Inconclusive Czech election leaves billionaire as kingmaker

By bne IntelliNews October 27, 2013

bne -

The October 25-26 election in the Czech Republic ended as expected with a win for the main opposition centre-left Social Democrats (CSSD), though it failed to produce a clear winner, meaning the country's perpetual political instability looks set to continue.

With all the ballots counted, CSSD took the most votes though ended with a disappointing 20%. The polls had forecast the party led by Bohuslav Sobotka would receive anywhere up to 30% of the vote as voters expressed dissatisfaction with the centre-right parties, pilloried for harsh austerity and near-endless corruption scandals that caused the last elected government to implode in June.

That dissatisfaction led (like the previous election three years ago) to a rash of new parties, the most prominent of which was the big winner in this election. Led by Slovak-born billionaire Andrej Babis, Ano 2011 scooped up a better-than-expected 19% of the vote, meaning this political novice will act as the kingmaker for the next government - even though the larger parties all insisted early in the campaign they would not work with Ano 2011.

The Communists (KSCM) came in third with almost 15%, while TOP 09, a conservative group that featured in the previous centre-right government, came in fourth with 12%. The biggest loser was the country's once-powerful conservative Civic Democrats (ODS), created in the 1990s by the former president Vaclav Klaus, which after being forced from power when their former leader and prime minister Petr Necas was caught up in a spying and corruption scandal had further humiliation heaped on them by winning only 8% of the vote.

The centrist Christian Democrats (KDU-CSL) returned to parliament after a three-year absence with 7% of the vote, the same as another new party, Usvit (Dawn), led by the Czech-Japanese Tomio Okamura, a senator who calls for referendums as a way to empower voters.

The results will make it hard to form a majority in the 200-seat lower house, meaning the country is in for another bout of instablity. The country has been without a proper administration since June and is currently being governed by a caretaker cabinet of technocrats (or cronies, argue some) appointed by President Milos Zeman, who has been angling to increase his power in this parliamentary democracy and will no doubt look to exploit the situation even though his centre-left Citizens' Rights Party-the Zemanites (SPOZ) failed to make the threshold to enter parliament.

CSSD will be the largest party with 50 seats, while Ano will have 47, the Communists 33, TOP 09 26, ODS 16, while the Christian Democrats and Usvit each have 14.

The obvious link-up is between CSSD and Ano in one form or another (either a coalition or CSSD minority government with support), with the Christian Democrats or even the Communists in the mix. A less likely scenario involves Ano plus the two centre-right parties of ODS and TOP 09.

Indeed, President Zeman will probably welcome as much horse-trading as possible. Sparking off the snap election when he exploited the fall of the last right-wing coalition to install his own "caretaker" government, the president has used the time to rebuild his influence within CSSD, the party that he used to lead. He fell out with his former party in 2005, but still has support amongst various factions.

Should the CSSD prove able to form a government, Zeman - who would formally appoint the prime minister - has made it clear that Sobotka could well find himself passed over in favour of Michal Hasek, the current governor of South Moravia. "The big question remains whether Zeman wants to exact his long-brewing revenge on Sobotka by not allowing him to become PM at all or by ushering him in now and then finding a way to run him out of office in a year or so. The other big question of these elections is how much Babiš is going to assist Zeman in this," notes Eric Best, a commentator on Czech politics.

The Communists would also push Zeman's agenda should it enter a coalition, although it is likely to remain outside formal government due to sensitivity in the country over the past. Protest against the potential involvement of the Communists - and the Machiavellian scent issuing from the presidential office - took artistic form in the last week of the campaign. A giant purple sculpture of a raised middle finger aimed at Zeman's office in Prague Castle took up residence on a barge on the Vltava River, while dummies have been hung by the neck on lampposts around the capital.

Economic left turn

While the intrigue surrounding the formation of an administration may well consume the Czech press for some time, what's clear is that the country will next be governed by a left-leaning cabinet. Even in the most extreme situation that the CSSD fails to build a coalition, that would simply leave Zeman to install another administration of "experts," given the decimation of the right.

That collapse of support is widely due to the austerity run by the ODS/TOP 09 coalition since taking power in 2010. While the spending cuts earned Prague some of the lowest bond yields in the EU, even analysts complained this year that the fiscal consolidation drive was also keeping the county bogged down in recession.

A left-leaning government will clearly loosen the purse strings somewhat, and taxes will rise, but in reality there's little room to manoevre in terms of state coffers, given that the previous coalition abandoned the most extreme elements of austerity just before it fell. Analysts at Erste Bank suggest the country's economic policy is set for a "left turn" rather than an "about face".

"Irrespective of which government there will be after [the] October elections the fiscal policy won't be a drag on growth anymore," they write in a note. "This, together with expected continuing recovery of [the Eurozone], leads us to expect growth of around 1.5% in 2014 and over 2% in 2015."

The main danger, both to long term competitiveness and immediate market reaction, they note, is the level of influence the communist KSCM achieves. However, the CSSD is unlikely to allow it too much clout.

The "CSSD will want to keep KSCM in check, if for nothing else then because of [the] former's keener attitude towards [the] Eurozone," Erste continues. "For CSSD, complying with Maastricht criteria is of paramount importance as it wants to lead [the] Czech Republic into [the] Eurozone." The weakness of the right wing meanwhile means the next government will have no reason to implement extreme changes to the budget to bribe the population.

The CSSD has said it would plan to roll back the previous government's unpopular pensions and healthcare reforms, as well as trimming the lower level of VAT. It has also said it wants to raise income tax for top earners, and implement crisis corporate taxes on the financial and telecom sectors, amongst others.

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