Czech Republic

Politics:

• Analysis

  Czech Republic politics: Quick View - Support for the KSCM is rising

  Event

  A STEM poll conducted on December 1st-7th shows that the KSCM remains the third most popular party.

  Analysis

  STEM's latest tracking poll confirms the leading position occupied by the left-wing opposition CSSD. Asked who they would vote for in an early election, 26.5% of respondents said the CSSD. In third place is the KSCM, with support from 12.7% of respondents. Both parties continue to consolidate their gains in the regional election in mid-October, where the KSCM came second. In contrast, popular support for the two ruling parties, the ODS and TOP 09, is declining. The ODS would secure 13.9% of the projected vote, whereas TOP 09 would gain a mere 9.1%.

  In an early election the ODS and TOP 09 would struggle to form a strong coalition government without support from at least one other party. The latest poll also suggests that popular support for small factions created over the past few years is growing in tandem with increasing political apathy. A STEM poll released on December 14th shows that only 10% of people are satisfied with the direction in which the country has been moving since 1989, in contrast to 57% who believe that it is not following a satisfactory path.

  Support for the CSSD and the KSCM appears to have stabilised at a level that would see both parties secure significant proportions of the popular vote to form a coalition government in the event of an early election. Given the KSCM's strategy to align itself with CSSD policies, it is likely that a KSCM-CSSD alliance would produce a stable administration. For instance, both parties have indicated that they would be prepared to reform the private pension system fostered by the ODS-led government, and until recently the CSSD, like the KSCM, was against any rises in indirect taxation in a bid to support domestic demand.

  Although the KSCM is making headway, it remains unpopular among the young, despite high rates of youth unemployment. Students in the southern town of Ceske Budejovice commenced a 24-hour hunger strike on December 17th in protest against the new CSSD-KSCM regional administration. In the near term support for the KSCM is likely to continue rising, particularly as the next phase of the government's austerity drive is due to commence in January 2013.

  December 19, 2012

• Background

  Czech Republic: Key figures

  Vaclav Klaus

  Vaclav Klaus was the prime minister in 1992-97 and has been president since February 2003. He founded the Civic Democratic Party (ODS) in 1991 and led the party until December 2002, when he resigned the leadership to run for president. Mr Klaus is a divisive figure with an abrasive political style, who holds controversial, sceptical views on European political integration and climate change. His views have diverged from the official ODS position, and he resigned his membership of the party in December 2008, following the party leadership's support for ratification of the EU's Lisbon treaty. His relations with the prime minister, Petr Necas, have always been cordial, however. This will serve to underpin the government's reform effort in the early part of the forecast period. Mr Klaus will have to stand down from the presidency in 2013, after which point he is expected to retain an active interest in politics and could found a new right-wing party.

  Petr Necas

  Mr Necas, the prime minister and ODS leader, is one of the few nationally known party members untainted by scandal or perceived corruption. He is a former industrial researcher with a doctorate in physics, and a Catholic with an intellectual interest in neo-conservative social policies. Mr Necas joined the ODS shortly after its foundation in 1991 and has been a member of parliament (MP) since 1992. He served as deputy defence minister in 1995-96 and as labour minister in 2007-09. Although known for his understated political style, Mr Necas's appearances as prime minister have been confident and competent, and he has successfully steered the party through economically challenging times as the Czech Republic has slipped back into recession in 2011. As a strong critic of vested interests within his party, he is credibly placed to reform the ODS. Mr Necas's position appears strengthened following the confirmation of his mandate to lead the ODS until the regional elections in October 2012, but his power within the party could be constrained by his limited support base among the ODS's regional organisations.

  Miroslav Kalousek

  Miroslav Kalousek, the finance minister and co-founder of TOP 09, is a former leader of the Christian Democratic Union-Czechoslovak People's Party (KDU-CSL). He was elected to parliament in 1998 and became party leader in 2003, but stepped down in 2006 when the KDU-CSL rejected his proposal to form a minority government with the Czech Social Democratic Party (CSSD) with tacit support from the Communist Party of Bohemia and Moravia (KSCM). He then served as finance minister in 2007-09 under the minority centre-right government. Despite his attempts to make a deal with the centre-left, Mr Kalousek has been a long-time advocate of the KDU-CSL moving to a more pro-market stance. When his successor rejected this course, Mr Kalousek led a breakaway grouping that became TOP 09, and approached Karel Schwarzenberg, an independent member of the Senate (the upper house of parliament), to head the new party. Mr Kalousek is likely to remain the intellectual architect of TOP 09's main social and economic policies. However, a recent corruption scandal (in July 2012 a high-ranking police official accused the finance minister of intervening in a politically sensitive investigation into army procurement contracts) could undermine his position within the party in the near term.

