Czech Cabinet Takes Office as President Looks Past Doubts

Czech President Milos Zeman named a new cabinet today as he disregarded his doubts whether some ministerial candidates were suited for the job, ending a seven-month political gridlock.

Three months after snap elections, Zeman appointed the members of Premier Bohuslav Sobotka’s cabinet, which wants to reignite economic growth with more state spending. While Zeman had reservations about three or four of Sobotka’s nominees, he accepted the lineup that includes billionaire Andrej Babis as finance minister.

“I’m confident the new government will bring economic growth to the Czech republic,” Sobotka told Zeman during the ceremony at Prague Castle. “It will bring prosperity and it will also bring the necessary stability. Our goal is to carry out policies that are socially sensitive and just.”

The second-largest post-communist economy in the European Union is seeking a growth impetus following a record-long recession as a June government collapse obstructed budget policies. The coalition of Sobotka’s Social Democrats, the pro-business ANO party and the Christian Democrats is seeking to reverse a three-year austerity drive that helped cut borrowing costs while exacerbating a six-quarter slump.

Zeman has sought a more active role in shaping policy than his two predecessors after winning the direct presidential election. He snubbed parliamentary parties and appointed a technocrat cabinet, which didn’t have backing from lawmakers, after the resignation of Petr Necas’s administration in a scandal over spying, sex and bribery.

Budget Debate

Sobotka and ANO leader Babis, disagree on how to finance the extra spending. Babis’s plan to plug the resulting budget hole without tax increases will be difficult to achieve, Zeman said.

“The main problem of the coalition agreement is some distinction between good ideas, aims or purposes on one side, and relatively fuzzy declarations about the tools, mainly the financial tools,” Zeman said in an interview yesterday. “It would be a miracle worthy of the Nobel Prize for economics” to cover the pledged spending solely by savings, without raising taxes.

The president named Sobotka as prime minister Jan. 17 after his Social Democrats won the October snap ballot. Zeman was the victorious party’s former leader and the last Czech premier to serve a full term between 1998 and 2002.

Bond Yields

Budget cuts have contributed to the Czech Republic’s status as a safe haven in central Europe, according to Moody’s Investors Service. The yield on 10-year Czech government debt has averaged 3.8 percent over the past decade, compared with 5.6 percent for Poland, the EU’s largest post-communist economy, and 3.5 percent for higher-rated France.

The Czech 10-year yield dropped 1 basis point, or 0.01 percentage point, to 2.29 percent as of 2:34 p.m. in Prague, holding below comparable U.S. Treasuries, according to data compiled by Bloomberg.

The government’s stability will be tested within six months as the parties will need to discuss the first draft of the 2015 state budget by July, Zeman said.

“There is the main problem, and that is the optimistic expectations of Mr. Babis about savings, and the relatively pessimistic expectations of Mr. Sobotka,” he said. “In this area, I support the attitude of Mr. Sobotka, but still, I believe that Mr. Babis might be successful, and the result will decide who will be the first dog in the government.”

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