Czech Political Crisis Could Help Treaty

The coalition government of the Czech Republic lost a confidence vote on 24 March and is expected to be out of office within weeks. Leaving aside for the moment the effect on the egocentric Czech political scene, what are the European consequences of the government falling midway through its prestigious European Union presidency?

First off is the problem of the union's anti-crisis measures and putting up a common front in negotiations with global partners. The outgoing government will be hard pressed to moderate discussions when it lacks leadership and a definite view (a government with no political support cannot have an opinion).

Nor will the caretaker government of bureaucrats and experts that is now being formed be able to moderate effectively because in the few weeks of the presidency left it will have no chance to find out what is going on, and the non-political ministers will have no informal partners in other countries to pair up with.

It is going to mean that during the worst economic crisis in its history, the EU will lack credible leadership for the next three months. This could have lasting effects especially for the smaller EU states and for all in the east of the bloc.

After this, small and midsize countries may never again be trusted with the current arsenal of presidential powers. The Lisbon Treaty shrinks the role of the rotating presidency anyway – but more on Lisbon in a bit.

Next, the EU states that want a sharper line between eurozone members and others – a form of economic and financial governance for the eurozone – will be strengthened. This idea is becoming more popular since it is clear that Europe lacks economic governance at this critical time. France's preference for this innovation has long run into German opposition. Berlin's support for the Poles, Czechs and others outside the zone has mainly stemmed from suspicion that France, by proposing institutionalization of the eurozone, wants to bring the European central bank under political control. That could be true, but it is probable that after the experience with Czech leadership the Germans will stop trying to deflect the tendency toward a two-speed Europe.

And if that happens, one of the first victims could be Poland, which is trying to talk its way into ERM 2 (the waiting room for full eurozone membership) as soon as possible. The Poles need allies, but a rudderless Czech Republic will be unable to articulate any position or offer them support.

Finally, the leadership vacuum for the remainder of the Czech presidency may nullify the Czechs' strenuous efforts to present themselves in a better light than those Central and Eastern European EU members suffering volatile currencies and foreign investor flight. Their arguments are correct: Czech foreign-denominated debt is very low, the needs of local banks are fully satisfied by local deposits (in fact, the banks are net lenders to their foreign parent companies), the current account balance is still in positive figures, our deficits and overall indebtedness are relatively low. The risk is that under the current political chaos the Czechs will be lumped in with what is seen as a very unstable region, thus threatening the economy still more.


And yet the import of this government should not be overstated. The outgoing cabinet drastically underestimated the financial and economic situation. Prague was repeatedly warned that the crisis would be the main agenda of its presidency but did nothing to get ready for the job. As late as November officials still saying the country was insulated from the slump. They did assemble a brain trust of economic experts, but not until early January when the presidency had already begun. Prime Minister Mirek Topolanek's "highway to hell" quip on the American anti-crisis package well illustrates the qualities of the Czech presidency.

No, the biggest political threat for the union as a whole dealing with the Czech turmoil has to do with the Lisbon Treaty. The way this plot line develops depends on who prevails in Czech politics. Will it be the euroskeptic President Vaclav Klaus or the Klaus-averse coalition of Topolanek's Civic Democrats and the opposition Social Democrats that may be emerging?

We await the Czech Senate's vote on the treaty. If Klaus manages to name a government to his own liking, the vote could well drop out of the Senate agenda until after next year's Senate elections when there is a chance the pro-Lisbon Social Democrats will win more seats than they now have. This will be taken very badly by our EU partners and will push the country even further to the sidelines. Postponement of the treaty will severely curtail Europe's decision-making ability at a time when robust action is urgently needed.

There is also a positive scenario. With his surprise visit to the Social Democrats' party congress in March and other signals of his indirect backing for their campaign to bring down the government, Klaus angered even his euroskeptic loyalists in the Senate. The treaty still has a good chance of being ratified in the Senate. That would be revenge on Klaus and good news for Europe, more important than what kind of government is sitting in Prague this week or next.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE