CHAMBER 
Seats 
68 
13 
18 

61 
18 
22 

200 

% 
33 
.1 
9 

31 
11 
9 

SENATE 
Seats 
32 
•  7 
13 

25 

2 

81 

% 
39.5 
8.6 
16.0 

30.8 

2.5 

1.2 
1.2 

UP b 

SINGLE MARKET:  WHITE PAPER MEASURES 

This table is based on information provided by the Czech authorities and confirmed by them as correct as at the end of June 1997.  It does not 
indicate the Commission's agreement with their analysis.  The table includes directives and regulations cited in the White Paper which total 899. 
These have been listed  in accordance with the categorization  used  in the White Paper and in relation to the policy  areas covered.  The table 
shows the number of measures for which the Czech Republic authorities have notified the existence of adopted legislation having some degree of 
compatibility with the corresponding White Paper measures. 

White Paper chapters 

l.Free  Movement  of Capital 

2.FM  and  Safety  of Industrial  Products 

3.Competition 

4.SociaI policy  and  action 

5.AgricuIture 

6.Transport 

7 . A u d i 0 V i s u aI 

8.Environment 

^Telecommunication 

lO.Direct  Taxation 

1 l.Free  movement  of goods 

12.PubIic Procurement 

13.Financial  services 

14.Protection  of  personal  data 

15.Company  Law 

16.Accountancy 

1 7 . C i v i I I aW 

18.MutuaI  rec. of  prof.  Quai. 

19.1ntellectual  property 

20.Energy 

21.Customs  law 

22.1ndirect  Taxation 

23.Consumer  Protection 

Total 

Czcch  RCP 
Number of White  Paper  measures 
Lzccn  KCP 
Number of White Paper  measures 
Czcch  Rcp 

Number of White Paper  measures 
Czcch ReP 
Number  of White  Paper  measures 
Czech Rep. 
Number  of White Paper  measures 
Czech Rep. 
Number of White  Paper  measures 

Czech  Rep. 

Number  of White  Paper  measures 
Czech ReP 
Number  of White Paper  measures 
Czech Rep 
Number  of White Paper  measures 
Czech  Rep 

Number  of White  Paper  measures 
Czech ReP 
Number  of White  Paper  measures 
Czech ReP 
Number of White Paper  measures 
Czech Rep 
Number  of White Paper  measures 
Czech  Rep 

Number  of White Paper  measures 
Czech Rep. 
Number  of White Paper  measures 
Czech  Rep 

Number  of White Paper  measures 

Czech  Rep. 
Number  of White Paper  measures 
Czech ReP 
Number  of White Paper  measures 
Czech ReP 
Number  of White Paper  measures 
Czech  Rep 

Number  of White Paper  measures 
Czech  RCP 
Number  of White  Paper  measures 
Czech  Rep 

Number  of White Paper  measures 
Czcch  Rep 

Number  of  White  Paper  measures 
Czech  Rep 

Number  of White Paper  measures 

IOG 

Direc 

tives 

Regul 

ations 

Total 

Stage I 

Stage 
II/III 

Stage I 

0 
3 
34 
.56 
3 
3 
11 
12 
28 
93 
13 
19 
1 
1 
5 
31 
3 
9 
1 
2 
0 
0 
0 
5 
8 
13 
0 
0 
2 
2 
2 
3 
1 
1 
2 
2 
5 
5 
1 
10 
1 
2 
0 
15 
5 
8 
126 
295 

1 
l 
24 
104 
0 
0 
10 
15 
24 
46 
6 
15 
0 
0 
5 
7 
0 
7 
1 
2 
0 
0 
5 
l 
3 
8 
1 
2 
2 
3 
1 
2 
0 
1 
0 
16 
2 
3 
1 
2 
1 
1 
4 
54 
1 
3 
92 
293 

0 
0 
2 
4 
0 
1 
0 
0 
5 
62 
4 
8 
0 
0 
2 
7 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
3 
23 
14 
0 
0 
0 
0 
36 
99 

Stage 
II/III 
0 
0 
0 
l 
0 
0 
1 
2 
0 
2 
4 
13 
0 
0 
1 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
i 
0 
0 
0 
0 
0 
0 
0 
3 
0 
0 
157 
184 
0 
6 
0 
0 
163 
212 

1 
4 
60 
165 
3 
4 
22 
29 
57 
203 
27 
55 
1 
I 
13 
45 
3 
16 
'2 
4 
0 
0 
5 
6 
11 
21 
1 
2 
4 
6 
3 
5 
1 
2 
2 
18 
7 
11 
2 
15 
182 
201 
4 
75 
6 
n 
417 
899 

STATISTICAL DATA 

If not explicitly  stated  otherwise, data contained  in this annex are collected  from  „ Czech  Statistical  Office 
(CESKY STATISTICKY URAD)" with whom Eurostat and Member States' statistical offices  are co-operating 
since several years in the framework  of the Phare programme. Regular data collection  and dissemination  are 
part of this co-operation  process with the aim to enable the application of EU laws and practices in statistics. 
The data presented below have been compiled as far as possible using EU definitions  and standards which in 
some cases differ  from  national  practices.  This may occasionally  give rise to differences  between  the data 
presented here and those shown elsewhere in the opinion, which are generally based on the individual applicant 
countries' updated replies to the questionnaire sent to them  in April  1996.  The exact compatibility  with EU 
standards on statistics and thus the comparability with EU figures can still not be guaranteed, particularly those 
statistics  that  have  not  been  supplied  through  Eurostat,  but  have  been  delivered  directly  by  the  countries 
concerned. The exact compatibility with EU standards on statistics and thus the comparability with EU figures 
can  still  not  be  guaranteed.  Wherever  available,  methodological  notes  are  given  describing  content  and 
particularities  of statistical  data presented  in this annex.  Data correspond to the  information  available  as of 
May 1997. 

