Henstilling med henblik på RÅDETS HENSTILLING om Tjekkiets økonomiske, sociale, beskæftigelsesmæssige, strukturelle og budgetmæssige politikker

EN EN
EUROPEAN
COMMISSION
Brussels, 4.6.2025
COM(2025) 203 final
Recommendation for a
COUNCIL RECOMMENDATION
on the economic, social, employment, structural and budgetary policies of Czechia
{SWD(2025) 203 final}
Offentligt
KOM (2025) 0203 - Henstilling
Europaudvalget 2025
EN 1 EN
Recommendation for a
COUNCIL RECOMMENDATION
on the economic, social, employment, structural and budgetary policies of Czechia
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the Functioning of the European Union, and in particular
Article 121(2) and Article 148(4) thereof,
Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council
of 29 April 2024 on the effective coordination of economic policies and on multilateral
budgetary surveillance and repealing Council Regulation (EC) No 1466/971
, and in particular
Article 3(3) thereof,
Having regard to the recommendation of the European Commission,
Having regard to the resolutions of the European Parliament,
Having regard to the conclusions of the European Council,
Having regard to the opinion of the Employment Committee,
Having regard to the opinion of the Economic and Financial Committee,
Having regard to the opinion of the Social Protection Committee,
Having regard to the opinion of the Economic Policy Committee,
Whereas:
General considerations
(1) Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the
objectives of the economic governance framework, which aims at promoting sound
and sustainable public finances and sustainable and inclusive growth and resilience
through reforms and investments, and preventing excessive government deficits. The
Regulation stipulates that the Council and the Commission conduct multilateral
surveillance in the context of the European Semester in accordance with the objectives
and requirements set out in the TFEU. The European Semester includes, in particular,
the formulation, and the surveillance of the implementation of country-specific
recommendations. The Regulation also promotes national ownership of fiscal policy
and emphasises its medium-term focus, combined with more effective and coherent
enforcement. Each Member State must submit to the Council and the Commission a
national medium-term fiscal-structural plan, containing its fiscal, reform and
investment commitments, over 4 or 5 years, depending on the length of the national
legislative term. The net expenditure2
path in these plans has to comply with the
1
OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj.
2
Net expenditure as defined in Article 2, point (2), of Regulation (EU) 2024/1263: ‘net expenditure’
means government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii)
expenditure on programmes of the Union fully matched by revenue from Union funds; (iv) national
EN 2 EN
Regulation’s requirements, including the requirements to put or keep general
government debt on a plausibly downward path by the end of the adjustment period, or
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to
bring and/or maintain the general government deficit below the 3%-of-GDP Treaty
reference value over the medium term. Where a Member State commits to a relevant
set of reforms and investments in accordance with the criteria set out in the
Regulation, the adjustment period may be extended by up to three years.
(2) Regulation (EU) 2021/241 of the European Parliament and of the Council3
, which
established the Recovery and Resilience Facility (the ‘RRF’), entered into force on
19 February 2021. The RRF provides financial support to Member States for
implementing reforms and investments, delivering a fiscal impulse financed by the
Union. In line with the priorities of the European Semester for economic policy
coordination, the RRF fosters economic and social recovery while driving sustainable
reforms and investments, in particular promoting the green and digital transitions and
making Member States’ economies more resilient. It also helps strengthen public
finances and boost growth and job creation in the medium and long term, improve
territorial cohesion within the Union and support the continued implementation of the
European Pillar of Social Rights.
(3) Regulation (EU) 2023/435 of the European Parliament and of the Council4
(the
‘REPowerEU Regulation’), which was adopted on 27 February 2023, aims to phase
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy
security and diversify the Union’s energy supply, while increasing the uptake of
renewables, energy storage capacities and energy efficiency. Czechia added a new
REPowerEU chapter to its national recovery and resilience plan in order to finance key
reforms and investments that will help achieve the REPowerEU objectives.
(4) On 1 June 2021, Czechia submitted its national recovery and resilience plan to the
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant
to Article 19 of that Regulation, the Commission assessed the relevance, effectiveness,
efficiency and coherence of the recovery and resilience plan, in accordance with the
assessment guidelines set out in Annex V. On 8 September 2021, the Council adopted
its Implementing Decision approving the assessment of the recovery and resilience
plan for Czechia5
, which was amended under Article 18(2) on 16 October 2023 to
update the maximum financial contribution for non-repayable financial support, as
well as to include the REPowerEU chapter6
. The release of instalments is conditional
on the adoption of a decision by the Commission, in accordance with Article 24(5),
stating that Czechia has satisfactorily achieved the relevant milestones and targets set
expenditure on co-financing of programmes funded by the Union; (v) cyclical elements of
unemployment benefit expenditure; and (vi) one-offs and other temporary measures.
