At the close of World War I, the Czechs and Slovaks of the former Austro-Hungarian Empire merged to form Czechoslovakia. During the interwar years, having rejected a federal system, the new country's predominantly Czech leaders were frequently preoccupied with meeting the increasingly strident demands of other ethnic minorities within the republic, most notably the Slovaks, the Sudeten Germans, and the Ruthenians (Ukrainians). On the eve of World War II, Nazi Germany occupied the territory that today comprises Czechia, and Slovakia became an independent state allied with Germany. After the war, a reunited but truncated Czechoslovakia (less Ruthenia) fell within the Soviet sphere of influence. In 1968, an invasion by Warsaw Pact troops ended the efforts of the country's leaders to liberalize communist rule and create "socialism with a human face," ushering in a period of repression known as "normalization." The peaceful "Velvet Revolution" swept the Communist Party from power at the end of 1989 and inaugurated a return to democratic rule and a market economy. On 1 January 1993, the country underwent a nonviolent "velvet divorce" into its two national components, the Czech Republic and Slovakia. The Czech Republic joined NATO in 1999 and the European Union in 2004. The country changed its short-form name to Czechia in 2016.
Czechia is a prosperous market economy that boasts one of the highest GDP growth rates and lowest unemployment levels in the EU, but its dependence on exports makes economic growth vulnerable to contractions in external demand. Czechia’s exports comprise some 80% of GDP and largely consist of automobiles, the country’s single largest industry. Czechia acceded to the EU in 2004 but has yet to join the euro-zone. While the flexible koruna helps Czechia weather external shocks, its central bank (Czech National Bank - CNB) has since November 2013 intervened in the foreign exchange markets to cap the value of the koruna at 27/Euro, with a 2% inflation target. This intervention has also helped to keep exports competitively priced. After inflation exceeded the bank's 2% target in early 2017, the CNB indicated it expects to end its intervention in the first half of 2017, though it will continue to intervene as necessary to maintain stability of the currency.After slowly recovering from a steep recession in 2009, the Czech economy again fell into recession in 2012 and 2013 because of a slump in demand within the EU and government austerity measures. Inflows of EU development funds underpinned a rebound in 2014-15. Real GDP growth reached 4.5% in 2015, in part due to last-minute spending of EU funds, and fell to 2.5% in 2016, still one of the highest rates in the EU. The Czech unemployment rate was 5.2% in 2016, one of the lowest rates in the EU.Since coming to power in 2014, the new government has undertaken some reforms to try to reduce corruption, attract investment, and improve social welfare programs, which could help increase the government’s revenues and improve living conditions for Czechs. The government introduced in December 2016 an online tax reporting system intended to reduce tax evasion and increase revenues. The government also plans to remove labor market rigidities to improve the business climate, bring procurement procedures in line with EU best practices, and boost wages. The country's low unemployment rate has led to steady increases in salaries – 4-5% in each of the past two years, and the government is facing pressure from businesses to allow greater migration of qualified workers, at least from Ukraine and neighboring Central European countries.Long-term challenges include dealing with a rapidly aging population, a shortage of skilled workers, a lagging education system, funding an unsustainable pension and health care system, and diversifying away from manufacturing and toward a more high-tech, services-based, knowledge economy.