BASIC DATA 

Total Area 
Population ( end of the period) 

- Total 
- Females 
-Males 

Population density 

Urban Population 

Deaths rate 
Births rate 
Income and GDP per capita 

-Average monthly wage and salary per employee 
-GDP per capita 

Structure of production: share of branch GVA 

-agriculture 
-industry 
-construction 
-services 

134.2 

1990 

1992 

1993 

1994 

1995 

1000 hectares 

7886 

7887 

7887 

10326 

in  1000 

10334 
5311.7 
5022.3 

*  per  1  km2 

10333 
5311.2 
5021.8 

10321 
5305 
5016 

13r 
in % of  total  population 

131 

131 

131 

69.6 

67.5 

74.7 

74.7 

per  1000 of  population 

11.7 
11.8 

11.5 
11.7 

European Currency  Unit 

11.4 
10.3 

in % of Total Gross Value Added 

11.4 
9.3 

235 
3491 

5.2 
34.1 
7.3 
53.4 

7.5 
50.0 
8.3 
34.2 

share of branch GVA in 1990 

share of branch GVA in 1995 

•  0.0 

•  0.0 

g 

-agriculture 

(g 

-industry 

Q 

Q 

• 

-construction 

.53.4 

-services 

-  Others 

50.0 

134.1 

g 

rj 

Q 

• 

H 

-agriculture 

j 

-industry 

-construction 

-services 

-Others 

ioT-

NATIONAL  ACCOUNTS 

Gross  Domestic  Product  (Current  Prices) 

567300 

716600 

791000 

1096807 

1139221 

1252100 

1990 

1991 

1992 

1993 

1994 

1995 

in Millions of National Currency 

Gross  Domestic Product  (Current  Prices) 

Gross Domestic  Product 

Gross Domestic  Product 

Final consumption  expenditure 

-of households  and NPISH 

-of general  government 

Gross fixed  capital  formation 

Exports  of goods and  services 

Imports  of goods and  services 

Final  consumption  expenditure 

-of households  and NPISH 

-of general  government 

Gross fixed  capital  formation 

Exports of goods and  services 

Imports of goods and  services 

in Billions of ECU 

in Purchasing Power Standard per capita 

32.1 

33.3 

36.1 

8749.0 

9698.0 

9410.0 

% change over the previous year 

-14.2 

-22.8 

-28.5 

-9.0 

-17.7 

63.3 

44.8 

18.5 

29.9 

57.5 

50.7 

-6.4 

8.9 

15.1 

-3.1 

8.9 

6.8 

22.0 

-0.9 

2.0 

2.9 

-0.1 

-7.7 

7.5 

10.4 

in % of Gross Domestic Product 

71.3 

50.9 

20.4 

28.2 

53.4 

54.1 

69.8 

48.1 

21.7 

27.5 

51.5 

50.2 

2.6 

3.0 

5.4 

-2.6 

17.3 

0.2 

7.8 

67.6 

46.4 

21.2 

27.5 

51.4 

52.8 

4.8 

3.4 

6.1 

-3.7 

16.1 

7.9 

19.2 

76.7 

57.3 

19.4 

31.0 

59.3 

63.8 

• 

-1.2 

4.9 

6.7 

0.9 

-2.1 

69.9 

50.6 

19.4 

28.6 

GDP (% Change over the previous  year) 

^  ?t&::tày''i<#/&.: 

'' 

'îÂi'&f''' 

Final  consumption  expenditure:  Final  consumption  expenditure  of  households  and  Non  Profit  Institution  Saving  Households  (NPISH) 

in  1990-1991 exclude NPISH. Final consumption  expenditure of general  government  in  1990-1991  include NPISH. 

VO& 

MAIN ECONOMIC INDICATORS 

Inflation  rate 

9.7 

56.5 

11.1 

20.8 

10 

9.1 

8.8 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

. 

percentage change over the previous year 

Industrial  production  volume  indices 

Gross  agricultural  production  volume  indices 

Unemployment  rate  (ILO  methodology) 

-Total 

- less then 25 years 

- 25 years and  more 

Gross Foreign  debt 

Balance  of  payments 

-Exports of goods 

-Imports of  goods 

-Trade  balance 

-Services, net 

-Income, net 

-Current account  balance 

-Capital  and fin. acc.(excl.  reserves) 