3
Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021
establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17, ELI:
http://data.europa.eu/eli/reg/2021/241/oj).
4
Regulation (EU) 2023/435 of the European Parliament and of the Council of 27 February 2023
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans
and amending Regulations (EU) No 1303/2013, (EU) 2021/1060 and (EU) 2021/1755, and Directive
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa. eu/eli/reg/2023/435/oj).
5
Council Implementing Decision of 8 September 2021 on the approval of the assessment of the recovery
and resilience plan for Czechia (ST 11047/21 INIT; ST 11047/21 ADD 1).
6
Council Implementing Decision of 16 October 2023 amending the Implementing Decision of
8 September 2021 on the approval of the assessment of the recovery and resilience plan for Czechia (ST
13383/23 INIT; ST 13383/23 ADD 1).
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out in the Council Implementing Decision. Satisfactory achievement requires that the
achievement of preceding milestones and targets for the same reform or investment
has not been reversed.
(5) On 21 January 2025, the Council, upon the recommendation of the Commission,
adopted a recommendation endorsing the national medium-term fiscal-structural plan
of Czechia7
. The plan was submitted in accordance with Article 11 and Article 36(1),
point (a), of Regulation (EU) 2024/1263, covers the period from 2025 until 2028 and
presents a fiscal adjustment spread over four years.
(6) On 26 November 2024, on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the 2025 Alert Mechanism Report, in which it did not identify
Czechia as one of the Member States for which an in-depth review would be needed.
The Commission also adopted a recommendation for a Council recommendation on
the economic policy of the euro area and a proposal for the 2025 Joint Employment
Report, which analyses the implementation of the Employment Guidelines and the
principles of the European Pillar of Social Rights. The Council adopted the
Recommendation on the economic policy of the euro area8
on 13 May 2025 and the
Joint Employment Report on 10 March 2025.
(7) On 29 January 2025, the Commission published the Competitiveness Compass, a
strategic framework that aims to boost the EU’s global competitiveness over the next
five years. It identifies the three transformative imperatives of sustainable economic
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To
close the innovation gap, the EU aims to foster industrial innovation, support the
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and
promote the adoption of advanced technologies like artificial intelligence and quantum
computing. In pursuit of a greener economy, the Commission has outlined a
comprehensive Affordable Energy Action Plan and a Clean Industrial Deal, ensuring
that the shift to clean energy remains cost-effective, competitiveness-friendly,
particularly for energy-intensive sectors, and is a driver for growth. To reduce
excessive dependencies and increase security, the Union is committed to strengthening
global trade partnerships, diversifying supply chains and securing access to critical
raw materials and clean energy sources. These priorities are underpinned by horizontal
enablers, namely regulatory simplification, deepening of the single market, financing
competitiveness and a Savings and Investments Union, promotion of skills and quality
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned
with the European Semester, ensuring that Member States’ economic policies are
consistent with the Commission’s strategic objectives, creating a unified approach to
economic governance that fosters sustainable growth, innovation and resilience across
the Union.
(8) In 2025, the European Semester for economic policy coordination continues to
develop alongside the implementation of the RRF. The full implementation of the
recovery and resilience plans remains essential for delivering on the policy priorities
under the European Semester, as the plans help effectively address all or a significant
subset of challenges identified in the relevant country-specific recommendations
7
Council Recommendation of 21 January 2025 endorsing the medium-term fiscal-structural plan of
Czechia, OJ C/2025/666, 10.2.2025.
8
Council Recommendation of 13 May 2025 on the economic policy of the euro area (OJ C,
C/2025/2782, 22.5.2025, ELI: http://data.europa.eu/eli/C/2025/2782/oj).
EN 4 EN
issued in recent years. These country-specific recommendations remain equally
relevant for the assessment of amended recovery and resilience plans in accordance
with Article 21 of Regulation (EU) 2021/241.
(9) The 2025 country-specific recommendations cover the key economic policy
challenges that are not sufficiently addressed by measures included in the recovery and
resilience plans, taking into account the relevant challenges identified in the 2019-
2024 country-specific recommendations.
(10) On 4 June 2025, the Commission published the 2025 country report for Czechia. It
assessed Czechia’s progress in addressing the relevant country-specific
recommendations and took stock of Czechia’s implementation of the recovery and
resilience plan. Based on this analysis, the country report identified the most pressing
challenges Czechia is facing. It also assessed Czechia’s progress in implementing the
European Pillar of Social Rights and in achieving the Union headline targets on
employment, skills and poverty reduction, as well as progress in achieving the United
Nations Sustainable Development Goals.