  Karolina Peake

  Karolina Peake has been an MP since June 2010. She is a deputy prime minister in charge of the government's anti-corruption programme, a position that she has held since June 2011. Until April 17th 2012 she was a member of Public Affairs (VV). She left the party following an internal rebellion against the leadership of Radek John, the party chair (VV formally left the coalition government on April 23rd). In May 2012 Ms Peake founded a new faction called LIDEM (this acronym alludes to "the people" in Czech), which has been formally registered. LIDEM describes itself as a liberal-democratic party. The coalition government is heavily reliant on support from LIDEM to pass legislation, as its majority has been significantly weakened. Ms Peake's position as head of the new faction will afford her more political exposure and power to lobby the government in its decision-making on important policies.

  August 01, 2012

• Structure

  Czech Republic: Political structure

  Official name

  Czech Republic

  Form of state

  Parliamentary republic

  Head of state

  President; currently Vaclav Klaus, re-elected by parliament to a second five-year term in February 2008

  National legislature

  The lower house, the Chamber of Deputies, has 200 members; the upper house, the Senate, has 81 members

  Electoral system

  Universal direct suffrage for party proportional representation, subject to a 5% threshold

  National elections

  Last elections: May 28th-29th 2010 (Chamber of Deputies); October 2014 (Senate and municipal government). Next elections: October 2014 (Senate); February 2013 (presidential); May-June 2014 (Chamber of Deputies)

  National government

  The prime minister, Petr Necas of the Civic Democratic Party, leads a government comprising the Civic Democratic Party, TOP 09 and a breakaway faction of former members of Public Affairs

  Main political parties

  Civic Democratic Party (ODS); Czech Social Democratic Party (CSSD); Communist Party of Bohemia and Moravia (KSCM); TOP 09; Public Affairs (VV)

  Prime minister: Petr Necas (ODS)

  Deputy prime minister & foreign minister: Karel Schwarzenberg (TOP 09)

  Deputy prime minister: Karolina Peake (independent)

  Key ministers

  Agriculture: Petr Bendl (ODS)

  Culture: Alena Hanakova

  Defence: Alexandr Vondra (ODS)

  Education, youth & sports: Petr Fiala (independent)

  Environment: Tomas Chalupa (ODS)

  Finance: Miroslav Kalousek (TOP 09)

  Health: Leos Heger (TOP 09)

  Industry & trade: Martin Kuba (ODS)

  Interior: Jan Kubice (independent)

  Justice: Pavel Blazek (ODS)

  Labour & social affairs: Jaromir Drabek (TOP 09)

  Regional development: Kamil Jankovsky (independent)

  Transport: Pavel Dobes (VV)

  Central bank governor

  Miroslav Singer

  November 01, 2012

• Outlook

  Czech Republic: Key developments

  Outlook for 2013-17

  • A two-party centre-right coalition government, supported by a newly formed faction, holds a tenuous majority of around 100 seats in the Chamber of Deputies (the lower house of parliament).
  • The likelihood of an early election has increased. The government's fiscal austerity drive has undermined its popularity, and the left-wing opposition is growing in strength following regional and Senate elections.
  • The Economist Intelligence Unit expects the budget deficit to shrink gradually over the forecast period. After peaking in 2013, public debt is forecast to level out at around 41.5% of GDP in 2017.
  • We estimate that real GDP will contract by 1% in 2012, owing to the adverse impact of fiscal austerity on domestic demand, combined with faltering external demand among trading partners in the euro zone.
  • GDP growth should rebound modestly in 2013, and strengthen to an average of 2.3% in 2013-17, as the external environment and the competitiveness of the domestic economy improve as a result of structural reform.
  • Increases in indirect taxation, regulated prices and food prices are estimated to push up inflation in 2012 beyond the target range of 1-3% set by the central bank, but inflation is forecast to moderate thereafter.
  • The trade account is forecast to remain in surplus in 2013-17, which will keep the current-account deficit in check, at an average of 2% of GDP in 2013-17.

