Czech President-Elect on Collision Course With Government

Milos Zeman’s victory in the Czech Republic’s presidential election sets up a clash with the government over its economic program aimed at cutting the budget deficit in the midst of a recession.

Zeman, 68, defeated Karel Schwarzenberg, the millionaire prince and foreign minister, in the run-off vote on Jan. 25-26 as Czechs punished the government for its austerity measures. The former premier promotes progressive taxation and closer ties with the European Union, bringing a new foreign-policy outlook after a decade under the euroskeptic Vaclav Klaus.

As the eastern EU member of 10.5 million struggles to exit its second recession since 2009, government deficit cuts were the focus of the presidential race. Zeman derided Premier Petr Necas’s administration for increasing sales taxes, an overhaul of the pension system and lack of state investments.

“A leftist president logically must be an opponent of a rightist government,” Zeman said in his first interview on the public Czech Television channel on Jan. 26. “In a number of specific laws, I will represent the leftist position.”

The Czech economy is suffering from weakening domestic demand after the Cabinet cut investments and raised taxes to trim the budget gap. With the prospects of a recession stretching into the longest ever, Necas wants to ease the pace of fiscal cuts from the election year of 2014 as he tries to avoid the fate of European leaders who were ousted following austerity measures that stunted economies from Romania to Spain.

Austerity Benefits

The government credits its program with helping to cut borrowing costs. Yields on five-year koruna notes fell 172 basis points, or 1.72 percentage points, in 2012, touching a record- low 0.66 percent on Dec. 27. The five-year rate stood at 0.90 percent as of 1:15 p.m. in Prague today, according to generic rates compiled by Bloomberg.

The president, who until now had been elected by lawmakers, picks the leader to form a Cabinet after elections. That’s often a key role in a country where balloting frequently fails to produce a majority. The head of state also influences monetary policy by holding the sole right to name central bank board members.

After taking the post in March, Zeman will be the ex- communist EU member’s third president since it became an independent state 20 years ago. Klaus, an economist who as premier oversaw the transition from a centrally-planned to market economy two decades ago, beat out Zeman among others to replace the late Vaclav Havel in 2003. He was forbidden by law to seek the post again.

‘Standard Cooperation’

While Necas said he hopes for “standard cooperation” with Zeman, the two “are on the opposite sides of the political spectrum in many issues, especially the social and economic,” the premier said after the election.

Zeman attacked the government in his first television interview, calling for early elections to replace the minority administration.

Necas’s three-party coalition lost parliamentary majority last year following clashes over personnel and budget issues. The government is ruling with support of unaffiliated lawmakers who have helped it push through a series of austerity measures and survive no-confidence motions. The fiscal steps have eroded the government’s popularity and opinion polls suggest the Social Democrats will win the next elections.

“Zeman is ostensibly setting himself up as a partner for center-left parties, which will in all likelihood form the governmental majority for the larger part of his forthcoming term in the office,” Otilia Simkova, an analyst at Eurasia Group in London, said in an e-mail to Bloomberg News.

Economic Forecaster

Zeman and Klaus were foes in the 1990s, heading the two largest political parties. Zeman, an economist who worked as a forecaster in the Academy of Science after the fall of communism, became premier in 1998 when his Social Democrats formed a minority government that ruled in an agreement with the opposition Civic Democrats, then led by Klaus.

Klaus endorsed Zeman before the run-off vote by saying his successor should be a person who spent his life in the Czech Republic, a swipe at Schwarzenberg whose aristocratic family was forced to flee the then Czechoslovakia after the communists took power in 1948. The Communist party, gaining popularity on the anti-austerity sentiment, and the trade unions had also supported Zeman.

Conciliatory Tone

Unlike Klaus, who refused to fly the EU flag above his Prague castle seat, Zeman envisages the transition of the EU into a federation with common foreign and defense policies, and supports the future adoption of the euro.

“Zeman has indicated he would employ a significantly more conciliatory tone toward the EU than the highly Euroskeptic Klaus,” Eurasia’s Simkova said.

Like Klaus, Zeman has also ruffled feathers abroad. In 2002 he equated Palestinians to Sudeten Germans, ethnic Germans who lived in Czechoslovakia before World War II, and compared Palestinian leader Yasser Arafat with Adolf Hitler. Though Zeman said he was misquoted, the Czech government apologized for the remarks anyway.

Zeman’s presidential campaign included calls for more state investment and restoring progressive taxation for higher earners. He has opposed the government’s pension overhaul, a program designed to boost private retirement savings that was among reasons cited by Standard & Poor’s when it lifted the rating on the country’s debt two steps to AA-, its fourth- highest investment grade, in 2011.

Bank Appointments

The president-elect said he would name central bankers who support economic growth and not strive only to meet the inflation and currency-stability goals mandated by law. Zeman may consider appointing a trade union representative as a policy maker, he said in one of the election debates.

Zeman’s first central-bank board appointment will come in March 2014 when the term of Eva Zamrazilova ends.

“In the next five years, President Zeman will have the option to replace five of seven members of the bank board, including the governor,” Jan Cermak, an analyst at CSOB AS in Prague said in a note today. “The makeup of the bank board can be really varied in 2018.”

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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