Assessment of the Annual Progress Report
(11) On 21 January 2025 the Council recommended the following maximum growth rates
of net expenditure for Czechia: 4.5% in 2025, 2.5% in 2026, 2.6% in 2027, and 2.9%
in 2028, which corresponds to the maximum cumulative growth rates calculated by
reference to 2023 of 10.1% in 2025, 12.9% in 2026, 15.8% in 2027, and 19.2% in
2028. On 30 April 2025 Czechia submitted its Annual Progress Report9
, on adherence
to the recommended maximum growth rates of net expenditure and the
implementation of reforms and investments responding to the main challenges
identified in the European Semester country-specific recommendations. The Annual
Progress Report also reflects Czechia’s biannual reporting on the progress made in
achieving its recovery and resilience plan in accordance with Article 27 of Regulation
(EU) 2021/241.
(12) Russia’s war of aggression against Ukraine and its repercussions constitute an
existential challenge for the European Union. The Commission recommended to
activate the national escape clause (NEC) of the Stability and Growth Pact in a
coordinated manner to support the EU efforts to achieve a rapid and significant
increase in defence spending and this proposal was welcomed by the European
Council of 6 March 2025. Following the request of Czechia on 22 May 2025, on [date]
the Council, upon the recommendation of the Commission, adopted a recommendation
allowing Czechia to deviate from, and exceed, the recommended maximum growth
rates of net expenditure10
.
(13) Based on data validated by Eurostat11
, Czechia’s general government deficit decreased
from 3.8% of GDP in 2023 to 2.2% in 2024, while the general government debt rose
from 42.5% of GDP at the end of 2023 to 43.6% at the end of 2024. According to the
Commission’s calculations, these developments correspond to a net expenditure
9
The 2025 Annual Progress Reports are available on: https://economy-finance.ec.europa.eu/economic-
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en
10
Council recommendation allowing Czechia to deviate from, and exceed, the recommended net
expenditure path (Activation of the national escape clause), [Please Complete: OJ C/2025/xxx,
x.x.2025].
11
Eurostat-Euro Indicators, 22.4.2025.
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growth rate of 0.0% in 2024. In the Annual Progress Report, Czechia estimates the net
expenditure growth in 2024 at 2.8%. The Commission estimates that the net
expenditure growth was lower than in the Annual Progress Report. The difference
between the Commission’s calculations and the estimates of national authorities is due
to the Commission’s recording of one-off expenditure for 2023 creating a higher base
for 2024, and the impact of discretionary revenue measures owing to methodological
differences between Czechia and the Commission. Based on the Commission’s
estimates, the fiscal stance12
, which includes both nationally and EU financed
expenditure, was contractionary, by 2.4% of GDP, in 2024.
(14) According to the Annual Progress Report, the macroeconomic scenario underpinning
the budgetary projections by Czechia expects real GDP growth at 2.0% in 2025, while
HICP inflation is projected at 2.3% in 2025. The Commission Spring 2025 Forecast
projects real GDP to grow by 1.9% in 2025 and 2.1% in 2026, and HICP inflation to
stand at 2.2% in 2025 and 2.0% in 2026.
(15) In the Annual Progress Report, the general government deficit is expected to remain at
2.2% of GDP in 2025, while the general government debt-to-GDP ratio is set to
increase to 44.5% by the end of 2025. These developments correspond to net
expenditure growth of 3.3% in 2025. The Commission Spring 2025 Forecast projects a
general government deficit of 2.3% of GDP in 2025. According to the Commission’s
calculations, these developments correspond to net expenditure growth of 4.0% in
2025. These higher projections of net expenditure growth than in the Annual Progress
Report are due to the Commission’s lower forecast of national co-financing of EU
programmes in 2025, and lower recording of one-off expenditure in 2025 by the
Commission. Based on the Commission’s estimates, the fiscal stance, which includes
both nationally and EU financed expenditure, is projected to be broadly neutral in
2025. The general government debt-to-GDP ratio is set to increase to 44.5% by the
end of 2025. The increase of the debt-to-GDP ratio in 2025 mainly reflects the
negative headline balance, partly offset by nominal GDP growth.
(16) General government expenditure amounting to 0.6% of GDP is expected to be
financed by non-repayable support (“grants”) from the Recovery and Resilience
Facility in 2025, compared to 0.4% of GDP in 2024, according to the Commission
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable support enables high-quality investment and productivity-enhancing reforms
without a direct impact on the general government balance and debt of Czechia.
(17) General government defence expenditure in Czechia amounted to 0.9% of GDP in
2021, 1.0% of GDP in 2022 and 1.2% of GDP in 202313
. According to the
Commission Spring 2025 Forecast, expenditure on defence is projected at 1.3% of
GDP in both 2024 and 2025. This corresponds to an increase of 0.4 percentage points
of GDP compared to 2021. The period when the national escape clause is activated
(2025-2028) allows Czechia to reprioritise government expenditure or increase
12
The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of
the general government. It aims to assess the economic impulse stemming from fiscal policies, both
those that are nationally financed and those that are financed by the EU budget. The fiscal stance is
measured as the difference between (i) the medium-term potential growth and (ii) the change in primary
expenditure net of discretionary revenue measures and including expenditure financed by non-repayable
support (grants) from the Recovery and Resilience Facility and other Union funds.
