Czech govt holds ranks to limp on

By bne IntelliNews July 19, 2012

Nicholas Watson in Prague -

The Czech coalition government managed to see off a confidence vote in parliament on July 18, but a perfect storm of sleaze, voter unpopularity, political infighting and a weak economy promises to make the remainder of its term in office a struggle to stay in power.

The three-party, centre-right coalition kept their discipline to defeat a parliamentary no-confidence motion, its fourth in less than two years, that had been called by the main opposition Social Democrats. The opposition required 101 votes in the 200-set lower house to topple the government, but managed only 89.

Analysts said the coalition members' survival instincts kicked in because all the polls suggest they would lose power if new elections were held today. "The opposition is clearly trying to take any occasion to break the government because they'd win any new election quite easily," says Jan Jandak of the Prague brokerage Wood & Co.

Indeed, the governing coalition under Prime Minister Petr Necas already fell apart in April over quarrels about spending cuts, allegations of sleaze and personality clashes, but the Civic Democrats (ODS) and Top09 managed to stitch together a new coalition using defectors from the junior partner Public Affairs, who formed a new party called LIDEM, to soldier on.

But if the members had been hoping to put the clashes behind them, there was little evidence of this in the debate leading up to the confidence vote. The leader of LIDEM, Karolina Peake, called one of the coalition's major figures, Finance Minister Miroslav Kalousek, a "big bully."

In fact, it's Kalousek who sits at the centre of the coalition's latest problems. He is the chief architect of the government's austerity programme, which is starting to attract as much criticism as it has gathered praise. At the same time, he has struggled in recent weeks to distance himself from a corruption case.

On the one hand, Kalousek's fiscal consolidation drive has won international plaudits for bringing down the budget deficit through a series of deep spending cuts and tax hikes. It has also helped pushed yields on Czech 10-year bonds, which fell to a record low at an auction on July 18, while the previous day, Moody's Investors Service affirmed the country's sovereign 'A1' rating due the government's commitment to fiscal consolidation.

However, Kalousek, in his zeal, is accused of going too far too fast, as evidenced by the deficit falling to 3.1% of GDP in 2011, versus a target of 4.8%. That, say critics, has pushed the economy back into recession and brought the labour unions onto the streets. "I always supported this government for its fiscal austerity programme, but I'm afraid they exaggerated and undershot the budget deficit/GDP ratio target for 2011, so we were more austere than we planned and by consequence this contributed, among other things, to negative growth of [0.7% year on year] in the first quarter of 2012," says Vladimir Dlouhy, a former economy minister and a candidate in next year's presidential election.

Meanwhile, Kalousek's position becomes more precarious by the day amid recurrent questions about his conduct since Vlasta Parkanova - a senior member of Top09 and former defence minister - had her parliamentary immunity lifted on 11 July. This allowed the police to charge her with abuse of office for failing to order an independent appraisal into a CZK3.5bn €138m) purchase of four Spanish-made CASA transport planes in 2009.

Ever a controversial figure, Kalousek was accused by the president of the Czech police, Petr Lessy, on 13 July of making improper remarks to him about the investigation during a telephone call. Kalousek admits to calling Lessy, though denies pressuring him over the investigation.

Parkanov denies any wrongdoing, though official documents have surfaced that appear to bear out the assessment - made by independent valuation consultancy American Appraisal and Czech prosecutors - that the planes were overpriced by at least CZK658m. On 16 July, Czech Position published a document from November 2005 detailing an official offer from the Franco-German consortium EADS of four CASA C-295 transport planes for €97.2m, not including VAT or servicing, that is addressed to the Ministry of Defence's armament section.

Analysts in Prague are speculating about what prompted Kalousek's outspoken defence of Parkanova and wild accusations of a conspiracy by the police.

Certainly, the Parkanova affair threatens to harm, perhaps fatally, the conservative party he created in 2009 after splitting from the scandal-plagued ODS. Others wonder whether the finance minister is more concerned about the interests of controversial businessman Richard Hava, whose family-related defence business Omnipol was involved in the CASA purchase as a middleman.

"Kalousek knows full well that his long-term mentor and close friend, defence lobbyist Richard Hava, is the real target of Parkanova's prosecutors. As deputy defence minister for many years [between 1993 and 1998], Kalousek designed a procurement system which obliged the state to buy equipment through middlemen such as Hava," says James de Candole of the Prague advisory firm Candole Partners.

Omnipol would not comment, but instead directed bne to a press conference broadcast by Czech TV, during which Omnipol director Michal Hon claimed that after banking and exchange rate fees and taxes, the company earned only CZK85m (€3.3m) on the CASA deal.

Whilst the pressure grows on Necas to dump Kalousek, the leader of Top09 - Foreign Minister Karel Schwarzenberg - has stated unequivocally that such a move would bring about the end of the current three-party coalition. Such a stance, say analysts, means the government is just one bad lurch in the economy or twist in a scandal away from disintegrating.

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