Jan Macháček

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Czech Business Weekly

Broken EU promises and Zeman’s ‘rats‘

25. 09. 2006
Grabbing headlines these past couple of weeks is the revelation that the budget deficit will preclude the country from adopting the euro in 2010 as planned, with pronouncements by new Finance Minister Vlastimil Tlustý later repeated by Prime Minister Mirek Topolánek and Czech National Bank (ČNB) Governor Zdeněk Tůma.

But at the same time, given the recent experience of Latvia — which was kept out of the eurozone on a very minor technicality concerning a single Maastricht criterion — it’s uncertain if the club really wants to bring us “inside.”

Although these two issues are connected, the bigger news seems to be that the Czech Republic won’t fulfill its convergence criteria for accepting the euro by keeping the budget deficit at below 3 percent of GDP by 2007. Thus this country is breaking promises it signed upon joining the EU in May 2004; that’s akin to breaking an international treaty, and from this moment on, we will be seen as an unreliable partner. Moreover, with economic growth at over 6 percent, there was no reason to do so.

The new Cabinet is blaming the previous one and in crucial respects is right to do so. Over the past eight years the Social Democrats (ČSSD) failed to reform or transform the system of social expenditures and redistribution. What’s worse, even with these large deficits, normal expenditures — such as highway repair, fixing school roofs and defense spending — are diminishing in real terms, while mandatory social redistribution is growing dramatically.

But new social expenditures worth Kč 20 billion (E 705 million) were voted in by all the political parties before the election, not just the ČSSD. Tlustý kept silent about the need to rollback irrational expenditures and didn’t attempt to negotiate with other political parties. Moreover, instead of proposing some cuts and legislative changes, Tlustý refuses to increase the tobacco tax and wants to lower the consumer tax on gasoline.

Tlustý is very close to Euroskeptic President Václav Klaus, and we suspect that the last thing he really cares about is this country accepting the euro.

Also a hot topic last two weeks was Tlustý’s meetings with former PM Miloš Zeman (ČSSD), which the ODS man said were purely about the budget issue: Zeman is an experienced politician and Tlustý asked him for advice. It’s naive to think that Zeman has a deep understanding of where to simplify the current budget or cut expenditures — and he’s already seeking qualified counsel (see “Expert team to advise Tlustý on cuts,” CBW, Sept. 18, 2006). Zeman can only help by getting his loyal supporters, such as ex-Labor Minister Zdeněk Škromach, to approve changes.

The real purpose of these meetings is probably to destabilize the ČSSD, in particular party leader and ex-PM Jiří Paroubek, by adding to his paranoia that an MP will defect to the right and break the 100–100 deadlock in Parliament. It’s also possible that Tlustý is scheming to form a government after Topolánek fails to win the Oct. 4 confidence vote, and is seeking Zeman’s support for some kind of a grand (and maybe hidden) coalition.

As for Zeman, his motivation is to clean ČSSD of all “the rats” who supposedly betrayed him during a presidential vote three years ago, including, he supposedly believes, ex-Finance Minister Bohuslav Sobotka. One thing is clear: Tlustý was certainly clever to exploit a major ČSSD weak point: the ego of its former chairman.

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