VISEGRAD: Reform but no change in way Czech politics does business

By bne IntelliNews July 1, 2010

bne -

The appointment of Miroslav Kalousek as the Czech Republic's new finance minister has been welcomed by those who support reform of social spending and cutting the budget deficit. However, those voters who had hoped two new parties in the three-party coalition heralded a fundamental shift in the country's scandal-prone politics are likely to be disappointed.

On June 30, the centre-right coalition that came out of the May elections agreed that Kalousek of the new Top09 party should take the all-important post of finance minister. Top09 campaigned on an agenda to cut the swelling budget deficit, which hit 5.9% of GDP last year, by targeting pensions and social spending. Putting Kalousek in charge of this gives hope that the new government will meet the ambitious deficit targets set by the outgoing administration, which promised in its latest convergence programme (which lays out how the government intends to bring its finances toward those levels needed to join the euro) to cut the deficit to 5.3% in 2010 and a further reduction of the deficit to 4.8% and 4.2% of GDP in 2011 and 2012 respectively.

"Regarding how the markets will perceive Kalousek's appointment, I think pretty positively, as we know he will advocate large budget cuts," says Stanislava Pravdova, an analyst with Danske Bank.

Pavel Sobisek, chief economist at UniCredit Bank in Prague, says the appointment of Kalousek is important in two respects. "First, the key cabinet position will be occupied by a member of the party that was the strictest of the three coalition parties in its calls to remove the fiscal imbalances," he says. "Second, Kalousek's track record as a finance minister looks promising: he was the minister during the toughest period of the global recession [between 2007-2009] and his steps looked competent then."

The parties have already agreed to cut spending by some CZK56bn (£1.78bn) next year. Rather, it was the division of government posts that proved to the biggest stumbling block in piecing together this new centre-right coalition, which for the first time in many years will have a decent majority of 118 seats in the 200-seat parliament, enabling it to push through the kind of bold reforms that the country has lacked since the 1990s.

There had been concern among the Civic Democrats (ODS), the largest party in the coalition with 51 seats under the leadership of Prime Minister Petr Necas, that too much power was being given away to Top09, which won just 43 seats. There had even been an idea floated, but ultimately abandoned, to split the responsibilities of the finance ministry, removing its power over state assets and leaving it with control over the budget.

Parceled out

Top09 was also given the foreign ministry, which will be headed by its leader, the popular and aristocratic Karel Schwarzenberg. The other new party in the coalition is the new populist Public Affairs party, with 24 MPs, whose head, the former journalist Radek John, has been appointed interior minister. His party has also got the education, transport and regional development ministries.

Public Affairs had demanded the interior ministry as its price for joining the coalition, because this portfolio would best enable it to be seen meeting its main campaign theme of rooting out corruption.

Indeed, the arrival of these two new parties on the Czech political scene has been widely interpreted as a sign of disgust by Czech voters at their country's corrupt political class. Yet some analysts in Prague question whether there has actually been a fundamental change in the country's politics, but rather, as James de Candole of Candole Partners puts it, a "controlled fragmentation" of the political centre and right by the business interests that stand behind the politicians.

The used Skoda-driving Necas is a highly-principled politician and his appointment as head of the ODS is a clear sign the party at large wants to purge its ranks of the most corrupt elements. But his biggest strength in the eyes of the public, that he has none of the country's powerful business groups behind him, could also prove to be his biggest weakness. "Necas himself loathes lobbyists," says de Candole. "The fear is that he and Schwarzenberg are quickly reduced to the role of 'Useful Idiot' by business interests in their parties."

What the two two new parties have going for them in the short run is that they will be useful in October's municipal elections by helping to syphon off disaffected ODS voters without seeing them gravitate to the opposition centre-left Social Democratic Party (CSSD), meaning the business interests will still have their people in power in Prague. However, the problem for these parties in the longer run is that they have no real structures, membership and history, and are heavily dependent on their charismatic leaders. "If one wanted to be a bit cynical, it would be possible to say that the ODS and CSSD, because they were influential, were gradually penetrated by various corruption-prone business interests - ODS calls them 'godfathers' - and the voters punished them," says Jiri Pehe, a political analyst. "However, in doing so, the voters elevated to the lower house two parties that were basically created by 'godfathers' - those two parties are basically business projects."

It's also clear from the cabinet line-up that the giant utility CEZ, which holds a level of power in the country that's unusual by any standards, will retain a high degree of influence in the new government. For example, two supervisory board members of CEZ, Ivan Fuksa and Martin Kocourek, have become the agriculture and trade ministers respectively.

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