Price Convergence and the Readiness of the Czech Economy for Accession to the European Union

Abstract

The readiness of the Czech economy for accession to the European Union (EU) cannot occur without reducing what has so far been a significant difference in economic performance between the Czech Republic and the EU. In particular, there will have to be a convergence of Czech GDP per capita as measured at purchasing power parity (PPP) and the per capita GDP of the EU countries. This process of real convergence will be accompanied by a simultaneous price convergence-changes in relative prices and a convergence of price levels. At the end of 1998, the economic level of the Czech Republic was slightly more than 60 percent of the EU average, while the relative price level was about 43 percent. Labor productivity was estimated at about 50 percent of the EU average. International comparisons show that the price level of the Czech Republic compared to the EU average is lower than would be expected given the per capita income of our country. This leads some analysts to conclude that the main problem with respect to our future integration into the EU is the difference in price levels. This, however, overshadows the real aspects of convergence. Both sides of the convergence process must be considered simultaneously, and both should be solved through The author works at the Czech National Bank (CNB). The opinions expressed in this article are those of the author and do not reflect the views of the CNB.