Source: EURLEX
Language: en
Format: md

**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 km [2] 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
was multiethnic: 51% Czech, 23% German, 14% Slovak and 5.5% Hungarian,
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
COMECON Czechoslovakia concentrated on developing its heavy industry. In the
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 fouryear 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 twice yearly. 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.

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, thoug [1 ]

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 CrossBorder 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.

_<rtM_ _[r]_ _rf_ **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 twothirds 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 takeover 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

Gross foreign debt/GDP

Exports of goods & services/GDP

Stock of foreign direct investment [1 ]

_million_

_PPS-ECU_ _(1995)_
_per cent (1995)_

_per cent (1995)_
_per cent (1995)_

_per cent_

_per cent_

_billion ECU_

_ECU_ _per head_

10.3

9410

55

5.2

6.3

39

57

5.3

520

_Source: Commission services, national_ _sources,_ _EBRD_

_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 **1** 5% of exports of goods and services.

**Main economic trends** **1994** **1995** **1996**

Real GDP growth rate

Inflation rate

annual average
December

_per cent_

_percent_
on _per cent_

4.8

9.1

7.9

3.6

0.6

-2.9

59.1

5.5

**4.0**

**8.8**

8.6

**3.4**

0.0

-8.6

69.3

2.4

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_

2.6

10.0

9.7

3.8

1.0

-0.1

51.3

2.1

_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
temporary weakening of demand in the EU, this may reflect either a fall in

**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-asyou-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 valueadded 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 stateowned 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 Economy 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 Cooperation 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 crossownership 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
changed. Substantial success has been achieved in stabilizing 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.

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), is likely to remain the technical
supervisory authority under the new system.

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 in the sectors 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 ]

**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 largest, state owned, banks, including increased
participation by foreign capital.

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**

The free movement of persons encompasses two concepts with different logical
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.

Termination of the foreigner's employment, including, unemployment, means
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 nonstate 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, lifelong 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_

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 published its comprehensive, pro-competitive policy for 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.

_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 is operational and administrative structures are sufficient to complete
transposition of EC legislation.

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 procompetitive 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 term provided that current efforts in transposition of laws and their
implementation are continued. Tariffs must be further rebalanced in order to enable the
public operator to take up competition.

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 audiovisual 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
non-domestic (import) transactions. The VAT _acquis_ also contains transitional
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 %-share

industrial

production
(value added)

%-share

industrial

employment

**22**

**20**

8

16

5

6.5

2

**10**

2.5

0.5

92.5

**7.5**

100

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

Total of the above

Other industries

Total Industry

_pm:_

_lndustr.pro_ _duct._ _(excl._ _construct.)_
_as_ _%_ _GDP_

21

15

12

12

12

6

4.5

3.5

2.5

2

90.5

9.5

100

_34_

**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 restructuring steps before full privatisation, the necessary 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.

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, majorityowned 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.
Exports account for a large share of the economy (over 50%) and industrial output.
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
and the Community and ' aims to promote co-operation on the modernisation,
restructuring and privatisation of Czech Republic's agriculture sector as well as the agroindustrial 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, insufficient environmental protection and lack of adequate market
information in certain parts of the marketing chain.

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 crosssubsidised 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.

The Czech Republic has started the development of Community conform efficiency
legislation (e.g. 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 t in 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 transEuropean 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

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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 level and possibly improve interministerial coordination.

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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 timeframe. 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 productrelated 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

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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

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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.

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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
of Refugees. It is also based implicitly on a range of international conventions
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.

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_**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.

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_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
immigrants in a structured manner, including seeking cooperation from IOM.
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.

_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

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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 nonproliferation 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.

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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
of infrastructure and equipment, in particular in terms of computerisation and
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 management, in 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 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

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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

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**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.**

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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-bycountry 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

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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.

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**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.

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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 nonpartisan 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 understaffing. 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.

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_**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.

Indirect taxation: The effective administration of the indirect taxation _acquis_
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
the overall professional standards of the staff, including training measures and
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

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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

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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 Czech Republic's preparation for membership is going forward notably on the basis
of the **Europe** **Agreement** which entered 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. Substantial success has been achieved in stabilising 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.

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. In certain fields, particularly financial services and taxation,
further work is still needed.

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
well as establishment of an effective administrative underpinning. Overall, the
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; research and technological development; telecommunications; statistics;
consumer protection; small and medium enterprises; trade and international economic
relations; and development.

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

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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
agriculture, environment and energy. Further administrative reform will be
indispensable if the Czech republic is to have the structures to apply and enforce the
_acquis_ fully.

