COMMENT: Election season in Central Europe

By bne IntelliNews May 26, 2010

East Capital -

Four elections in Central Europe in the second quarter, as Hungary held its general election, the Czech Republic and Slovakia will hold their general elections over the next three weeks, and Poland has its presidential election. There have been/will be changes in most countries (except perhaps in Slovakia). The market impact will, however, be limited, but positive if anything, as the main policies are unlikely to change in the short term.

The main focus is on the budget and fiscal consolidation, and it seems like populist spending policies do not pay off, suggesting that the political climate is maturing.

The economic situation in the region is challenging but not critical. Growth is expected to recover decently and inflation to stay low in all countries except for Hungary. Budget deficits are a concern in all countries, but especially in Poland and Hungary, as the public debt is worryingly high. Poland has constitutional limits at 55% and the debt is high by most standards in Hungary (not least according to Maastricht). A simple scoring (4 points for best, 1 point for worst) illustrates that the Slovak and Czech Republics look most promising from a pure macro perspective, and Hungary remains the least tempting.

Strong centre-right victory in Hungary

Fidesz did not only win a majority in the peculiar two-round parliamentary election in Hungary, but managed to get a two-thirds majority in parliament. This is a market-friendly outcome, given Fidesz's focus on classic centre-right policies. Victor Orban will become prime minister, but his room for manoeuvre will likely be limited (despite the strong majority), given the difficult economic situation. The government will, however, be able to take strong and fast decisions if necessary and the general political climate did not deteriorate, as the far-right populist Jobbik party got less support than feared and came in third after the socialists.

Coalition building will be as complicated as usual in the Czech Republic The political situation remains puzzling in Prague. The three-party centre-right coalition government, in power since January 2007, broke down in March last year after a vote of non-confidence in the midst of the Czech Republic holding the EU Presidency.

Since May 2009, the country has been governed by a caretaker government under Prime Minister Jan Fischer. It will serve up to the parliamentary elections (Chamber of Deputies) on May 28-29. Elections to the Senate and local elections are scheduled for the autumn. Fischer is not a contender and has been nominated as vice president to the EBRD.

According to opinion polls, the Social Democrats (CSSD) are leading the election race, followed by centre-right Civic Democratic Platform (ODS). A Social Democratic government relying on support in parliament by the communists may be the outcome. It is highly unlikely that the communists will enter government, as they are frowned upon. The Czech Communist Party is a non-reformed party and any renewal is not in sight. It is by size the third largest political party. However, the smaller parties may hold the key to the formation of government - provided they enter parliament. A government led by ODS is not to be ruled out, possibly in coalition with the Christian Democrats (KDU) and the newly formed fiscal conservative TOP09, led by the popular Prince Karel Schwarzenburg.

A Social Democratic government would bring some changes to tax policy and social transfers. Views differ as to how much the fiscal stance will change, but both major political parties have a good track record on fiscal policy, with ODS leaning more towards fiscal tightening. Monetary policy will not change due to a shift of government. The Central Bank acts independently of the government. President Klaus is expected to nominate a new Central Bank governor, after Governor Tuma announced his resignation recently, before the elections.

No change expected in Slovakia as socialists expected to stay There are as many as 18 parties running in the June 12 parliamentary elections in Slovakia, and there is a possibility that eight of them pass the 5% threshold. That means that the focus after the election will be on coalition building in order to get a majority government or, at least, parliamentary support.

The incumbent socialist government, headed by Prime Minister Robert Fico, is expected to win, despite the fact that the five small centre-right parties in opposition have gained in the polls recently. If the centre-right parties succeed in the election and manage to form a coalition, policies are expected to turn slightly more market-friendly. The socialists have no clear reform agenda so policies are not expected to change much if Fico is re-elected. Some reforms are arguably called for, especially in order to bring down the budget deficit. But as the country risk remains low and Slovakia can borrow relatively inexpensively on the market (approx 100bp above Bunds), politicians are not likely to push through unpopular reforms. Quite the contrary; there has been a drive to push through a number of large PPP projects ahead of the elections that may be good for growth, but not necessarily for the budget.

Emotionally charged presidential election in Poland The ruling Civic Platform has been waiting for three years to get its candidate for the presidency in order to fully implement its policies when the threat of presidential veto has limited its ambitions.

And the polls looked very supportive as the incumbent centre-right PiS has been rather unpopular. The tragic death of President Lesh Kaczynski a few weeks ago has changed the field somewhat, as his twin brother, Jaroslaw Kaczynski, who is expected to run, should get a certain amount of sympathy votes. Acting President Komorowski, the Civic Platform candidate, is however expected to win on June 20, and leads with some 20 points in the polls. If elected, Komorowski is likely to be more important for what he does not do(veto legislation) rather than what he does.

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