  Review

  • The leading left-wing opposition party, the Czech Social Democratic Party (CSSD), holds a constitutional majority in the Senate following elections held between October 12th and October 20th.
  • Following regional elections in mid-October, the CSSD remains the largest party in most locations. The Communist Party of Bohemia and Moravia (KSCM) also made gains.
  • On October 25th the government proposed a resolution against the transfer of regulatory powers over banks in the euro zone to the European Central Bank (ECB, the euro area's central bank).
  • In late September the central bank cut the benchmark repo interest rate to 0.25%, from 0.5%, in response to deepening recession.
  • Consumer price inflation accelerated to 3.4% in September as external pressures (such as high global oil prices) exerted upward pressure.
  • The unemployment rate reached 8.4% in September, up from 8.3% in August, as the number of vacancies fell to a six-month low.

  November 01, 2012

Economy:

• Background

  Czech Republic: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	10.5	Population growth	0.5
  GDP (US$ bn; market exchange rate)	215.2b	Real GDP growth	1.6
  GDP (US$ bn; purchasing power parity)	272.9	Real domestic demand growth	0.7
  GDP per head (US$; market exchange rate)	20,417	Inflation	2.7
  GDP per head (US$; purchasing power parity)	25,891	Current-account balance (% of GDP)	-3.2
  Exchange rate Kc:US$ (av)	17.7b	FDI inflows (% of GDP)	3.2
  a Economist Intelligence Unit estimates. b Actual.

  Download the numbers in Excel

  Background: Czechoslovakia was founded in 1918, after the collapse of the Habsburg Empire. A communist regime was installed in 1948 and lasted until the "Velvet Revolution" in 1989. The first free election was held in June 1990, and the Czech Republic emerged in 1993 as one of the successors to Czechoslovakia.

  Political structure: Parliament consists of the 200-member Chamber of Deputies (the lower house) and the 81-member Senate (the upper house). Executive power is exercised by the prime minister, and the president is elected by parliament for a five-year term. The centre-right won an unexpected victory in the election to the Chamber of Deputies in May 2010, and a right-wing coalition comprising the Civic Democratic Party (ODS), TOP 09 and Public Affairs (VV) was formed. The government was reconfigured in April 2012, following the departure of VV. A new political faction, LIDEM, which includes former VV members, was created in May and supports the ruling coalition in parliament. In October 2010 the Czech Social Democratic Party (CSSD), the main centre-left party, won a majority in the Senate, the less powerful of the two parliamentary bodies. The most recent presidential election was in February 2008, with the incumbent, Vaclav Klaus, re-elected to a second and final term in office. The next presidential election, which will be the first directly elected contest in the country's history, is scheduled to take place at the start of 2013. Mr Klaus's term of office ends in March 2013.

  Policy issues: Implementation of healthcare and pension reforms approved in 2011-12, a core plank of the government's fiscal consolidation package, will be required for long-term fiscal sustainability and to cope with an ageing population.

  Taxation: The corporate tax rate was reduced to 19% in January 2010, from 20%. A flat tax of 15% on personal income is calculated from the so-called super-gross wage, which includes social and health insurance, but this is likely to be replaced with a new (and higher) flat rate based on gross income for all eligible taxpayers, starting in 2013. Indirect taxes are playing an increasingly important role within the tax regime. Since January 2012 the preferential rate of value-added tax (VAT) has been 14%, applying to essential goods and services (such as food and medicine). The standard upper VAT rate is 20%. The government's austerity package for 2013 envisages an increase in both rates by 1 percentage point (awaiting parliamentary endorsement). It is still possible that both VAT rates may be unified at 17.5% next year, as a political compromise on austerity.

  Foreign trade: After the fall of communism, trade was reoriented. The EU accounts for about 80% of Czech exports. The current-account deficit narrowed to 3% of GDP in 2011, according to the Czech National Bank (CNB, the central bank), owing mainly to a sizeable trade surplus.