-Reserve  assets 

previous year »  100 

94.7 

97.7 

102.1 

94.0 

109.2 

105.0 

106.8 

in */• labour force 

3.9 

3.8 

7.7 

3 

3.6 

6.8 

2.9 

3.4 

6.1 

2.9 

in Billions of USD 

4.548 

5.838 

in millions of  USD 

12997.2 

14016.4 

21462.4 

-13308.9 

-14905.3 

-25140.3 

21702.5 

-27674.3 

-311.8 

1010.7 

-117.4 

669.2 

2470.0 

-3029.3 

-888.8 

-3677.8 

-5971.8 

733.0 

-20.2 

-49.7 

3371.1 

1842.0 

-105.7 

-1369.1 

8232.6 

-2371.6 

-7458.1 

1785.1 

-679.9 

-4476.4 

4072.3 

828.0 

Inflation  rate:  Percentage  change  of yearly  average  over  the  previous  year 

all  items  index  (data  are  based  on  national  CPIs which  are 

not strictly  comparable). 

Industrial  production  volume  indices:  Industrial  production  covers  mining  and  quarrying,  manufacturing  and  electricity,  gas  and  water 
supply  (according  to  the  NACE  Classification  Sections  C,D,E).  In  1993-94  the  index  of  total  industrial  production  is  based  on 
exhaustive  surveying  in  enterprises  with  25  or  more  employees,  since  1995  with  100  or  more  employees;  and  on  estimates 
proceeding  from  quarterly  sample  surveys  for  enterprises  up  to  24  (or  99)  employees  and  for  natural  persons  -  tradesmen  not 
registered  in the Business Register. Indices for branches, however, cover only enterprises with 25 or more employees up to the end of 
1994 and since  1995 with  100 or more. 

Gross  agricultural  production  volume  indices: 

Indices  based  on  evaluation  of  all  individual  products  of  gross  agricultural  production. 

Constant prices refer to  1989. 

Unemployment  rate  (by  ILO  methodology):  Percentage  of the  unemployed  labour  force.  This  rate  is derived  from  LFSS  (Labor  Force 

Survey) observing the following  ILO definitions  and recommendations: where 
Labor force  employed  and unemployed persons in the sense of the ILO definitions  stated below. 
The  employed 
all  persons  aged  15+,  who  during  the  reference  period  worked  at  least  one  hour  for  wage  or  salary  or  other 
remuneration  as employees, entrepreneurs,  members  of cooperatives  or contributing  family  workers.  Members  of  armed  forces  and 
women on child-care  leave are included. 
The  unemployed  all  persons  aged  15+, who concurrently  meet all three conditions of the ILO definition  for  being classified  as the 
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight. 
The persons on compulsory  military service are excluded from the employed but women on additional child-care leave are included. 

Gross  foreign  debt  :  Debt is extracted  form the OECD's  External Debt Statistics. 

Balance  of  payments:  Data  is derived  from  IMF database,  their comparability  with  respective  EU  statistics  can  not be  guaranteed,  but 
balance  of payments  is compiled  mainly  in accordance  to IMF standards.  Balance  in trade of goods  in accordance  with  balance 
of  payments  principles.  Exports  and  imports  are  both  in  f.o.b.  values.  Net  income  includes  direct,  portfolio  and  other 
investment  income,  compensation  of employees. Current  account  balance  by definition  of  IMF  5th  Manual, capital  transfers  are 
excluded.  Reserve  assets:  it means  changes  in reserve  assets  during  the year;  (+) signifies  an  increase,  (-) a decrease  in  reserve 
assets. 

\o°\ 

FOREIGN TRADE 

Imports and experts (current  prices) 

-  Imports 

-  Exports 

- Balance of trade 

External  trade volume  indices 

-  Imports 

-  Exports 

Structure of Import Trade  by SITC (current  prices) 

- (0+1) food  and live animals, beverage and  tobacco 

-  2 crude materials, inedible 

-  3 mineral  fuels  and  lubricants 

•  4 animal and vegetable oils etc. 

-  5 chemicals and related  products 

-  6 manufactured  goods classified  chiefly  by material 

-  7 machinery  and transport equipment 

-  8 miscellaneous manufactured  articles 

-  9 goods not elsewhere  classified 

Structure  of Export Trade  by SITC (current  prices) 

- (0+1) food  and live animals, beverage and tobacco 

-  2 crude materials,  inedible 

-  3 mineral  fuels  and  lubricants 

-  4 animal  and vegetable oils etc. 