13
Eurostat, government expenditure by classification of functions of government (COFOG).
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government revenue so that lastingly higher defence expenditure would not endanger
fiscal sustainability in the medium term.
(18) According to the Commission Spring 2025 Forecast, net expenditure in Czechia is
projected to grow by 4.0% in 2025 and 4.0% cumulatively in 2024 and 2025. Based on
the Commission Spring 2025 Forecast, the net expenditure growth of Czechia in 2025
is projected to be below the recommended maximum growth rate, both annually and
when considering 2024 and 2025 together.
(19) The Annual Progress Report does not include budgetary projections beyond 2025.
Based on policy measures known at the cut-off date of the forecast, the Commission
Spring 2025 Forecast projects a general government deficit of 2.2% of GDP in 2026.
These developments correspond to net expenditure growth of 4.8% in 2026. Based on
the Commission’s estimates, the fiscal stance, which includes both nationally and EU
financed expenditure, is projected to be broadly neutral in 2026. The general
government debt-to-GDP ratio is projected by the Commission to increase to 45.4%
by the end of 2026. The increase of the debt-to-GDP ratio in 2026 mainly reflects the
negative headline balance, partly offset by nominal GDP growth.
Key policy challenges
(20) The tax and benefit system puts a heavy burden on low-income earners. Low-income
earners often receive little or no financial benefit from working due to high health and
social contributions (not deductible) and to benefits that decrease as income rises. For
a single worker with 50% of average earnings and without children, Czechia has one
of the highest labour tax wedges – the gap between the net take-home pay of workers
and their costs to employers – in the EU, and it has been rising for over 10 years. In
Czechia, the inactivity and unemployment traps (taxation of people entering the labour
market) are above the EU average, which discourages low-income and part-time
workers from working. Adjusting labour taxes to reduce the burden on low-income
earners would bring more people from these households into the labour market,
including from informal or precarious work arrangements to formal and standard
employment. Combining this with greater use of underutilised environmental and
property taxation instruments would make the tax system more growth friendly.
(21) Czechia’s overall tax revenue in relation to GDP was considerably below the EU
average in 2023 (34% against the EU average of 39%). Increasing the share of taxes
that are less detrimental to growth is an option to support economic growth and fiscal
sustainability. Recurrent property taxes are some of the least detrimental taxes to
growth, but revenue from recurrent property taxation is very low at 0.2% of GDP
(against the EU average of 0.9% of GDP in 2023). Despite the slight increase in
recurrent property taxes in 2024 and in the coming years as a share of GDP, the
recurrent property taxation system of buildings and units is still based on property size,
which leads to unequal taxation of properties of the same value and to taxation not
evolving in line with property values. Implementing a property tax system based on
property values aligned with market values would enable Czechia to regularly update
property values. If combined with elements to protect low-income households, this
would increase the efficacy of tax as a tool to mitigate increases in property prices and
to put the housing stock to its most productive use. In turn, this would improve
housing affordability and people’s ability to move around for work, thereby supporting
economic growth and further increasing revenue from recurrent property taxes.
(22) Czechia’s structural budget balance has decreased from close to balance on average
over 2014-2019 to -1.7% in 2024. This was due to permanent measures such as the
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personal income tax cut and increases in pensions and defence spending, which were
not financed by corresponding revenue growth. In 2023 and 2024, Czechia adopted
legislative reforms addressing the long-running country-specific recommendation on
pensions. The reforms raise the statutory retirement age to 67 by 2056, slow down the
growth of newly granted pensions, reduce the maximum duration of early retirement,
and tighten eligibility conditions for early retirement. These measures are projected to
increase the effective retirement age and limit the increase in public pension spending
in the long term by 1.9 pps. of GDP14
. Fully implementing the recently adopted
pension reforms would help mitigate ageing-related spending pressure and the
resultant risks to fiscal sustainability.
(23) Risks to fiscal sustainability remain. As of 2025, working pensioners are entitled to a
discount on social insurance. Supporting employability of older workers not claiming
retirement pension, based on a proper cost-benefit analysis of what motivates people
close to retirement to work longer, would further decrease risks to fiscal sustainability.
