Convergence of the czech price level toward European union must be based on productivity

In Czech economic strategy for EU accession, the difference of price levels is often cited as an important topic for macroeconomic policy. However, the key task is the convergence of Czech Republic's economic level (GDP per head) toward EU average. Convergence of the price level will be a side-effect accompanying the real convergence. At the end of 1998, Czech Republic's economic level was just over 60 % of EU average, while the relative price level was estimated at rouhly 43 %. Both real and price level convergence will require productivity increase in the CR, faster than that achieved by EU. Price level convergence not underpinned by productivity increase could not be sustained, as it would undermine the competitiveness of Czech exports. Macroeconomic policy should strive to create a favourable framework for the growth of productivity, rather than trying to "pre-programme" the price level convergence. The bulk of the present difference in price levels is in non-tradeable goods. In tradeables, some price divergence exists as well, often due to differences in quality that are hard to measure. Convergence of the price level toward EU average will proceed through changes of relative prices in the Czech Republic, and in the price level relation between the tradeable and non-tradeable sectors.

Keywords: inflation, EU accession, relative price level, convergence, productivity, competitiveness, exchange rate appreciation, Balassa-Samuelson effect