Czechs keep eye on Germany's fiscal package

The Finance Ministry is hoping a broad new German stimulus package will bolster the Czech auto industry and export-driven economy.

The German Parliament voted to approve a 51 billion euro ($65.8 billion/1.5 trillion Kč) stimulus package Feb. 13, bringing the total for two stimulus packages passed since November to 82 billion euros, or 1.6 percent of German gross domestic product. The new two-year package, which will put 18 billion euros toward infrastructure and education, will also include tax breaks, decrease healthcare payments and provide individual stimulus checks such as 100 euros per child for families and 2,500 euros toward the purchase of a new car.

Germany's GDP growth fell by almost half in 2008 to 1.3 percent and is expected to plummet further in 2009. The newest stimulus package proposes both short- and long-term solutions for the struggling economy of the Czech Republic's largest trading partner, said Jeanette Schwamberger, spokeswoman for international finance at the German Finance Ministry.

"No one can eliminate all recessionary tendencies, but the package was aimed at softening the recession," she said. "It was the aim to get a short-term, timely stimulus, but also important that the measures would enhance our long-term economic development."

Finance Minister Miroslav Kalousek has indicated the importance of a successful German package, telling Czech economic weekly Ekonom that efforts to promote the German domestic market were "much more important for us than some kinds of packages to boost consumption in the Czech Republic." Any effort to boost the German economy, which accounts for 30 percent of Czech exports, will have significant, if not immediate, effects on the Czech Republic. But the bonus check for new-car buyers is proving to be the biggest and most immediate boon to the Czech economy and the ailing car industry, which relies heavily on Germany, said Karel Potměšil, an auto industry analyst at Cyrus.

"Germany is the biggest market for Škoda, which sold more than 120,000 cars there last year - twice as many than in the Czech Republic," he said.

As a result of increased German demand, Škoda Auto has resumed a five-day workweek for manufacturers of the Fabia, a compact car. Škoda predicts a demand of 18,000 cars in Germany of mostly smaller models. There is no guarantee that German new-car buyers will choose Škoda over other European brands, but the 2,500 euro limit of the bonus check will limit many German households to a selection of smaller cars such as the Fabia. And the positive effects of increased auto sales won't be limited to large car manufacturers like Škoda.

"These incentives can really help not only Škoda and Hyundai, but Czech parts suppliers as well," said Jiří Kyncl, a spokesman for the Automotive Industry Association. "Every car in Europe has something from the Czech Republic."

The effects of Germany's stimulus package will also extend beyond the auto industry, as Germany accounts for more than 25 percent of foreign direct investment (FDI) in the Czech Republic. According to statistics from the German-Czech Chamber of Commerce and Industry, 70 percent of Czech export companies are under foreign control, and most of these companies are German-owned. Two German-owned banks, Commerzbank and Landesbank Baden-Württemberg, have branches in the Czech Republic. The German domestic economy is the immediate focus of the stimulus package, but secondary effects are certain to trickle throughout the Czech Republic, said Sebastian Holtgrewe, a spokesman for the chamber, who called German companies "the most important investors in the Czech Republic."

"All German companies, especially the bigger ones, are closely connected with their mother company. If the mother is doing better, that could only help the Czech branches, too," Holtgrewe said.

The most immediate effects of the German stimulus on the Czech economy will also be the most ephemeral. Analysts expect an initial spike in Fabia sales, but say that won't be enough to boost the auto industry for long. The lasting effects of a successful German package won't be visible on the Czech market until the second half of 2009, as economic confidence improves, freeing up the loan market and leading to an increase of both domestic consumption and exports, said Luboš Mokráš, a European analyst at Česká spořitelna.

"In the short term, the Czech economy will continue to struggle, especially with low demand," he said. "In the case of a successful stimulation, when confidence improves, it should support economic demand."

The international effects of the German package come at time when many European economies are contemplating a turn inward toward protectionism. According to Schwamberger, when designing the stimulus package, the Social Democrats, Chancellor Angela Merkel's Christian Democratic Union (CDU) and the sister party Christian Social Union (CSU) were careful to keep the EU economy in mind. Such economic considerations should prove beneficial both for Germany and other countries in Europe.

"Germany is well aware that nearly half of its GDP comes from economic relations with other countries," Schwamberger said. "We didn't focus our measures only on the national economy, because everybody has to be part of the EU program - and the world."

Stephan Delbos can be reached at
sdelbos@praguepost.com