(24) In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion
2.2 of Annex V to that Regulation, the recovery and resilience plan includes an
extensive set of mutually reinforcing reforms and investments to be implemented by
2026. These are expected to help effectively address all or a significant subset of
challenges identified in the relevant country-specific recommendations. Within this
tight timeframe, finalising the effective implementation of the recovery and resilience
plan including the REPowerEU chapter, is essential to boost Czechia’s long-term
competitiveness through the green and digital transitions, while ensuring social
fairness. To deliver on the commitments of the recovery and resilience plan by August
2026, it is essential for Czechia to accelerate the implementation of reforms and
investments by addressing relevant challenges. The absorption of recovery and
resilience funds is particularly constrained by limited administrative capacity at some
of the implementing bodies. This is particularly visible in areas that require more
expertise, such as the green and digital transitions. Absorption is also limited by the
low and ineffective use of financial instruments along with insufficiently targeted
grant support. The systematic involvement of local and regional authorities, social
partners, civil society and other relevant stakeholders remains essential in order to
ensure broad ownership for the successful implementation of the recovery and
resilience plan.
(25) The implementation of cohesion policy programmes, which encompass support from
the European Regional Development Fund (ERDF), the Just Transition Fund (JTF),
the European Social Fund Plus (ESF+) and the Cohesion Fund (CF), has accelerated in
Czechia. It is important to continue efforts to ensure the swift implementation of these
programmes, while maximising their impact on the ground. Czechia is already taking
action under its cohesion policy programmes to boost competitiveness and growth. At
the same time, Czechia continues to face challenges, including those relating to
boosting its innovation potential, including by investing in critical technologies and
increasing pressures in the area of housing and skills shortages and mismatches. In
accordance with Article 18 of Regulation (EU) 2021/1060, Czechia is required – as
part of the mid-term review of the cohesion policy funds – to review each programme
taking into account, among other things, the challenges identified in the 2024 country-
14
https://economy-finance.ec.europa.eu/publications/2024-ageing-report-economic-and-budgetary-
projections-eu-member-states-2022-2070_en.
EN 8 EN
specific recommendations. The Commission proposals adopted on 1 April 202515
extend the deadline for submitting an assessment – for each programme – of the
outcome of the mid-term review beyond 31 March 2025. It also provides flexibilities
to help speed up programme implementation and incentives for Member States to
allocate cohesion policy resources to five strategic priority areas of the Union, namely
competitiveness in strategic technologies, defence, housing, water resilience and
energy transition.
(26) The Strategic Technologies for Europe Platform (STEP) provides the opportunity to
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP
is channelled through 11 existing EU funds. Member States can also contribute to the
InvestEU Programme supporting investments in priority areas. Czechia could use
these initiatives to support the development or manufacturing of critical technologies,
including clean and resource-efficient technologies.
(27) Beyond the economic and social challenges addressed by the recovery and resilience
plan and other EU funds, Czechia faces several additional challenges related to
decarbonisation, public administration, business environment and skills and education.
(28) Czechia has started substantial civil service reforms to improve the functioning of its
civil service, including amendments to the Civil Service Acts, both on national and
regional level, which brought in term limits for senior posts and more flexible
recruitment. However, systemic challenges persist in attracting, retaining and
developing skilled professionals, particularly in expert, managerial and digital roles.
Fragmented human resource management and comparatively low public-sector wages
undermine the competitiveness of the public administration as an employer. The
potential impact of reforms has not been adequately monitored and it is difficult to
track progress due to limited data. Strengthening the capacity of Czechia’s public
administration to attract, retain and develop talent is crucial to increase the
effectiveness and quality of services, and in turn boost competitiveness and economic
development.
(29) Although public-sector performance has remained relatively stable, gaps in strategic
planning, cross-departmental coordination and evidence-informed policymaking
continue to affect the quality and coherence of policies. The lack of a comprehensive
framework for long-term investment planning undermines policy implementation and
impact. Strengthening strategic steering and reducing departmental silos would
improve policy consistency and delivery.
(30) As set in the Competitiveness Compass, all the EU, national, and local institutions
must make a major effort to produce simpler rules and to accelerate the speed of
administrative procedures. The Commission has set ambitious goals for reducing
administrative burden: by at least 25% and by at least 35% for SMEs; and has created
new tools to achieve these goals, including systematic stress test of the stock of EU
legislation and enhanced stakeholders’ dialogue. To match this ambition, Czechia also
needs to take action. 72% of businesses consider the complexity of administrative
procedures to be a problem for their company when doing business in Czechia16
.
15
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
amending Regulations (EU) 2021/1058 and (EU) 2021/1056 as regards specific measures to address
strategic challenges in the context of the mid-term review - COM(2025) 123 final.