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**

CHAMBER SENATE

Political Party Seats % Seats
Civil Democratic Party ODS 68 33 32
Civic Democratic Alliance ODA 13 _**.1**_ _•_ 7

Christian Democratic KDU-CSL 18 _**9**_ 13

Party
Social Democratic Party CSSD 61 31 25
Republican Party SPR-RSC 18 11
Communist Party of KSCM 22 9 2
Bohemia and Moravia

Democratic Union DEU

Independents

Seats

%

33

_**.1**_

%

39.5

8.6

16.0

30.8

2.5

1.2

1.2

Seats

32

ODS

ODA

KDU-CSL

68

13

18

_**9**_

_•_ 7

13

31

11

CSSD

SPR-RSC

KSCM

61

25

18

22

9

2

DEU

200

81

**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.**

Regul ations

#### White Paper chapters

l.Free Movement of Capital Czcch RC P

Number of White Paper measures
2.FM and Safety of Industrial Products Lzccn KC P

Number of White Paper measures
3.Competition Czcch Rcp

Number of White Paper measures
4.SociaI policy and action Czcch Re P

Number of White Paper measures
5.AgricuIture Czech Rep.
Number of White Paper measures
6.Transport Czech Rep.

Number of White Paper measures

7 . A u d i 0 V i s u a I Czech Rep.

Number of White Paper measures
8.Environment Czech Re P

Number of White Paper measures
^Telecommunication Czech Rep

Number of White Paper measures
lO.Direct Taxation Czech Rep

Number of White Paper measures
1 l.Free movement of goods Czech Re P
Number of White Paper measures
12.PubIic Procurement Czech Re P

Number of White Paper measures
13.Financial services Czech Rep

Number of White Paper measures
14.Protection of personal data Czech Rep

Number of White Paper measures
15.Company Law Czech Rep.

Number of White Paper measures
16.Accountancy Czech Rep

Number of White Paper measures

1 7 . C i v i I I a W Czech Rep.

Number of White Paper measures
18.MutuaI rec. of prof. Quai. Czech Re P

Number of White Paper measures
19.1ntellectual property Czech Re P

Number of White Paper measures
20.Energy Czech Rep

Number of White Paper measures
21.Customs law Czech RC P

Number of White Paper measures
22.1ndirect Taxation Czech Rep

Number of White Paper measures
23.Consumer Protection Czcch Rep

Number of White Paper measures
Total Czech Rep

Number of White Paper measures

**IOG**

Direc tives

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

Stage
II/III

**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

Stage I

**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

Total

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**

1990 1992 1993 1994 1995

1000 **hectares**

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

**share of branch GVA in 1990**

            - 0.0

7886 7887 7887

in 1000

10326 10334

5311.7

5022.3

    - per 1 km2

10333

5311.2

5021.8

10321

5305

5016

13r 131 131 131

in % of total population

69.6 67.5 74.7 74.7

per 1000 of population

11.4

10.3

11.7

11.8

11.5

11.7

11.4

9.3

235

3491

5.2

34.1

7.3

53.4

g -agriculture j

rj -industry

Q -construction

- -services

H -Others

European Currency Unit

in % of Total Gross Value Added

**share** **of branch GVA in 1995**

 - 0.0

**134.1**

**134.2**

7.5

50.0

8.3

34.2

**.53.4**

ioT

50.0

g -agriculture

(g -industry

Q -construction

Q -services

- - Others

**NATIONAL ACCOUNTS**

Gross Domestic Product (Current Prices)

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

1990 1991 1992 1993 1994 1995

**in Millions of National Currency**

567300 716600 791000 1096807 1139221 1252100

**in Billions** **of** **ECU**

32.1 33.3 36.1

**in Purchasing Power Standard per capita**

8749.0 9698.0 9410.0

**% change over the previous year**

-0.9

2.0

2.9

-0.1

-7.7

7.5

10.4

-1.2

- 4.9

6.7

0.9

-2.1

69.9

50.6

19.4

28.6

-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

71.3

50.9

20.4

28.2

53.4

54.1

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

**in** _**%**_ **of** **Gross** **Domestic Product**

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

**GDP (% Change over the previous year)**

_**^**_ _**?t&:**_ _**[:]**_ _**tà**_ _**[y]**_ _**''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

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

12997.2

-13308.9

-311.8

1010.7

-117.4

669.2

2470.0

-3029.3

1990 1991 1992 1993 1994 1995 1996 .

**percentage change over the previous year**

**9.7** **56.5** **11.1** 20.8 10 9.1 8.8

**previous year** **» 100**

94.7

97.7

**in** ***/•** **labour** force

102.1

94.0

109.2

105.0

3.6

6.8

2.9

21462.4

-25140.3

-3677.8

1842.0

-105.7

-1369.1

8232.6

-7458.1

106.8

3.4

6.1

2.9

21702.5

-27674.3

-5971.8

1785.1

-679.9

-4476.4

4072.3

828.0

3.9 3.8

7.7

3

in Billions of USD

4.548 5.838

in millions of USD

14016.4

-14905.3

-888.8

733.0

-20.2

-49.7

3371.1

-2371.6

Inflation rate: Percentage change of yearly average over the previous year
not strictly comparable).

all items index (data are based on national CPIs which are

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:

Constant prices refer to 1989.

Indices based on evaluation of all individual products of gross agricultural production.

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

```

25265

21657

-3608

123.7

105.7

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

104

104.6

27824

21918

-5906

109.6

100

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

102.8

103.5

**previous year » 100**

106.7

119.1

114.2

102.6

**in** _**V»**_ **of total** **Import**

8.2

**4.9**

10

0.4

13.1

16.5

35

11.9

```
 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

```

7.3

5

11.1

0.4

12.1

15.9

36.1

11.7

0.4

7.8

6.1

6.2

0.2

9.5

29.9

27.6

12.7

in % of total Export

6.5

6.8

5.7

0.3

10

30.5

25.9

14.3

previous **year =** 100

98.8

102.3

100.6

103.9

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

**Structure of export by main partners**

**in 1996**

**34.4%**

**Structure of import** **by** **main partners**

**in 1996**

**41.6%**

**5.9%**

1992

1993 1994 1995 1996

**in •/•** **of** **total** **imports**

DE 25.8

SK 13.1

RU 8.9

AT 6.9

IT . 5.8

39.5

**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**

**DE**

**SK**

**RU**

**AT**

**IT**

**DE**

**SK**

**AT**

**IT**

**RU**

25.4

17.4

9.8

7.8

4.7

34.9

26

21.5

6

5

4.5

37

DE

SK

AT

IT

RU

DE

SK

RU

AT

IT

v 25.5

14.2

8.4

8.1

5.1

38.7

29.8

9.6

7.4

5.9

5.7

41.6

35.9

14.3

6.5

5.6

3.3

34.4

**in** **%** **of** **total** **exports**

DE

SK

RU

IT

AT

DE

SK

AT

PL

IT

29.4

16.4

7.1

4.4

3.9

38.8

DE

SK

AT

PL

IT

31.8

16.2

6.5

5.4

4

36.1

Poland

Russian Federation

Slovakia

United States

**u\**

AT

DE

FR

IT

**5.6%**

Austria

Germany

France

Italy

**14.3%**
**6.5%**

PL

RU

SK

US

**SOCIAL INDICATORS**

**1991** **1992** **1993** **1994** 1995

**Population on** **1** **January** **thousand**

7.2

2.8

0.1

1.2

1.3

1.70

9.89

3.58

68.7

76.6

**Proportion of population by age 1 January** 1995

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

10304.61

```
 129354

 124290

  1343

  496

 71973

 29366

   7

   2.9

   0.5

   0.3

   0.8

  1.86

  10.38

  3.82

```

```
10312.55 10325.7 10334

```

**in % of total population**

**total number**

```
121705

120337

 1204

 437

74060

28572

```

```
121025

118185

 1020

 445

66033

30227

```

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

10333

18.9

16.5

27.9

23.6

13.1

5.3

3.0

'7.7

70

76.9

12.7

16.2

per 1000 of population

6.4

2.9

0.3

0.5

0.8

1.70

8.40

3.66

69.3

76.4

at 65 years

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

**82.5**

**91.1**

**119.6**

**117**

**123.8**

**121.5**

**130**

**123.3**

**125.3**

**103.7**

1993 1994 1995 1996

**in percent of population age** **+15**

**63.3** **63.3** **62.8** **62.6**

**in thousand**

**3420** **3369** **3123** **3030**

**in** **%** **of labour force**

**3.9** **3.8**

**7.7**

**3.6** 3.4

**7.7** **6.8** 6.1

**3** **2.9** 2.9

**in %** **or economically active population**

**3**

**3.6**

**6.8**

**2.9**

**3.5** **3.2** **2.9** **3.5**

1993 1994 1995 1996

**Previous year «** **100**

**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

Government budget

-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**

486.50

499.36

596.35

-12.86

-15.77

41.2

49.2

-1.1

-1.3

**-**

385.03

383.32

445.12

1.71

3.97

**in** **%** **of** **Gross** **Domestic Product**

42.1

48.9

0.2

0.4

425.63

441.21

521.27

-15.58

-14.38

42.5

50.2

-1.5

-1.4

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

Total reserves ( gold excluded, end of period)

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

1990 1991 1992 | 1993 1994 1995 1996

**Billions** **(10*9)** **of US Dollars**

12.01

12.03

**Millions** **(10*6)** **of US Dollars**

15.04

15.99

17.04

22.04

17.39

23.61

3789 6145 13843 12297

_**%**_ **per annum**

14.07 13.12 12.8 12.54

7.03 7.07 6.96 6.79

8.5 9.5 10.5

**1** **USD** **= ..CZK**

14.07

7.03

7.07

13.12

12.8

6.96

8.5

9.5

29.153

29.955

**1** **ECU-** **CZK**

34.138

33.420

28.785

28.049

34.240

34.501

26.541

26.602

34.716

34.961

27.145

27.332

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:** International Monetary Fund exchange rates as present in the publication: "Statistiques Financières
Internationales".

**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** **(12** **months**
**changes)**
**Percentage change of the CPIs with the current month compared with the corresponding month of the previous year** **(t/t-12)**

**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

Industrial production volume indices by NACE classes

-Total

    - Mining and quarrying

    - Manufacturing

    - Production and distribution of electricity, gas and water

1993 | 1994 | 1995 | 1996

**in %** **of** **Gross** **Domestic Product**

**3.7** **2.8**

**26.7** **26.3**

**2.8**

**26.3**

**2.4**

**26.6**

2.2

26.6

5

106.8

105

105.5

102.5

**6.6**

**94.7**

**92.9**

**92.3**

**95.2**

**5.7**

**previous year »** 100

**102.1**

**100.6**

**100.1**

**97.2**

**5.1**

**109.2**

**98.6**

**108.2**

**103.4**

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

106.2

106.4

102.9

94.8

102.6

101.3

99.3

110.6

101.6

97.6

100.6

96.3

1995Q1 1995Q211995Q3 1995Q4 1996QI 1996Q2 1996Q3 1996Q4

corresponding period of the previous year - 100

**107.6**

**100.5**

**106.7**

**101.8**

**,113.2**

**101.0**

**113.7**

**104.3**

109.7

110.1

- 107.4

109.8

109.1

114

108.9

105.9

108.2

S7.1

106.4

102.9

**107.4**

**95.6**

**105.8**

**104.3**

106.6

102.4

105

97.9

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

Number of telephone subscribers

Number of inhabitants per passenger car

**in 1000** **of** **population**

**3031** **314J** **324|** **342|** **360**

**inhabitants**

**4.2|** **4.11** **3.5|** **3.5|** **3.3**

_**\\%**_

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

**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

Share of GDP

   - Agriculture, hunting, forestry and fishing (Nace A+B)

Gross agricultural production volume indices

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

Sales or procurement of animal for slaughter

    - pigs

    - cattle

    - poultry

Livestock breeding intensity (end of period)

    - cattle

   - of which: cows

   - sheep

    pigs

    - of which: sows

Share of GDP is calculated at factor costs.

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

1992 1993 1994 1995 1996

in % of Gross Domestic Product

6.5 5.8 5.2 5

Previous year- 100

97.7 94 105 99.8

in 1000 Hectares

1660

812

77

91

12

1589

759

111

125

19

41.3

45.0

177.4

309.7

339.0

1607

783

105

107

12

1580

832

78

«• 94

12

in 100 kg/Hectares . .

1583.1

799

85

104

42.0

46.7

211.8

415

377.3

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

1992 1993 1994 1995 1996

in 1000 tons of live weight

536.1

402.8

153.2

582.2

390.3

113.3

515

313.3

109.9

565.8

322.9

140

Heads per 1000 Ha of agricultural land

465

178

29

523

200

50

474

179

45

Heads per 1000 Ha of arable land

1287

93

1220

92

607

310.4

132.1

445

168

26

1290

1210

97

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 km [8 ]

Administrative regions: 8
Population: 10 333 800

**Souroa:** **Czaoh Statlatioa] Offloa**
**Cartography and** **gaographlo** **Information** **managamant:** **9I800**

**eurostai**

**Czech Republic**

**1993**

Legend:

A / Country boundary

A / Region boundary

COUNTRY NAME

**REGION NAME**

_**OTYNAME**_

Selected major settlements:
(1 000 inhabitants)
O 200 - 250

  - 250  - 500

  - 500-1000

**•** **> 1** **000**

General information about the country:
Age groups (in years):

<15

15- 65
# **_m_**
### z >65

<15

15- 65

>65

Uving standard (in 1993): ECU 2 625

**(GDP** **par** **capta)**

Area: 78 864 km [2 ]

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**