-  5 chemicals and related  products 

-  6 manufactured  goods classified  chiefly  by material 

-  7 machinery  and transport  equipment 

-  8 miscellaneous manufactured  articles 

-  9 goods not elsewhere  classified 

External  trade  price  indices 

-  Imports 

-  Exports 

1992 

1993 

1994 

1995 

1996 

in millions of USD 

12860 

13206 

346 

14971 

14255 

-716 

previous year »  100 

106.7 

119.1 

114.2 

102.6 

in V» of total Import 

7.3 

5 

11.1 

0.4 

12.1 

15.9 

36.1 

11.7 

0.4 

8.2 

4.9 

10 

0.4 

13.1 

16.5 

35 

11.9 

in % of total  Export 

7.8 

6.1 

6.2 

0.2 

9.5 

29.9 

27.6 

12.7 

6.5 

6.8 

5.7 

0.3 

10 

30.5 

25.9 

14.3 

25265 

21657 

-3608 

123.7 

105.7 

27824 

21918 

-5906 

109.6 

100 

6.3 

4.5 

7.8 

0.3 

11.8 

20.3 

37.1 

11.9 

5.6 

5.2 

4.3 

0.2 

9.3 

32.2 

30.4 

12.8 

6.5 

3.7 

8.7 

0.3 

11.8 

19.3 

38.2 

11.5 

5.1 

4.7 

4.5 

0.2 

9.1 

28.8 

32.7 

14.9 

previous year =  100 

98.8 

102.3 

100.6 

103.9 

104 

104.6 

102.8 

103.5 

7.5 

5.8 

15.5 

0.3 

9.8 

10.3 

41.5 

9.3 

0 

8.8 

6.5 

5.7 

0.1 

9.2 

32.3 

25.4 

12 

Imports  and  exports  (current  prices),  External  trade  volume  indices  and  Structure  of  external  trade  by  SITC  (current  prices): 

Trade  data  exclude  direct  re-exports,  trade  in  services  and  trade  with  customs  free  zones  as  well  as  licenses,  know-how  and 
patents. The  data  are  based  upon  the  special  trade  system  and  are  regularly  updated.  For  1994: data  uses the  methodology  in 
use up to the end of  1995.  From year  1995 on: data uses the methodology  in use just since January  1, 1996.: 
Trade  Classifications:  The  Czech  Republic  is  using  the  commodity  classification  according  to  the  Combined  Nomenclature. 
Imports  are  recorded  on  FOB  basis  and  are captured  with the date  the commodities  are released  into circulation  in the  country. 
Exports  are  recorded  on  FOB  basis  and  are  captured  with  the  date  on  which  the  commodities  cross  the  customs  border.  The 
customs statistics  is utilized  for  monitoring of foreign  trade data. Eurostat has converted National  Currencies to the US dollar  by 
applying the International  Monetary  Fund annual  average exchange rates. 

External  trade  price  indices:  The price  indices have been calculated  by "unit value" method. 

wo 

FOREIGN 
TRADE 

Structure of imports by main countries (current prices) 

1 st partner 
2nd partner 
3rd partner 
4th partner 
5th partner 
others 

Structure of exports by main countries (current prices) 

1st partner 
2nd partner 
3rd partner 
4th partner 
5th partner 
others 

1992 
* 

DE 
RU 
AT 
US 
IT/FR 

DE 
RU 
AT 
IT 
PL 

26.3 
20.2 
9.1 
5.4 
4.7 
29.6 

33.3 
8.5 
7.4 
5.7 
5 
40.1 

1993 

1994 

1995 

1996 

DE 
SK 
RU 
AT 
IT 

DE 
SK 
AT 
IT 
RU 

in •/• of total imports 

25.4 
17.4 
9.8 
7.8 
4.7 
34.9 

DE 
SK 
RU 
AT 
IT 

v  25.5 
14.2 
8.4 
8.1 
5.1 
38.7 

in % of total exports 

26 
21.5 
6 
5 
4.5 
37 

DE 
SK 
AT 
IT 
RU 

29.4 
16.4 
7.1 
4.4 
3.9 
38.8 

DE 
SK 
RU 
AT 
IT 

25.8 
13.1 
8.9 
6.9 
.  5.8 
39.5 

DE 
SK 
AT 
PL 
IT 

31.8 
16.2 
6.5 
5.4 
4 
36.1 

DE 
SK 
RU 
IT 
AT 

DE 
SK 
AT 
PL 
IT 

29.8 
9.6 
7.4 
5.9 
5.7 
41.6 

35.9 
14.3 
6.5 
5.6 
3.3 
34.4 

Structure of export by main partners 
in 1996 

Structure of import by main partners 
in 1996 

34.4% 

41.6% 

5.6% 

6.5% 

14.3% 

5.9% 

AT 

DE 

FR 

IT 

Austria 

Germany 

France 

Italy 

PL 

RU 

SK 

US 

Poland 

Russian  Federation 

Slovakia 

United States 

u\ 

SOCIAL INDICATORS 

Population on  1 January 

1991 

1992 

1993 
thousand 

1994 

1995 

10304.61 

10312.55 

10325.7 

10334 

10333 

Proportion of population  by age  1 January  1995 

in %  of total  population 

y0_14 
yl5_24 
y25_44 
y45_64 
y65_max 

Live  births 
Deaths 
Infant  deaths 

- Less than  1 year 
- Still birth 

Marriages 
Divorces 

Crude  marriage  rate 

Crude  divorce  rate 

Natural  growth 
Net  migration 
Total  population  growth 
Total  fertility  rate 
Infant  mortality  rate 
Late foetal  mortality  rate 
Life  expectancy 

- Males 
- Females 
Life  expectancy 

- Males 
-  Females 

total number 

129354 
124290 

121705 
120337 

121025 
118185 

1343 
496 
71973 
29366 

7 

2.9 

0.5 
0.3 
0.8 
1.86 
10.38 
3.82 

1204 
437 
74060 
28572 

1020 
445 
66033 
30227 

per  1000 of  population 

7.2 

2.8 

0.1 
1.2 
1.3 
1.70 
9.89 
3.58 

68.7 
76.6 

6.4 

2.9 

0.3 
0.5 
0.8 
1.70 
8.40 
3.66 

69.3 
76.4 

at 65 years 

106618 
117497 

847 
336 
58440 
30939 

5.7 

3.0 

-1.1 
1 
-0.1 
1.40 
7.90 
3.14 

69.5 
76.6 

18.9 
16.5 
27.9 
23.6 
13.1 

5.3 

3.0 

'7.7 

70 
76.9 

12.7 
16.2 

Infant  Deaths:  Data  for  the year  1994: Children  born  in  1993 and  1994 deceased  before  the age of  1 year  in  1994. 