16 ‘
Businesses' attitudes towards corruption in the EU’ Flash Report, Eurobarometer Report (April 2024)
EN 9 EN
(31) Challenges remain in terms of the implementation capacity of the public
administration. Processes such as spatial planning remain complex and slow,
becoming a major constraint on the business environment, competitiveness and
economic development. These are the main reasons for Czechia having the seventh
smallest construction area per person of issued permits in the EU in 2023. They hold
back businesses by slowing down and raising the cost of commercial development,
slowing down the roll-out of high-speed digital infrastructure, raising the cost of
energy due to slow modernisation of the energy infrastructure, and reducing the
mobility of labour due to the inadequate supply of affordable housing. Affordability of
housing is further aggravated by sub-optimal tax incentives, which fail to encourage
land use, subsidise housing purchases rather than construction, and prioritise short-
term rents over long-term rents. Spatial planning rules are particularly burdensome in
large cities, where it can take over a decade to update an urban plan. Reform is needed
to accelerate the process, especially by adjusting the competencies and differentiating
planning requirements between small and large areas of construction. Such measures
could significantly improve efficiency and responsiveness in urban development. On
permitting, although progress has been made on the legal framework and, to some
extent, on digitalisation, positive impacts are not yet visible on the ground. Further
improving digitalisation and the capacity and management of construction offices
could help accelerate the process.
(32) Czechia’s fragmented municipal governance is a significant challenge to
competitiveness as it limits administrative efficiency and the effective use of EU
funding, especially by small municipalities and local stakeholders. Although a new
legal framework for communities of municipalities has some scope to provide shared
services and staff, uptake has been very limited. Strengthening inter-municipal
cooperation, professionalising procurement practices and providing more support to
beneficiaries (through project managers, joint service platforms and guidance) would
increase the capacity and effectiveness of local administration and boost regional
cohesion.
(33) Czechia has untapped potential to boost competitiveness, not least in structurally
affected regions. Losses in competitiveness have been particularly visible in
structurally affected regions (Karlovarský, Ústecký and Moravskoslezský regions),
manifested in net outflows of young people. There is a lack of effective support to
build up the administrative capacity of these regions.
(34) Czech households have a higher savings rate than the EU average, with cash and
deposits accounting for 42.7% of household assets, above the EU average. Mobilising
these assets to fund through the capital markets the much-needed process of
decarbonisation and the digitalisation of the economy could unlock additional
financing to businesses whose main sources of funding are internal firm financing and
bank lending. Increasing the current share (of 6.6%) of listed shares and bonds in the
mix of business funding sources could significantly boost Czechia’s competitiveness
and reduce the impact of inflation of household savings.
(35) Leveraging public funding remains key to mobilise private finance to support
competitiveness. Czechia still has a low rate of take-up of financial instruments, such
as revolving ones supported from the Cohesion Funds (2.36% against the EU average
of 9%). In addition, experience with implementing financial instruments under the
RRF revealed there is significant room to improve and expand the use of these
instruments to incentivise private investment in the Czech economy and support the
transition away from grant support. However, the National Development Bank
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continues to operate below its full potential with limited firepower compared to its EU
peers and insufficient administrative capacity. Strengthening the National
Development Bank would help unlock its potential to address market failures and lack
of risk capital to boost innovation, without crowding out private financial institutions.
(36) Support for the business spin-off and start-up ecosystem, including business creation,
scale-up and expansion, remains pivotal to accelerate growth and innovation.
Challenges to start-ups persist as they experience difficulties in securing financing, a
shortage of skilled workers and complex bureaucracy. Czech businesses still cite the
complexity of administrative processes as a significant barrier to doing business (72%
against the EU average of 66%), including start-ups that do not use employee stock
option plans because the framework does not reflect the real needs of businesses. To
improve the attractiveness and competitiveness of innovative Czech businesses, it
would be helpful to increase support for start-ups and spin-offs by unlocking
financing, strengthen their attractiveness to skilled workers and reduce administrative
burden, in particular by optimising the framework governing employee stock options.
(37) Czechia’s innovation performance continues to be held back by ineffective transfer of
technology and knowledge and by weak links between academia and business. Public
spending on research and development financed by businesses is still only around half
of the EU average (0.024% of GDP, against the EU average of 0.050%), and has
recently been falling, demonstrating the low degree of, and incentives for, cooperation
between academia and business. This weighs heavily on the transfer of research results
into the economy and limits Czechia’s innovation capacity. This is shown, for
example, by the low rate of patent applications, below the EU average (patent
applications filed under the Patent Cooperation Treaty totalled 0.7 per billion euro of
GDP in 2022 versus the EU average of 2.8). Measures to structurally improve and
strengthen technology transfer in Czechia, aimed specifically at making technology
transfer more effective and facilitating the creation of spin-offs, could help tackle this
challenge.
(38) There is room to improve how public support for innovative companies is organised.
Only a third of companies that are consistently engaged in R&D use indirect public
support in the form of R&D tax incentives, and even fewer small and young firms use
the incentives. Action to improve this should be combined with action to make the
R&D tax deduction more attractive for companies and to cut red tape.