  Major exports 2011	% of total	Major imports 2011	% of total
  Machinery & transport equipment	55.0	Machinery & transport equipment	42.0
  Intermediate manufactured goods	17.9	Intermediate manufactured goods	18.1
  Chemicals	6.5	Chemicals	11.3
  Raw materials & fuels	3.6	Raw materials & fuels	10.8
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Germany	32.0	Germany	29.4
  Slovakia	8.9	China	7.5
  Poland	6.2	Poland	7.1
  France	5.4	Slovakia	7.0
  Austria	4.6	Netherlands	5.6

  Download the numbers in Excel

  Download text file (csv format)

  November 01, 2012

• Structure

  Czech Republic: Economic structure

  Data and charts: Annual trends charts

  
  

  

  November 01, 2012

• Outlook

  Czech Republic: Country outlook

  Czech Republic: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The government no longer commands a decisive majority in the 200-seat Chamber of Deputies (the lower house of parliament). Following the departure of Public Affairs (VV) from government in April 2012, its support in parliament has fluctuated between less than 100 seats (during times of political crisis) and 105 seats. The coalition comprises the centre-right Civic Democratic Party (ODS) and TOP 09, and is supported by a new faction, LIDEM, composed of former VV members. Recent corruption scandals and political obstruction to government reforms--particularly to its fiscal consolidation programme--have severely tested the coalition's cohesion and stability. Divisions within the coalition parties will also continue to threaten the government's stability in the short term.

  ELECTION WATCH: The first round of the presidential election is due in January 2013, followed by a second round in February. If the contest for the first directly elected president in the country's history returns an independent candidate, this is expected to underpin political stability in the medium term.

  INTERNATIONAL RELATIONS: Although the Eurosceptic ODS remains in power, Karel Schwarzenberg, a strongly Europhile deputy prime minister and foreign minister, has put his stamp on foreign policy. He remains opposed to the government's stance on not signing up to the new fiscal treaty on budgetary responsibility that the EU has proposed in response to the euro zone debt crisis. The government is also opposed to the creation of a euro zone banking union. Mr Schwarzenberg, an experienced diplomat, has pursued a pragmatic foreign policy, which combines liberal economic positions in international and EU affairs with an eye to the Czech Republic's national interest. A balance will need to be struck with the Eurosceptic and pro-Russian stance of the president, Vaclav Klaus, who opposes the adoption of the euro and is highly critical of EU policy. Czech-Russian relations are becoming increasingly important as more Russian foreign direct investment (FDI) flows into the country. Czech-Slovak relations are expected to become increasingly important in strategic areas such as energy security as both countries look to develop their nuclear-power capacity.

  POLICY TRENDS: In 2013-15 the government will institute significant reforms to healthcare, social welfare, pensions and the tax system, in order to ensure the long-term sustainability of the public finances.

  ECONOMIC GROWTH: The Czech Republic has a two-speed economy in which exports have propelled growth while domestic demand has remained weak since the financial crisis of 2008-09. The country has one of the highest export-to-GDP ratios in the EU (in excess of 75%), which leaves the economy exposed to economic shocks in core export markets. The Economist Intelligence Unit estimates that real GDP contracted by 1.2% in 2012 (compared with 1% previously), in line with depressed household consumption, amid fiscal tightening, faltering external demand owing to the euro zone recession, and falling fixed investment.

  INFLATION: Our baseline forecast is that inflation will fluctuate within the target band of 1-3% of the Czech National Bank (CNB, the central bank) over the forecast period. In 2012 headline inflation exceeded the upper limit of this target band, at an estimated average of 3.3%. This followed an increase of 4 percentage points in value-added tax (VAT) on essential goods (from 10% to 14%) at the start of the year, and elevated food prices (particularly agricultural commodity prices) following poor harvests. The resumption of fiscal tightening and persistently weak aggregate demand will help to dampen price pressures in 2013-14, although inflation is expected to remain high in the first half of 2013 owing to upward pressures on soft and hard commodities. A gradual nominal appreciation of the koruna against the euro will offset the inflationary effect of stronger domestic demand after 2014.

  EXCHANGE RATES: The koruna is expected to appreciate modestly against the euro over the forecast period, but it currently appears to be on a weakening trend. After firming against the euro in the first quarter of 2012, as regional funding markets stabilised and investor aversion to risk eased, the koruna came under pressure in the second and third quarters, owing to the Czech Republic's strong economic ties to the EU, heightened political instability and the risk of contagion from the euro zone crisis. The prospect and realisation of further monetary easing underlined this trend in the fourth quarter. However, positive investor sentiment towards the Czech Republic--given its relatively low public debt, healthy domestic banking system and growing trade surplus, all of which has served to keep bond yields low--is expected to help to strengthen the koruna in 2013. The currency is expected to stabilise gradually over the forecast period.

