REPORT FROM THE COMMISSION Czechia Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Czechia, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 543 final  REPORT FROM THE COMMISSION Czechia  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Czechia 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general  escape  clause  of  the  Stability  and  Growth  Pact.   The  clause,  as  set  out  in  Articles 
5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of 
Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe 
economic downturn. In its Communication, the Commission shared with the Council its view 
that, given the expected severe economic downturn resulting from the COVID-19 outbreak, 
the  current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data  notified  by  the  Czech  authorities  on  31  March  2020  and  subsequently  validated  by 
Eurostat1  show  that  the  general  government  surplus  in  Czechia  reached  0.3%  of  GDP  in 
2019, while general government  gross debt stood at 30.8% of GDP. According to the 2020 
Convergence  Programme,  Czechia  plans  a  deficit  of  5.1%  of  GDP  in  2020,  while  debt  is 
planned at 37% of GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Against this background, the Commission has therefore prepared this report, which analyses 
Czechia’s  compliance  with  the  deficit  criterion  of  the  Treaty.  The  debt  criterion  can  be 
considered to be met as the debt ratio in 2019 is below the Treaty reference value of 60% of 
GDP.  It  takes  into  account  all  relevant  factors  and  gives  due  consideration  to  the  major 
economic shock linked to the COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

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Table 1. General government deficit and debt (% of GDP)  

2016 

2017 

2018 

2019 

2020 
COM 

2021 
COM 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 

+0.7 

+1.5 

+0.9 

+0.3 

-6.7 

-4.0 

36.8 

34.7 

32.6 

30.8 

38.7 

39.9 

Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION 

Based on the 2020 Convergence Programme, Czechia’s general government deficit in 2020 is 
planned to reach 5.1% of GDP, above and not close to the Treaty reference value of 3% of 
GDP. 

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission 2020 spring forecast projects a contraction of real GDP in 2020 by 6.2%. 

The  planned  excess  over  the  Treaty  reference  value  is  not  temporary  based  on  the 
Commission  2020  spring  forecast,  which  projects  the  general  government  deficit  to  remain 
above 3% of GDP in 2021.  

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference  value.  The  planned  excess  is  considered  to  be  exceptional  but  not  temporary  as 
defined  by  the  Treaty  and  the  Stability  and  Growth  Pact.  Hence,  the  analysis  suggests  that 
prima  facie  the  deficit  criterion  for  the  purpose  of  the  Treaty  and  Regulation  (EC)  No 
1467/97 not fulfilled. 

3. 

RELEVANT FACTORS  

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration. 

In the current  situation,  a key  additional factor to  take into consideration regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results in  a highly  uncertain outlook. The pandemic has also  led to 
the activation of the general escape clause. 

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3.1. 

 COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those measures will contribute to substantially higher government deficit and debt positions. 

3.2  Medium-term economic position  

Czechia’s  economy  is  set  to  suffer  a  strong  hit  from  the  COVID-19  pandemic  in  2020.  As 
external  demand  drops  and  lockdown  measures  disrupt  economic  activity,  according  to  the 
Commission 2020 spring forecast  GDP is  expected to  drop by 6.2% in  2020.  Investment  is 
expected  to  contract  sharply,  owing  to  value-chain  disruptions,  increasing  uncertainty  and 
workforce shortages during the lockdown period. Trade is also set to be affected strongly due 
to the structure of Czechia’s exports. This a mitigating factor in the assessment of Czechia’s 
compliance with the deficit criterion in 2020. The economy is expected to gradually recover 
in  2021,  growing  by  5%  but  remaining  below  the  2019  level.  The  upturn  is  forecast  to  be 
mainly  driven  by  an  increase  in  private  consumption  and  investment.  Unemployment  is 
expected  to  be  affected  as  well,  reaching  around  5%  in  2020,  but  its  increase  should  be 
cushioned by the government’s measures, a previously tight labour market and a low share of 
temporary contracts. Nonetheless, there is a great degree of uncertainty surrounding the near-
term macroecomic outlook.. 

3.3 

 Medium-term budgetary position 

Based on outturn data and the Commission 2020 spring forecast, Czechia was compliant with 
its medium-term budgetary objective in 2019.  

After  the  start  of  the  pandemic,  the  State  budget  for  2020  had  to  be  revised  to  a  deficit  of 
5.5%  of  GDP.  The  2020  Convergence  Programme  provides  information  on  substantial 
measures to contain the pandemic and to support the economy. According to the authorities, 
the  total  amount  of  direct  fiscal  support  provided  to  the  economy  until  22  April  2020  was 
around 4% of GDP, out of which 2.2% of GDP as expenditure. These measures will add to 
the  previously  agreed  increases  in  public  wages,  pensions  and  other  social  benefits.  Some 
new measures have also been discussed and may further affect the State budget. Overall, the 
Programme expects a deficit of 5.1% of GDP in 2020.   

In  2021,  according  to  the  Convergence  Programme,  the  deficit  is  expected  to  decrease  to 
4.1%  of  GDP.  The  recovery  in  tax  revenue  is  expected  to  be  modest,  whereas  current 
expenditures  are  expected  to  continue  growing.  The  Parliament  recently  fast-tracked  a 
legislative amendment to the Law of Fiscal Responsibility, without a prior consultation of the 

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Czech Fiscal Council, making room for the measures related to COVID-19 recovery needs. 
In particular, the amendment increased the maximum structural deficit for 2021 from 1% to 
4% of GDP, , beyond the medium-term objective of a structural deficit of 0.75%, and allowed 
for  a  gradual  adjustment  path  between  2022  and  2027,  with  an  annual  consolidation  of  at 
least 0.5 percentage points of GDP between 2022 and 2027.  

3.4 

Other factors put forward by the Member State 

On  11  May  2020,  the  Czech  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous sections already broadly covers the key factors put forward by the authorities.  

 4. 

CONCLUSIONS 

According to the Convergence Programme Czechia’s general government deficit in 2020 is 
planned to reach 5.1% of GDP, above and not close to the 3% of GDP Treaty reference value. 
The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  but  not 
temporary.  

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors.  

Overall, since the planned deficit is well above 3% of GDP and the excess not temporary, and 
taking  into  account  all  relevant  factors,  the  analysis  suggests  that  the  deficit  criterion  as 
defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled. 

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