Czech Republic finally gets elected government

By bne IntelliNews January 30, 2014

bne -

The Czech Republic gained an elected government for the first time in seven months on January 29 as President President Milos Zeman finally gave his approval to the coalition cabinet. Many, however, are already wondering how long the new government will last.

The cabinet took power three months to the day after new Prime Minister Bohuslav Sobotka saw his centre-left CSSD take the most votes in early elections. The party has spent the intervening time thrashing out a coalition agreement with the centrist Ano 2011 and Christian Democrats.

The coalition takes over from a caretaker government of figures close to Zeman, which has run the country since August, despite the objections of all political parties. The power-hungry president has extended the life of his cabinet by pushing the boundaries of his office, but finally ran out of time. He appointed Sobotka on January 17, having failed to dislodge him in the wake of the October vote via an attempted party coup.

"I'm confident the new government will bring economic growth to the Czech republic," Sobotka told Zeman, according to Bloomberg. "It will bring prosperity and it will also bring the necessary stability. Our goal is to carry out policies that are socially sensitive and just."

Despite the CSSD's disappointing performance in the election - which saw it take just 21% of the vote - and the subsequent squabbles with its coalition partners and the president, Sobotka insists his government will be strong. The handover of power at the ministries will continue through January 31, reports Wall Street Journal, with the new cabinet to face a vote of confidence in parliament next month.

Zeman had insisted for weeks that he had the right to interfere in the make up of the cabinet, and broadcast his objections to several candidates. Despite Sobotka having publicly rejected the president's claim to any say, horse trading has clearly been ongoing. The coalition has said it will appoint "expert" deputy ministers, meaning Zeman can park his supporters in important positions.

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 - 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.

Combustible cocktail

That's the last thing Sobotka needs, with his government already facing a potentially combustible cocktail of threats. The failure of the CSSD to properly capitalize at the snap election, which came following the June collapse of the previous centre-right coalition amid one scandal too many, did little to shore up his position. Meanwhile, the population has 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 that has promised to clean up corruption. Such protest parties have enjoyed power in the recent past, but have more often than not injected instability into government. The coalition commands 111 seats in the 200-strong lower house, but the weight of governing has often impacted smaller Czech political parties in recent years, helping to bring down coalitions.

Ano threatens an even greater destabilizing effect than previous new parties given that it has the weight of support to challenge Sobotka directly. The coalition agreement has already seen Babis water down the CSSD's plans to raise taxes to pay 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.

Zeman is well aware of the coalition's weak point. In an interview on January 28, he suggested the plan to find the cash for extra spending without tax increases will be tricky to achieve. "The main problem of the coalition agreement is some distinction between good ideas, aims or purposes on one side, and relatively fuzzy declarations about the tools, mainly the financial tools," the president told Bloomberg. "It would be a miracle worthy of the Nobel Prize for economics" to cover the pledged spending solely by savings, without raising taxes.

At the same time, there is no little concern over Ano's control of the finance ministry. With Babis' Agrofert corporation the largest employer in the Czech Republic, the conflict of interest is stark. Raising such fears, on the eve of taking office the new finance minister rejected moves by the CSSD to follow tradition and install its candidate as deputy minister.

Clearing the way for taking power, the dispute between the coalition partners was put on the back burner. However, further talks scheduled for January 31, according to Radio Praha, and analysts suggest that the result of this fight will offer an indication of the real division of power in the centre-left coalition.

That's the sort of talk the president is keen to encourage. "There is the main problem, and that is the optimistic expectations of Mr. Babis about savings, and the relatively pessimistic expectations of Mr. Sobotka," he said according to Bloomberg. "In this area, I support the attitude of Mr. Sobotka, but still, I believe that Mr. Babis might be successful, and the result will decide who will be the first dog in the government."

As Otilia Dhand at Teneo Intelligence puts it: "The government stability outlook is challenged by CSSD's internal factionalism and the lack of cohesion within ANO. Moreover, tensions among the coalition partners appeared already during the negotiations process and should not be underestimated. A relatively high degree of political volatility is typical for the Czech political system and is likely to continue in the current parliamentary term as well."

Yet for all the talk of instability, there's little room for manoeuvuer in economic policy whoever is in charge. On top of that, investors are well versed in shrugging off Czech political shenanigans. Sobotka will be the eleventh PM since 1993, and despite several months of unelected 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 dropped 1 basis point to 2.29% as the government was sworn in, holding it below comparable US Treasuries, according Bloomberg.

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