Potential Czech government announces coalition agreement

By bne IntelliNews December 12, 2013

Tim Gosling in Prague -

The Czech Republic took a big step towards ending months of political standoff late on December 10 as the three parties that have been locked in coalition talks in the weeks since snap elections said they have finally reached a deal to form a coalition. The agreement should allow the country to have its first elected government in six months before the end of the year, but now the real challenges start.

"I think I can say we've finished the job," Bohuslav Sobotka, chairman of the leftwing Social Democrats (CSSD), told reporters. The likely next prime minister has been locked in talks with partners Ano 2011 and the Christian Democratic Party (KDU-CSL) since elections which ended on October 29 saw his party slump from earlier forecasts of a strong win to finish with just over 20% of the vote.

Ano 2011, a brand new grouping headed by billionaire Andrej Babis, was the surprise package, taking nearly the same number of seats. With Sobotka having faced down an attempted coup within the CSSD - assumed to have been orchestrated by President Milos Zeman - in the wake of the vote, he has spent the weeks since discussing a government with the two parties.

"It is definitely done," Sobotka said, adding that the coalition could sign the deal on December 12 and make it public on the following day. That will enable Sobotka to present his government to Zeman by the end of the year. With the addition of the small KDU-CSL, the coalition will command 111 seats of the 200 in parliament.

Tax policy was the main sticking point in coalition talks. The agreement the trio has thrashed out leaves tax rates for companies and high earners unchanged, despite pledges from CSSD to raise corporate taxes on certain sectors of the economy.

The business-friendly Ano has reportedly managed to secure the key compromise, however, that tax policy will see no changes in 2014. In additional, a super-reduced VAT rate (likely to be set at 5%) for medicines, baby products and books is to be added in 2015. Sector-specific corporate tax targeting regulated industries remains in CSSD's plans, but will not be implemented next year.

In addition, the parties have agreed to scrap for the meantime the pension reform introduced in January to divert some flows to private pension funds. Alongside the harsh austerity programme - which was even universally criticized by analysts - the move to a second pillar was one of the most unpopular policies of the former centre-right coalition under Petr Necas.

That administration collapsed in June in the wake of a spying and corruption scandal. That offered the power-hungry Zeman an opportunity to bend the constitution to push aside the objections of parties of all stripes to install his own "caretaker" government, led by Jiri Rusnok. That cabinet's failure to win the approval of parliament led to the snap vote in Octiber.

The disillusionment of Czechs with established political parties - which have remained almost constantly mired in corruption scandals over the past decades - saw Ano catapulted into a position where it could dictate policy to the CSSD. "I'd like to thank our potential coalition partners for finding an agreement on the programme despite... divergent party programmes," Jaroslav Faltynek, head of the ANO parliamentary caucus, said, according to AFP.

It remains unclear what role agriculture, food and media tycoon Babis will play in the new government. Speculation has it that he will hold a role of Deputy PM. However, analysts worry more about the candidates he has put forward for ministerial posts, many of whom currently work for Babis' corporation Agrofert - the largest employer in the Czech Republic featuring over 200 companies.

In particular, there is concern over his suggestion that he wants to appoint an economist - rather than politician - as finance minister. "Whatever cabinet seat Babis occupies, as the de facto owner of Ano 2011, he will effectively control the actions of the finance minister, and may do so in ways that would benefit his private interests, as the owner of the Agrofert group," says James de Candole of Candole Partners. The dependence of any appointee "would be acute if the post was given to an 'independent expert' with no political power base of his own."

However, the country could be protected from those potential conflicts of interest by the president, who has vowed to interfere in the appointment of the cabinet. After the details of the coalition are made public, Sobotka will then have to face his old foe, who has had it in for mild-mannered head of the CSSD - a party Zeman led as PM in 1998-2002 - for years.

Zeman has already said he will refuse to appoint some CSSD and Ano ministerial candidates. "Constitutional experts largely agree that he can only do so in extreme cases," points out Otilia Dhand at Teneo Intelligence, "yet, recall that Zeman has not appointed Sobotka the prime minister, as he only gave him a mandate to negotiate a new government."

Indeed, the analyst is not alone in suspecting the president may well yet attempt to engineer as much delay as possible in the formation of the new administration. "It is likely that Zeman will both try to bar some nominees from the government and keep his own PM appointee, Jiri Rusnok, in the office for as long as possible," Dhand continues. However, he adds that "despite the obstacles posed by the president, a new government headed by Sobotka is still expected to be appointed by the year-end."

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