Infant  Mortality  Rate:  Data  for  the year  1994: Children  born  in  1993 and  1994 deceased  before  the age of  f  year  in  1994. 

ux-

LABOUR MARKET 

Economic Activity  Rate  (ILO  methodology) 

Average  employment 

Unemployment  rate by age (ILO  methodology) 

- total 
- less then 25  years 
- 25 years and  more 

Registered  unemployment  (end  of  period) 

J&' 

Average  paid  employment  indices  by NACE  classes 

- Agriculture, hunting, forestry  and  fishing 
- Mining and  quarrying 
-  Manufacturing 
- Production  and  distribution of electricity, gas and water 
-  Construction 
- Transport, storage and  communication 

Monthly  nominal wages  and  salaries  indices  by NACE  classes 

- Agriculture, hunting, forestry  and  fishing 
- Mining and  quarrying 
-  Manufacturing 
-  Production  and distribution of electricity, gas and water 
-  Construction 
- Transport,  storage and  communication 

Monthly  wages  and  salaries  indices 
-  nominal 
-real 

1993 

1994 

1995 

1996 

in percent of population age +15 

63.3 

63.3 
in thousand 

62.8 

62.6 

3420 

3369 

3123 

3030 

in % of labour force 

3.9 

3.6 
6.8 
2.9 
in % or economically active population 

3.8 
7.7 
3 

3.5 

3.2 

2.9 

1993 

1994 

1995 

1996 

Previous year «  100 

3.4 
6.1 
2.9 

3.5 

82.5 
91.1 

119.6 
117 
123.8 
121.5 
130 
123.3 

125.3 
103.7 

87.4 
90.1 
95.3 
102.7 
104.5 
96.6 

115 
113.2 
117.3 
117.3 
116.7 
120 

118.5 
107.7 

80.2 
89.5 
88.7 
97.5 
100.2 
98.7 

117.3 
114.8 
118.4 
118.8 
115.9 
121.1 

118.5 
108.6 

95.3 
92.3 
96.4 
98.2 
98.7 
98.9 

113.9 
115.8 
117.5 
119.1 
114 
118.8 

118 
108.5 

Economic  activity  rate  (ILO  Methodology):  percentage of  labor force  in  the  total  population  aged  15+. This  rate  is derivated  of  LFSS 

(Labor Force Survey) observing the following ILO definitions and recommendations:  where: 
Labor force  employed and unemployed persons in tlie sense of the ILO definitions stated below. 
The  employed  all  persons  aged  15+,  who  during  the  reference  period  worked  at  least  one  hour  for  wage  or  salary  or  other 
remuneration  as employees,  entrepreneurs, members of cooperatives  or contributing  family workers. Members of armed forces and 
women on child-care leave are included. 
The unemployed  all  persons aged  15+, who concurrently meet all  three conditions of the ILO definition  for being classified  as the 
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight. 

Unemployment  rate  (by  ILO  methodology):  Percentage of the unemployed  labour force  Tliis  rate  is derived  from  LFSS  (Labor Force 

Survey) observing the following ILO definitions  and recommendations (See ILO definitions above) 
The persons on compulsory military service are excluded from the employed but women on additional child-care leave are included. 

Average  employment  and Average  paid  employment indices by NACE classes: The data for entrepreneurial  sphere cover organizations 

with 25 or more employees, since  1st quarter  1995 in industry, trade, catering and accommodation with  100 or more employees. The 
data cover  also  all  budgetary,  subsidised  organisations  and  persons  with  secondary job  are  included.  Armed  forces,  apprentices, 
employees on child-care and additional child-care leaves are excluded. 

Registered  unemployment  (end  of  period):  Registered  unemployment  in  per  cent  -  percentage  of  unemployed  registered  in  civil 
economically  active  population,  based  on  Labour  force  sample  survey  (LFSS).  Up  to  tlie  1st  quarter  1994  economically  active 
population based on administrative records (excl. armed forces); since tlie 2nd Quarter  1994 economically  active population includes 
persons in employment (incl. armed forces) based on LFSS, and registered unemployed persons. 

Monthly  wages  and  salaries  indices:  Monthly real wages  and salaries indices  arc derived  from £ro55 nominal  wages  and salaries  indices 
divided  by  consumer  price  indices.The  data  for  entrepreneurial  sphere  cover  organizations  with  25  or  more  employees,  since  1st 
quarter  1995  in  industry,  trade,  catering  and  accommodation  with  100  or  more  employees.  The  data  cover  also  all  budgetary, 
subsidised  organisations  and  persons  with  secondary job  arc  included.  Armed  forces,  apprentices,  employees  on  child-care  and 
additional child-care leaves are excluded. 

ti2> 

PUBLIC FINANCE 

Government  budget 

-Government  revenue 
-Grants 
-Consolidated  central  government expenditure 
-Consolidated  general  government  expenditure 
-Consolidated  central  government  deficit/surplus 
-General  government  deficit/surplus 

1990 

1991 

1992 

1993 

1994 

1995 

in Billions of national currency 

385.03 

425.63 

486.50 

383.32 
445.12 
1.71 
3.97 

441.21 
521.27 
-15.58 
-14.38 

499.36 
596.35 
-12.86 
-15.77 

Government  budget 

in % of Gross Domestic Product 

-Consolidated  central government  expenditure 
-Consolidated  general government  expenditure 
-Consolidated  central government  deficit/surplus 
-General  government  deficit/surplus 

-

42.1 
48.9 
0.2 
0.4 

42.5 
50.2 
-1.5 
-1.4 

41.2 
49.2 
-1.1 
-1.3 

Government  budget:  These  data  relate  to central  and  general  government  as published  in the  IMF's  Government  Finance  Statistics 

Yearbook (1996) (GFSY); included  also is the country's  presentation  in the GFSY. 
Because  the  GFSY  does  not  present  statistics  for  general  government,  but  for  individual  levels  of  government  separately,  the 
consolidated  series  presented  here  were  obtained  from  central  and local  government  data  and  adjusted  in consolidation  for the 
identified  intergovernmental  transfers. 
Even  though  the statistics  cover  the  central  and  local  government  published  in GFSY, the  coverage  may  not be  exhaustive  if 
some  central  or local  government  units  are not included  in that coverage.  A measure of the exhaustiveness  of the coverage can 
be obtained  by comparing  in the GFSY the note on the coverage of data for individual  countries  with  the list of central  and local 
government  units  provided. 
It should  be noted  that the deficit/surplus  used  here  is equal to revenue  and grants minus expenditure,  and does  not take  lending 
minus repayments  into account (see further  below). 
The  netting  of  inter-government  transfers  carried-out  in  the  attached  tables  is  limited  to  the  current  and  capital  transfers 
consisting  of  the  identified  grants  and  current  and  capital  subsidies  between  the  levels  of  government.  Other  types  of 
transactions  occurring  between  government  levels, such  as the payments  of taxes  and employers'  social  security  contributions, 
and  the  reciprocal  purchases  of goods  and  services  are not  normally  classified  as  inter-governmental  transfers  have  not  been 
eliminated  in  the  consolidation  process.  Finally,  whether  the  absence  of  data  for  current  and  capital  transfers  should  be 
attributed  to  the  absence  of  transfer  or  to  lack  of  data  is  unclear;  in  all  cases  absence  of  information  on  transfers  have  been 
deemed  to represent  zero-transfers. 

a.  Government  expenditure  consists  of general  government  cash  expenditures  on  current  and  capital  goods  and 

services,  interest payments and current and capital transfers  but excludes non-cash transactions. 

b. Deficit/surplus  equals cash revenue and cash grants minus cash expenditure.  This  measure of the  deficit/surplus 
differs  from  that  used  in  GFS which  equals  cash  revenue  and  cash  grants,  minus  cash  expenditure,  minus  net  lending.  This 
exclusion  of  net  lending(consisting,  in  the GFS  methodology,  of  operations  in  financial  assets  and  liabilities  carried  out  for 
specific  policy  purposes, rather  than  for liquidity  purposes)  brings the measure of the deficit/surplus  presented  here closer to the 
national  accounts concept of net borrowing/net lending.  Also, as a result of this exclusion,  receipts  from  privatisation  (classified 
as  repayments  in the GFS methodology)  do not enter  in the determination  of the  deficit/surplus  presented  in the attached  tables 
(and  therefore  do not reduce the deficit). 

VVMr; 

FINANCIAL SECTOR 

Monetary  aggregates 

- Monetary  aggregate  Ml 
- Quasi  money 

1990 

1991 

1992 

| 

1993 
Billions (10*9) of US Dollars 

1994 

1995 

1996 

12.01 
12.03 

15.04 
15.99 

17.04 
22.04 

17.39 
23.61 

Total  reserves ( gold  excluded, end  of  period) 

Millions (10*6) of US Dollars 

Average  short  term  interest  rates 

- lending  rate 
- deposit  rate 

Official  discount  rate  (end  of  period) 

USD exchange  rates 

Average of period 

End of period 

ECU exchange  rates 

Average of period 

End of period 

3789 

6145 

13843 

12297 

%  per annum 

14.07 
7.03 

1  USD =  ..CZK 

13.12 
7.07 
8.5 

12.8 
6.96 
9.5 

12.54 
6.79 
10.5 

29.153 

29.955 

28.785 

28.049 

26.541 

26.602 

27.145 

27.332 

1  ECU-  CZK 

34.138 

33.420 

34.240 

34.501 

34.716 

34.961 

34.715 

34.247 

Monetary Aggregates:  Money  (Ml):  Includes demand  deposits and currency outside banks.  Quasi money  (QM):  Include time, savings 
and  foreign  currency  deposits.  Eurostat has converted National  Currencies to the US dollar by applying the International  Monetary 
Fund annual end of period exchange rates. 

Total  reserves  (gold  excluded,  end  of  period): 

The  statistics  on  official  foreign  reserves  are  extracted  from  the  IMF's  monthly 
International  Financial  Statistics  (IFS).  Total  reserves (gold  excluded)  are defined  as the  sum  of central  bank  holdings  of  foreign 
currencies  and  other  (gross)  claims  on  non-residents; this definition  excludes  claims on  residents  denominated  in  foreign  currency. 
According  to  tlie  definition;  official  foreign  reserves  are  calculated  at  market  exchange  rates  and  prices  in  force  at tlie  end  of  the 
period  under  consideration.  Total  reserves  (gold  excluded)  published  in  IFS  may  differ  from  the  figures  published  by  the  national 
authorities.  Some  factors  contributing  to  possible  differences  are  the  valuation  of  the  reserve  position  in  the  Fund,  and  a  different 
treatment of claims in non-convertible currencies. 

USD  exchange  rates: 
Internationales". 

International  Monetary  Fund  exchange  rates  as  present  in  the  publication:  "Statistiques  Financières 

Average  short  term  interest  rates:  Data are extracted  from  the IMF's monthly  International  Financial  Statistics (IFS). Average  short-term 
lending  and  deposit  rates  relate  to  period  averages.  Lending  rates  generally  consist  of  the  average  interest  rate  charged  on  loans 
granted  by reporting  banks. Deposit rates relate to average demand  and  time deposit rates or average time deposit rates. These rates 
may  not  be  strictly  comparable  across  countries  to  tlie  extent  the  representative  value  of  the  reporting  banks  and  the  weighting 
schemes vary. 

tt** 

INFLATION 
changes) 
Percentage change of the CPIs with the current month compared with the corresponding month of the previous year (t/t-12) 

(12  months 

Inflation  (%  change  of CPI) 

Inflation  (12  months  changes): 

Inflation  rates  (12  months  changes)  are  percentage  changes  of  the  CPIs  with  the  current  month 
compared  with  the  corresponding  montli  of  the  previous  year.  Inflation  rates  are  based  on  national  which  are  not  strictly 
comparable  between  candidate  countries  or  with  those  based  on  EU  HICPs  (different  methods,  concepts,  practices  in  the 
calculation  of CPIs). 

Ub 

INDUSTRY 

Structure of GDP by economic activities (NACE, current prices) 

- Mining and quarrying 
.  Manufacturing 
- Production and distribution of electricity, gas and water 

Industrial production volume indices by NACE classes 

- Total 
- Mining and quarrying 
• Manufacturing 
- Production and distribution of electricity, gas and water 

1993 

| 

1994 

| 
in % of Gross Domestic Product 

1995 

| 

1996 

3.7 
26.7 
6.6 

94.7 
92.9 
92.3 
95.2 

2.8 
26.3 
5.7 

previous year »  100 

102.1 
100.6 
100.1 
97.2 

2.4 
26.6 
5.1 

109.2 
98.6 
108.2 
103.4 

2.2 
26.6 
5 

106.8 
105 
105.5 
102.5 

Industrial production volume indices by NACE classes 
-Total 
- Mining and quarrying 
- Manufacturing 
- Production and distribution of electricity, gas and water 

1993Q1  1993Q2  1993Q3  1993Q4  1994Q1  1994Q2  1994Q3  1994Q4 
corresponding period of the previous yew <• 100 

96 
92 
94 
95 

93 
93 
90 
97 

95 
96 
91 
99 

99 
98 
98 
88 

101.6 
97.6 
100.6 
96.3 

106.2 
106.4 
102.9 
94.8 

102.6 
101.3 
99.3 
110.6 

1995Q1  1995Q211995Q3  1995Q4  1996QI  1996Q2  1996Q3  1996Q4 
corresponding period of the previous year -  100 

108.2 
S7.1 
106.4 
102.9 

107.4 
95.6 
105.8 
104.3 

107.6 
100.5 
106.7 
101.8 

,113.2 
101.0 
113.7 
104.3 

109.7 
110.1 
•  107.4 
109.8 

106.6 
102.4 
105 
97.9 

109.1 
114 
108.9 
105.9 

102.6 
95.5 
101.3 
96.9 

Structure of GDP by economic activities (NACE, current prices) : is calculated at factor costs. 

industrial  production  volume  indices  by  NACE  classes: 

Industrial  production  covers  mining  and quarrying,  manufacturing and 

electricity, gas and water supply (according to the NACE Classification Sections C,D,E).  In 1993-94 the index of total industrial 
production is based on exhaustive surveying in enterprises with 25 or more employees, since 1995 with 100 or more employees; and 
on estimates proceeding from quarterly sample surveys for enterprises up to 24 (or 99) employees and for natural persons - tradesmen 
not registered in the Business Register.  Indices for branches, however, cover only enterprises with 25 or more employees up to the 
end of 1994 and since 1995 with 100 or more. 

