Nicolaus Heinen of DB Research -

The Czech Republic's first EU presidency coincides with turbulent times. The world is groaning under the impact of the financial crisis and in Europe the Lisbon reform treaty is on a knife-edge, with the Irish and Czechs refusing to ratify it for differing reasons. Since the Czech head of state is a Eurosceptic, the expectations for the country's presidency could not be lower. As a small country ruled by a minority government, the Czech Republic will not be able to match France's high-octane policymaking rhythm. The French presidency has, nevertheless, provided a good base for the Czechs to work from over the next six months.

France enjoyed a largely successful presidency. Besides racking up policy achievements in the areas of foreign affairs and climate change, President Nicolas Sarkozy also managed to imbue European policy with new élan and force Europe back onto the global political stage. Europe spoke with a single voice, albeit with an unmistakably French accent.

In October, financial events caught everyone unawares and in very short order the rescue of Europe's banking landscape had to be guaranteed and a package of economic policy measures drafted. Then, in November, came the agreement of a common framework for national economic stimulus packages. The rapid agreement on a set of binding economic policy instruments despite the inimical circumstances is first and foremost to the credit of France's leadership.

But all is not sweetness and light. Although Europe underwent political renewal, institutionally it did not. The French sense of entitlement to play the lead role systematically undermined the work of the Commission. This attitude was also manifested in the repeated attempts made to influence ECB monetary policy. Fortunately they were unsuccessful. Now it's the Czech Republic's turn to take action.

Economy, Energy and Efficiency

The country has self-confidently described the priorities of its presidency within the framework of the EU's medium-term objectives as the "three Es": E for the economy will be the dominant issue, ahead of energy policy and external relations. A European economic government à la francaise is off the agenda for now, given that Czech elites have had their own experience of state economic dirigism: the days of central planning ended less than 20 years ago.

Since then, heavy foreign investment has constantly boosted productivity and per-capita incomes. In recent years, the economy as a whole has posted real growth averaging 5% per annum, combined with low inflation and unemployment rates. Also, budget deficits have remained low, and this has been achieved with public debt of less than 30% of GDP. As a small country with a very open economy, the Czech Republic has a strong interest in free markets and articulated this many times in the run-up to its presidency.

Europe can certainly use such a message. The Czechs' call for a Europe without barriers, that is for enlargement and the safeguarding of the four basic freedoms, comes at just the right time. This is the case because the free movement of goods and capital in particular is coming under increasing threat on account of the economic and financial crisis. The Czech Republic has to find the solutions to several of these challenges over the next six months.

Short-term challenge: finding novel answers to the financial crisis

Following France's ad hoc crisis management, it is now structural answers to the financial crisis that need to be found. At the next G20 conference in London in April a new global financial architecture is due to be discussed in greater detail. As the EU's mouthpiece, the Czech Republic has to successfully articulate and assert European ideas for a new global financial architecture at the international level. Within Europe, policies geared towards sustainability must comply with the Stability and Growth Pact - even in difficult economic times. With regard to fiscal discipline, the Czech Republic is one of the most exemplary EU member states and is, therefore, a credible advocate for this policy objective.

Medium-term challenge: defusing economic tensions and combating new interventionism

The fallout from the financial crisis will continue to exacerbate the economic tensions within the Eurozone. Different countries are being affected in different ways. While Germany is suffering from the collapse of its export markets, Ireland and Spain are wrestling with the aftermath of the bursting of their real estate bubbles. In addition, the widening of risk premiums on the 10-year government bonds of several EU member states shows that investors are pricing in the differences in creditworthiness between some EU member states.

In an emergency, it's every man for himself. National economic stimulus programmes become misguided and spawn interventionism, such as selective aid to "winner sectors." In the slipstream of the financial crisis the free market is thus subjected to a heavy pounding. The Czech Republic has grave reservations about economic stimulus programmes and will, therefore, ensure that national packages remain compatible with EU competition law.

Against this background, it is to be welcomed that the Czechs' self-proclaimed objective is to prevent the financial crisis from degenerating into a battle for subsidies - also at the global level. In view of the latest aid provided to US carmakers, this position is understandable given that the Czechs' output of around 1m vehicles last year made it the biggest automaking nation of all the new member states.

Long-term challenge: to prevent further undermining of the Commission

With the French leading the way, the Lisbon treaty objective of a slimmed-down Commission was recklessly sacrificed in order to persuade Ireland to hold another referendum. Each member state will continue to have one commissioner, and the proposed reduction in the size of the Commission from 27 to 15 commissioners has been scrapped. This could further undermine the role of the Commission, which already took a battering last year. This misguided decision will come back to haunt the EU at the latest when the successor republics of the former Yugoslavia become member states.

2009 is the European year of creativity and innovation. We can be confident that the Czech Republic will make creative use of its opportunities to correct France's hastily committed errors by performing some fine-tuning while nevertheless pursuing the course set by French. The Czechs will display less stridency and glamour, but offer and more realism and continuity. The country has the key advantage of being better prepared for the challenges ahead both substantively and mentally. No one in the Czech Republic will be caught completely off guard by events - the situation is already too grave.

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