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The Industry Doom in Czech Republic: Keen Policy Judgment is Needed

14 / 09 / 2022

Author: Reka Sulyok

The energy intensive industries penned a letter to the Czech government last week. The open letter urges the government to provide a lifeline and pleads the government to represent their interest in the European arena. In our view, the industries ask for more than just activating mitigation levers. The recommendations range from one-off state aid to a Kurzarbeit scheme to prevent layoffs. But the broad-based support package is at odds when inflation is running hot. A broad industry support scheme could prove inflationary and necessitate more aggressive monetary tightening in the short to medium run. The bailout then could result in a sharper downturn and more jobs lost to reach balance.

The gas price frenzy also revealed that the incumbent industry’s expectations are formed in an adaptive way meaning that their production decisions are made with a significant delay. After an upbeat Q1 performance the broad expectation of steelmakers was a steady course. As the tail risks materialized, industries had a rude awakening. As market volatility likely prevails, they need to change behavior.

We also think that long-term perspectives need to be factored into the emergency policy solution. The potential stoppage of key industries such as steel and chemicals is a nasty reminder for the overdue work on energy transition.  What is the most important trade-off for a forward-looking fiscal policy?

Read more in the commentary.

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