Czech Republic crawling towards new government

By bne IntelliNews January 20, 2014

Tim Gosling in Prague -

The Czech Republic on January 17 took a step towards gaining an elected government for the first time since the summer when President Milos Zeman appointed the head of the Social Democrat Party (CSSD) prime minister. However, a fight over the rest of the cabinet likely lays ahead, and many are already wondering how long the new government will last.

Bohuslav Sobotka was sworn in nearly three months after his party took the most votes in snap elections. The centre-left CSSD has spent the intervening time thrashing out a coalition agreement with the centrist Ano 2011 and Christian Democrats. A caretaker government of figures close to Zeman has run the country since August, despite objections from all the country's political parties.

The power-hungry president has extended the life of his cabinet by pushing the boundaries of his office. However, he has finally had to appoint Sobotka, having failed to dislodge him in the wake of the October vote via an attempted party coup.

Despite the CSSD's disappointing performance in the election, which saw it take just 21% of the vote compared with earlier hopes of 30%-plus, Sobotka said he is "convinced the Czech Republic very soon will have a strong coalition government with a [solid] majority in the parliament," according to the Wall Street Journal.

Attention now turns to the makeup of the rest of the cabinet. Zeman has been insisting that he has the right to interfere, and has objected to several potential candidates. However, despite Sobotka having publicly rejected the president's claim to have any say, horse trading behind the scenes appears to have been successful.

The coalition now says it will appoint "expert" deputy ministers, meaning Zeman can park supporters at the ministries. The president, meanwhile, said in early January that he is now likely to swear in the remainder of the cabinet by the end of the month.

While it looks likely then that Zeman and Sobotka have found a compromise to allow the new government to take the reins, the longstanding hostility between them - said to hark back to 2003 when Zeman broke with the CSSD after it failed to rally behind him in his debut bid for the presidency - is barely concealed. The new PM has said the coalition will prepare constitutional changes to limit the president's scope of action. Zeman will likely use his continued influence inside certain sections of the CSSD to stir up more trouble.


That's the last thing Sobotka needs. The party's failure to properly capitalize at the snap election - it managed to grab just 21% of the October vote, which came after the centre-right coalition collapsed amid one scandal too many - did little to shore up his support. Meanwhile, the population has clearly signaled it is weary of politicians of all stripes.

That was the key to the 19% of the vote taken by Ano 2011, a new group headed by billionaire Andrej Babis promising to clean up corruption. Such protest parties have enjoyed power in the recent past, but have more often than not injected instability into the system. The coalition commands 111 seats in the 200-strong lower house.

As bne noted in September, it's the weight of governing that tends to impact the smaller Czech political parties, which so often brings down governments. Ano, however, threatens further instability, as it has the weight of support to challenge Sobotka.

The coalition agreement has already seen Babis water down the CSSD's plans to raise taxes on companies and high earners and for loosened fiscal policy. While that has buoyed some analysts, the struggling Czech economy needs strong action to help it speed up recovery from a recession that was extended by the strict austerity of the previous centre-right administration.

"Our main priorities will include restarting economic growth, supporting the creation of new jobs, improving the functioning of the state and restoring people's trust in politics as such," Sobotka said following his swearing in ceremony, reports Bloomberg.

At the same time, there is no little concern over Ano's forthcoming control of the finance ministry. With Babis' Agrofert corporation the largest employer in the Czech Republic and featuring over 200 companies, the conflict of interest is stark.

Investors, however, are well versed in shrugging off Czech political instability. Sobotka will be the eleventh PM since 1993, yet despite three months of a caretaker government and the questionable constitutionality of the president's practices, appetite for Czech sovereign debt remains keen.

The yield on 10-year Czech government debt has averaged 3.8% over the past decade, compared with 5.6% for Poland, notes Bloomberg. The country's bonds are closer to the likes of France which averages 3.5%. The ministry of finance pushed yields lower on January 15 as it sold CZK10bn in 9- and 15-year debt.

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