w-Y 

INFRASTRUCTURE 

Railway network 
Railway transport 

- freight transport 
- passengers transport 

1991 

1992 

1993 

1994 

1995 

in Km per  1000 Km2 

119.9 

119.7 

119.8 

119 

120 

in million ton or passengers-km 

25579 
8548 

24401 
8481 

25459 
8023 

in  1000 of population 

Number of telephone subscribers 

3031 

314J 

324| 

342| 

360 

inhabitants 

Number of inhabitants per passenger car 

4.2| 

4.11 

3.5| 

3.5| 

3.3 

\\% 

AGRICULTURE 

Land  area  by land-use  categories 

-total 
- agricultural  land 
-  forest 
- arable land 

- permanent meadows  and  pastures 

Agricultural  land  by  legal  status 

- state enterprise 
-  Cooperatives 
- others 

1992 

1993 

1994 

1995 

1996 

in  1000 Hectares 

7886 
4283 
2629 
3175 
872 

7887 
4282 
2629 
3173 
873 

7887 
4281 
2630 
3158 
886 

7887 
4280 
2630 
3143 
902 

7887 

in % of agricultural land 

14 
49.6 
36.4 

4.5 
41.9 
53.6 

Share  of GDP 

1992 

1993 

1994 

1995 

1996 

in % of Gross Domestic Product 

- Agriculture, hunting, forestry  and fishing  (Nace A+B) 

6.5 

5.8 

5.2 

5 

Previous year-  100 

Gross agricultural  production  volume  indices 

97.7 

94 

105 

99.8 

Main  crops  by  area 

- Cereals 
- of which: wheat 
- Potatoes 
- Sugar beet 

- Fodder beet 

Main  crops  by yield 

- Cereals 
-ofwhich:  wheat 
-  Potatoes 
- Sugar beet 
- Fodder beet 

in  1000 Hectares 

1607 
783 
105 
107 
12 

1660 
812 
77 
91 
12 

1580 
832 
78 
«•  94 
12 

1583.1 
799 
85 
104 

in  100 kg/Hectares 

. 

. 

40.3 
42.2 
228.2 
402.6 
445.8 

40.8 
45.7 
159.9 
356.0 
353.5 

41.8 
.46.0 
170.5 
394.9 
374.9 

42.0 
46.7 
211.8 
415 
377.3 

1589 
759 
111 
125 
19 

41.3 
45.0 
177.4 
309.7 
339.0 

Sales or  procurement  of animal  for  slaughter 

in  1000 tons of live weight 

1992 

1993 

1994 

1995 

1996 

-  pigs 
-  cattle 
- poultry 

Livestock  breeding  intensity  (end  of  period) 

-  cattle 
-  of which: cows 
-  sheep 

-  pigs 
-  of which: sows 

536.1 
402.8 
153.2 

582.2 
390.3 
113.3 

515 
313.3 
109.9 

565.8 
322.9 
140 

607 
310.4 
132.1 

Heads per  1000 Ha of agricultural  land 

523 
200 
50 

474 
179 
45 

465 
178 
29 

Heads per  1000 Ha of arable land 

1287 
93 

1220 
92 

1210 
97 

445 
168 
26 

1290 

Share  of GDP  is calculated  at  factor  costs. 

Gross  agricultural  production  volume  indices: 

Indices  based  on  evaluation  of all  individual  products  of  gross  agricultural  production. 

Constant prices refer  to  1989. 

Sales or  procurement  of animals  for  slaughter:  The data refer to tlie sales of principal products of agriculture. 

\\P[ 

Czech Republic 
1993 

A/  Country boundary 
/V  Main railway line 
Ferry connection 

A/  Motorway 
A/  National road, Double lane 
A/  National road 
A/  Principal road 
A/  Main navigable waterway 

Selected major settlements: 
(1 000 inhabitants) 

O 
• 
• 
• 

200-250 
250 - 500 
500-1000 
>1000 

General information about the country: 
Age groups (in years): 

L_J  <15 
WÊÊ  15- 65 
•i  >65 

Living standard (in 1993): ECU 2 625 
(QDPparoaplta) 

Area: 78 864 km8 
Administrative regions: 8 
Population: 10 333 800 

Souroa: Czaoh Statlatioa] Offloa 
Cartography and gaographlo Information managamant: 9 I 8 00 

eurostai 

Czech Republic 
1993 

Legend: 

A/  Country boundary 

A/  Region boundary 

COUNTRY  NAME 
REGION NAME 
OTYNAME 

Selected major settlements: 
(1 000 inhabitants) 
200 -  250 

O 

• 
• 
• 

250 -  500 
500-1000 
> 1  000 

General information about the country: 
Age groups (in years): 

m 

<15 

15-  65 

>65 

z 

Uving standard (in 1993): ECU 2 625 
(GDP par capta) 

Area: 78 864 km2 
Administrative regions: 8 

Population: 10 333 800 

Souro»: Ozaeh «ahatloaj Offloa 
Cartography and gaograpMo information managamant: QI8CO 

75 km 

eurostat 

ISSN 0254-1475 

COM(97) 2009 final 

DOCUMENTS 

EN 

11  01  06 

Catalogue number  : CB-CO-97-377-EN-C 

ISBN 92-78-22895-8 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg