Most recently, the EC warned three major steelworks that they will be forced to return the Czech government's state aid if they fail to make progress in restructuring within the next 18 months. The EU bans state support to industries. However, the EC permits provisional state aid to some industries to restructure or stabilize them.

The Czech Republic negotiated transition periods for the three steel manufacturers during its EU accession talks to allow the state to give 14 billion Kč ($56 million) split among Vítkovické železárny (renamed Vítkovice Steel), Nová huť (Mittal Steel Ostrava) and Válcovny plechu Frýdek-Místek to help with restructuring costs. The regulations require the companies to complete restructuring by the end of 2006.

Though most Czech steelmakers took advantage of last year's 7 percent growth in demand and rising steel prices, the projected viability of some of these companies is still in question.

Restructuring results of these steel producers are worse than expected despite favorable conditions of the steel market, the EC said in a statement released earlier this month. Therefore, the EC warned, if they fail to meet the deadline, the steelworks could be forced to return all the state aid.

The EC insists that the only way for these companies to effectively restructure is through cost-cutting and increasing revenue by manufacturing products with higher added value, and they are not doing enough.

Court threat

The EC also highlighted the slow speed in which the government was adopting EU directives regulating financial markets. Among its criticism was a failure to adopt directives for complementary oversight of financial conglomerates, reorganization and liquidation of loan institutions and reorganization and liquidation of insurance companies.

The EC warned that if the Czech government, as well as 12 other EU member states, do not provide within two months a satisfactory answer to its criticisms and a viable plan for future adoption of missed directives, it could bring the issue to the European Court of Justice. The court would then determine whether the country is obliged to adopt the EU directives in a set period of time. If a government fails to comply with its ruling, the court could issue hefty fines against the country.

Jan Vytopil, spokesman for Czech representative to the EU in Brussels, said there was no such threat. He said that bills passed by the Chamber of Deputies in July governing insurers and financial entities would comply with EU directives.

The bills are awaiting discussion and approval by the Senate and the signature of President Václav Klaus. The directive governing lending institutions will be included in a new bankruptcy bill to be considered by the Chamber of Deputies in September.

According to the EC, the Czech Republic ranks near the bottom in terms of adopting EU directives. The EC said that the Czech Republic is the worst of the 10 new member states.

The EU also singled out the Czech Republic for criticism in terms of delay in adopting the 57 EU laws that were to be incorporated in July. Based on EU statistics released in June, the country has a failure rate of 3.6 percent compared with the EU average of 1.9 percent.