Czech Paralysis Extends as President Zeman Seizes Spotlight

The Czech Republic’s political deadlock was extended yesterday as President Milos Zeman’s defiance of lawmakers threatens to hamper the country’s ability to tackle its longest economic slump on record.

The showdown with lawmakers came to a head when technocrat Prime Minister Jiri Rusnok lost a confidence vote. His nomination by Zeman in June without parliamentary backing was an unprecedented snub to parties. The country may now face a snap vote as its increasingly fractured politics remain in crisis.

Buoyed by a mandate from almost one-third of 10 million Czechs in a January ballot, the nation’s first directly elected head of state is carving out a new role for the presidency shaped by the likes of the late Vaclav Havel. Following the illegal spying and graft scandal that toppled Premier Petr Necas’s government in June, the rift risks policy paralysis in a country struggling to exit its second recession since 2009.

“Zeman started to alter the practice essentially from day one in office, and in his view the direct mandate entitles him to interpret his role in the constitutional system differently from his predecessors,” Otilia Dhand, an analyst at Teneo Intelligence, a London-based political risk evaluator, said Aug. 5 by phone.

Yields Rise

The yield on the government’s 10-year koruna debt, which reached an all-time low 1.48 percent on May 17, has risen since the start of the crisis to 2.254 percent today, holding below comparable U.S. Treasuries, data compiled by Bloomberg show.

The coalition that backed the previous cabinet said it continued to hold a majority to stay in power and pledged to choke the interim government’s budget plans, including infrastructure spending, aimed at kickstarting an economy that has shrunk for six consecutive quarters though March.

That front was shattered after the failed confidence vote. The TOP09 party of former Foreign Minister Karel Schwarzenberg, frustrated that several members of its allies broke an agreement to vote against Rusnok, said it would back the poll-leading Social Democrats’ push for an early election. Such a motion may now have enough votes as deputies today start meetings to untangle the crisis.

No Deadline

Even if parliament dissolves itself, Zeman has to make the move official and has no constitutional deadline for doing so. For now, Rusnok stays in office.

While previous presidents largely acted as figureheads in domestic policy, Zeman is seeking a greater say as interest rates near zero have failed to revive the $196 billion economy.

Necas had focused on curbing the fiscal gap by reducing investments and raising taxes. While undershooting 2011 and 2012 deficit targets helped cut borrowing costs, it frustrated the public and damped private consumption, exacerbating the economic contraction, the central bank has said.

The turmoil scuttled ex-Finance Minister Miroslav Kalousek’s plan to boost spending if the outlook for public finances improved. The budget gap narrowed by about half through July from a year ago, to less than a third of the 2013 target.

While the second-richest ex-communist European Union nation has had more premiers than any other bloc member in the last decade, it’s attracted $65 billion of foreign direct investment since 2003, helping the economy double in size. The koruna has gained about 20 percent against the euro in that period.

‘Gigantic Victory’

The currency didn’t react to the rising chance of an early election with opinion polls “indicating a gigantic victory for the left,” Lubos Mokras, a Ceska Sporitelna AS analyst in Prague, said today by e-mail. The koruna gained 0.1 percent to 25.886 per euro as of 11:22 a.m.

Zeman in March became the Czech Republic’s third president since the country’s independence 20 years ago. The euro-skeptic economist Vaclav Klaus beat out Zeman among others to replace Havel in 2003. He was forbidden by law to seek the post again.

With Zeman already breaking with tradition, his next moves may also be unconventional because the law doesn’t set the rules for when and how to replace Rusnok after the lost confidence motion, nor is there a deadline for dissolving parliament, said Jiri Pehe, director of New York University in Prague.

“Zeman is trying to shift the center of power gravity toward the president and weaken the parliament, and he is using his direct mandate to justify his moves,” Pehe said in an Aug. 6 interview. “The recent developments mean that even extreme possibilities now appear conceivable. In all scenarios, Zeman is holding the winning cards.”

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