(39) Since the start of the Russian invasion of Ukraine, Czechia has tackled its substantial
reliance on fossil-fuel imports from Russia by diversifying its supplies of natural gas.
Nonetheless, Czechia remains highly dependent on imported fossil fuels, with coal, oil
and gas making up 28.7%, 25% and 15% respectively of its energy mix in 2023. In
addition, the transport sector accounts for the largest share of final energy
consumption (30.9% of the total), followed by energy consumed by households
(28.2%) and by industry (26.2%). The country's significant degree of dependence on
these fuels leaves it exposed to price spikes, with considerable negative effects for
households and energy-intensive industry. To reduce dependence on fossil fuels, it is
crucial to accelerate the roll-out of renewables, with a particular focus on large-scale
renewables. Accelerating investments in the decarbonisation of the heating and
industrial sectors is another key element.
(40) Czechia has been reforming its legislative framework for governing the deployment of
renewable energy sources, but further incentives and substantial investment are needed
in order to bring stability and predictability to the market. This would also attract
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further private investment in renewables. Renewable energy power auctions and the
use of power purchase agreements are still very limited in Czechia, with the first
corporate agreement concluded in 2021. Launching power auctions and developing
long-term contracts could enable the growth of larger scale renewable energy projects
beyond traditional support schemes and also create opportunities for energy-intensive
industries to decarbonise.
(41) The limited capacity of Czechia’s distribution grid network and the need to upgrade
the grid continue to hamper the swift deployment and pace of investment in renewable
energy sources. Although Czechia has recently adopted reforms aiming to shorten
connection queues and increase transparency, investment remain below the level
needed to accommodate the connection of new renewable energy sources, increased
electrification, the development of sustainable mobility and the level needed to
improve fossil-free flexibility services, such as energy storage systems and the
development of smart metres. The Electricity Data Centre has initiated operations for
energy sharing. The final phase, which enables the provision of flexibility services,
however, faces implementation delays.
(42) Czechia’s energy intensity is one of the highest in the EU, which means it would
benefit from increasing energy savings by targeting deep renovations. Despite the
current renovation support programmes, the final energy consumption of buildings
remains high, especially in public buildings. This is in part due to the high electricity-
to-gas price ratio, which encourages the use of gas for heating and disincentivises the
switch to heat pumps and electrification. Stepping up action to decarbonise the heating
sector and provide support to renewable heating and cooling would encourage the
production of clean technologies in Czechia (e.g. heat pumps). The use of innovative
financial instruments, such as energy performance contracts, could accelerate the slow
rate of renovation of public buildings and underpin action by Czechia to achieve its
2030 target to reduce building energy consumption by 8% compared to 2020 levels.
(43) Competitiveness and productivity are curbed by a shortage of workers. Czechia could
increase the rate of employment of women with young children, given the low rate of
women employed several years after childbirth. The tax and benefit system dissuades
low-earning parents, in particular mothers, from going back to work. High tax
deductibles for non-working spouses and family benefits incentivising the parent
earning less to take long periods of leave and discourage parents, in particular mothers,
from working or looking for a job. Taxation on earnings for second earners was above
the EU average in 2023, and above the tax wedge for single people at the same wage
level. Encouraging the lower-earning parent to work or look for a job would also bring
in more revenue to support the social security funds and public finances overall.
(44) The share of women, especially those with young children, on the labour market is
also constrained by a lack of early childhood education and care and long-term care
services. Parents of children under four face difficulties finding childcare and, as a
result, the parent earning less is disincentivised from working. The gender
employment gap for women between 25 and 34 was 36.1 pps. in 2024 (against an EU
average of 25.2 pps.), corresponding to almost 67 000 fewer women in work than if
Czechia had the EU average gender employment gap.
(45) Shortages of workers and skills mismatches remain a pressing challenge, hindering the
competitiveness of the Czech economy. These challenges could be improved by easing
transitions between jobs, including measures such as increasing the affordability of
housing or reforming regulated professions to reduce the high barriers to professional
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certification. In addition, Czechia has received the EU’s highest inflow per person of
people displaced from Ukraine under temporary protection. Over 50% of displaced
Ukrainians are working in less qualified positions than they did in Ukraine, with
language reported to be a clear barrier. Furthermore, roughly 30% cite qualification
recognition as a barrier to getting a better job. Simplifying the process of recognising
foreign qualifications and increasing the labour market participation of
underrepresented groups, including people displaced from Ukraine under temporary
protection and Roma, could ease labour market tightness.
(46) Higher education participation and attainment is decreasing, which exacerbates the
shortage of skilled workers. Tertiary educational attainment among 25-34-year-olds
has been falling since 2021 and is the fourth lowest in the EU (33.5% vs the EU
average of 44.2%), far from the EU target of 45%. Between 2016 and 2021, the
number of students enrolled fell by 11.6% and dropout rates remain persistently high.