  EXTERNAL SECTOR: The current-account deficit is forecast to average around 2.1% of GDP per year in 2013-17. Export growth slowed substantially in 2012, in line with faltering external demand as the recession in the euro zone has continued to deepen. Combined with weak domestic demand, this has resulted in the narrowing of the current-account deficit. Export growth will start to recover in 2014 as trade links with the EU start to improve. As a result, imports will rise faster than exports, as domestic demand rebounds following the relaxation of austerity measures. The trade surplus should be broadly stable for most of the forecast period, as import growth tends to mirror export growth, given the high import content of Czech goods sold abroad. As the profitability of foreign-owned firms grows and more firms reinvest their profits, the transfers balance is expected to remain in surplus as the flow of funding from the EU remains steady over the forecast period. We expect FDI financing to cover the current-account deficit in 2013-17.

  December 01, 2012

• Forecast

  Czech Republic: Country forecast summary

  Country forecast overview: Highlights

  • The Czech Republic is governed by a centre-right coalition comprising the Civic Democratic Party (ODS) and TOP 09, supported by a newly formed faction, LIDEM. The majority held by the government in the Chamber of Deputies (the lower house of parliament) has been significantly reduced, to around 100 seats, which has increased political tensions.

  • The government has drawn up a new austerity package for 2012-15 covering pensions, social welfare and tax reforms in order to ensure the long-term sustainability of the public finances. Several reforms, including a multi-billion koruna tax package due to take effect in 2013, are still awaiting endorsement, and their fate remains unclear.
  • Budget deficits are set to shrink gradually over the forecast period, and public debt will remain below the EU average, despite some fiscal spillage in 2012-13. The uncertain fate of the government's multi-billion koruna tax package also increases the likelihood of fiscal slippage.
  • The economy is estimated to contract by 1% in 2012, owing to faltering external demand in the euro zone and the impact of fiscal austerity on domestic demand. Growth is forecast to pick up gradually after 2013, averaging 2.3% per year in 2013-17, which is well below the growth achieved in 2003-07.

  • In 2013-17 inflation will hover close to the target of the Czech National Bank (CNB, the central bank) of 2% (±1 percentage point), after accelerating to an estimated 3.3% year on year in 2012, following increases in indirect taxation, and persisting upward pressures on food and fuel prices.
  • The koruna will strengthen modestly against the euro for much of the forecast period. The Economist Intelligence Unit does not expect the Czech Republic to join the EU's exchange-rate mechanism (ERM2) before 2017.
  • Current-account deficits will moderate over the medium term, owing to continuing trade surpluses as ties with trading partners in the EU and elsewhere remain strong, as and foreign-owned firms continue to reinvest profits in the domestic economy. However, this trend is expected to be hampered in the short term, owing to the euro zone crisis, which has undermined business confidence and pushed down fixed investment.
  • Foreign direct investment (FDI) inflows should finance most of the current-account deficit over the forecast period. A drop in FDI inflows is expected in 2012, in line with an economic slowdown in the euro zone.

  

  November 01, 2012

View detailed map

Country Briefing

Land area

78,866 sq km

Population

10.5m (June 2011, official figures)

Main towns

Population in '000 (June 2010, official figures)

Prague (capital): 1,249

Brno: 371

Ostrava: 335

Olomouc: 232

Ceske Budejovice: 187

Plzen: 186

Liberec: 170

Climate

Continental (warm summers and cold winters)

Weather in Prague (altitude 254 metres)

Hottest month, July, 17.9°C (average daily temperature in 2008); coldest month, December, 0.7°C (average daily temperature in 2008); driest month, February, 27 mm average rainfall; wettest month, July, 86 mm average rainfall. Annual average rainfall in 2008, 619 mm

Language

Czech (Slovak officially recognised)

Weights and measures

Metric system

Currency

Koruna ceska (Kc) or Czech crown. Introduced in February 1993 after the break-up of the monetary union with Slovakia

Fiscal year

Calendar year

Time

One hour ahead of GMT in winter; two hours ahead in summer

Public holidays

January 1st (New Year), Easter Monday, May 1st (Labour Day), May 8th (Liberation Day), July 5th (St Cyril & St Methodius), July 6th (Jan Hus Day), October 28th (Independence Day), November 17th (Freedom and Democracy Day), December 24th-26th (Christmas)

March 16, 2012