(47) High dropout rates, particularly in science, technology, engineering, and mathematics
(STEM) fields, and declining enrolment in STEM programmes since 2017 illustrate
systemic challenges. In 2022, only 11.9 women out of a thousand people aged 20-29
graduated in STEM fields, below the EU average of 15.1. The lack of sufficient career
guidance and financial support to students are among the drivers of high dropout rates
at Czech higher education institutions.
(48) Czechia has a shortage of general secondary schools and limited scope for students to
move between general and specialised education pathways, limiting their options to
successfully pursue tertiary education. Although student interest in tertiary educational
attainment has strongly increased over the last 30 years, the number of general
secondary schools has not kept pace with demand. The shortage of general secondary
schools pushes students to enrol in less competitive vocational schools, leading to
early specialisation. Although two thirds of people who complete vocational education
and training (VET) enrol in tertiary education, their success rates are below those of
students in general tracks, which contributes to consistently low tertiary educational
attainment. To address these challenges, Czechia has recently announced steps to
create new pathways that combine general and professional subjects and is seeking to
modernise VET programmes to bring them into line with the needs of the labour
market. To better prepare students who have completed secondary education for the
labour market and support their transition to tertiary education, further improvements
could focus on (i) expanding work-based learning opportunities, (ii) easing school-to-
work transitions, (iii) improving the scope for students to move between general and
vocational secondary education, (iv) increasing the capacity of general secondary
schools and (v) diversifying and expanding access to tertiary education.
HEREBY RECOMMENDS that Czechia take action in 2025 and 2026 to:
1. Reinforce overall defence spending and readiness in line with the European Council
conclusions of 6 March 2025. Adhere to the maximum growth rates of net
expenditure recommended by the Council on 21 January 2025, while making use of
the allowance under the national escape clause for higher defence expenditure.
Reduce the tax burden on low-income workers. Increase revenue from recurrent
property taxes. Improve the incentives for people close to retirement to continue
working.
2. In view of the applicable deadlines for the timely completion of reforms and
investments under Regulation (EU) 2021/241, accelerate the implementation of the
recovery and resilience plan, including the REPowerEU chapter. Accelerate the
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implementation of cohesion policy programmes (ERDF, JTF, ESF+, CF), building,
where appropriate, on the opportunities offered by the mid-term review. Make
optimal use of EU instruments, including the scope provided by the InvestEU and the
Strategic Technologies for Europe Platform, to improve competitiveness.
3. Strengthen the capacity of Czechia’s public administration to attract, retain and
develop talent, particularly to attract people with analytical, managerial and IT skills.
Strengthen strategic steering capacities to improve consistency across policies.
Simplify urban planning and reduce administrative burden by improving
digitalisation, capacity and the management of construction offices. Incentivise and
simplify cooperation among municipal administrations. Provide support for
administrative capacity building and target this support to structurally affected
regions.
4. Strengthen capital markets, business access to non-bank finance and the conditions
for saving, investment and innovation by promoting household investments in capital
markets and by improving existing long-term savings products’ effectiveness in
mobilising new long-term investments. Encourage institutional investor participation
in listed and unlisted shares, as well as venture capital and private equity. Increase
the use of financial instruments, including by strengthening the capacity of the
National Development Bank to mobilise private funding to boost competitiveness
and the decarbonisation of the economy. Support the creation of start-ups and spin-
offs, for example by improving legislation on employee stock option plans. Boost
innovation, including by facilitating technology transfer from academia to business.
Better tap the potential of R&D tax benefits to stimulate innovation in the private
sector.
5. Reduce reliance on fossil fuels, notably for road transport, heating and power
generation. Provide further incentives for the roll-out of large-scale renewable energy
capacity, notably by running renewable power auctions and by promoting the use of
long-term power purchase agreements. Increase investment in electricity grids to
enhance fossil-free flexibility and enable the electrification of transport and industrial
processes. Ensure the swift implementation of the full functionalities of the
Electricity Data Centre. Enact measures to reduce energy consumption and the
carbon intensity of the buildings sector, especially of the public building stock.
6. Lower the tax and benefit disincentives for parents to return to work and improve the
supply of childcare and care services to encourage more women to enter the labour
market. Strengthen the competitiveness of the economy and reduce labour shortages
by addressing skills mismatches, simplifying the recognition of foreign qualifications
and increasing the labour market participation of underrepresented groups. Boost
educational outcomes by increasing participation in tertiary education, reducing
dropout rates and providing more student support. Increase the number of students
and graduates in science, technology, engineering and mathematics, especially
women. Expand access to general secondary education, enable students to transition
between general and vocational education, and provide more support for
disadvantaged schools and pupils, including Roma.
Done at Brussels,
For the Council
The President