Czech Prime Minister Petr Necas announced his resignation June 16 amid mounting allegations of corruption and spying against his office manager and a close aide. Whoever takes over in Prague must address the slowdown of the Czech Republic’s export-oriented economy. Doing so will require prioritizing economic ties with Russia in light of the weakness of European markets.
Over the last year, the Czech Republic has experienced political instability and a weakening central government fueled by discord among the three-party ruling coalition and public anger over economic decline and tax increases. The rivalry between the left-wing president, Milos Zeman, and the center-right Mr Necas has contributed to the political tensions during the past few months.
Mr Necas, who had served as prime minister since 2010, also stepped down as party leader of the Civic Democratic Party, which leads the center-right government coalition it forms with the Liberal Democrats and TOP 09. The three parties, which lack a parliamentary majority and thus depend on the votes of independents, still aim to revive the coalition without early elections.
According to current polls, early elections would especially benefit the opposition Social Democratic party and would likely result in a center-left government. Negotiations among the parties and Mr Zeman over the coming days will determine whether a new government will be formed with the current forces in parliament, whether a technocratic government is put in place, or whether elections scheduled for 2014 will be moved up.
If early elections take place and the Social Democrats do indeed win, the new government coupled with the current president would likely result in a less euroskeptic Czech Republic. Under the center-right government and euroskeptic former President Vaclav Klaus, the Czech Republic joined the United Kingdom in remaining outside the EU fiscal compact treaty. Even so, any new government – even one with a pro-European stance – will refrain from pushing for euro zone membership given the crisis in the currency union.
From the European Union’s
perspective, the collapse of the Czech government will not have wider
destabilizing effects. The governments of Slovenia and Bulgaria also
fell in 2013, but had no such impact on the union.
Challenges to a new government
The Czech Republic is currently stuck in its longest period of economic contraction in more than two decades. While still relatively mild compared to the contraction in Southern Europe, according to statistics agency Eurostat the Czech unemployment rate has gradually risen from 6.5 percent in late 2011 to 7.2 percent today. This rate is comparable to that of Denmark, and well below the 11 percent EU average and the rates in crisis countries like Greece or Spain. According to Eurostat’s report, the Czech economy contracted by 1.3 percent in 2012 and is expected to contract by 0.4 percent this year as the Czech Republic’s main Northern European trade partners experience weaker growth.
Given the country’s weakening economy, any new government will likely have to implement further unpopular economic reforms. In March, Social Democrat leader Bohuslav Sobotka announced that as prime minister he would increase taxes on banks and large companies instead of continuing to reduce government spending, as Mr Necas had planned to do. While this strategy would likely meet less popular opposition, it could put the Czech Republic at odds with foreign investors.
Compounding these woes, the Czech Republic has experienced its worst flooding since 2002. In response to the floods, the government has announced around $600 million in infrastructure investment and tax relief. The government hopes infrastructure repairs will jump-start temporary growth and raise domestic consumption.
But such moves are unlikely to bring much long-term relief to the Czech Republic, which is heavily trade-oriented. In 2012, the export of goods and services accounted for the equivalent of 78 percent of gross domestic product, far higher than the 52 percent seen in Germany, which is considered the classic trade-oriented economy. In the same year, the Czech Republic had a trade surplus (including goods and services) of 5.3 percent of gross domestic product, just below Germany’s surplus of 5.6 percent.
The Czech Republic is especially vulnerable to weakening European demand, since 80 percent of its exports go to other EU countries; 31 percent of Czech exports go to Germany alone. While the relative resilience of the German economy has helped the Czech Republic and other Central European countries avoid the kind of deep contractions seen in Southern Europe, low growth expectations for Germany darken the outlook for Prague.
Diversifying its export markets has hence become a greater priority for the Czech Republic. Over the past years, it has gradually managed to reduce its share of exports going to the European Union, which stood at 85 percent in 2007.
An alternative economic partner
For Prague, Russia is seen as an increasingly important economic partner that can compensate for the decline in Western Europe. Over the past six years, exports to Russia have doubled, reaching $6 billion in 2012 according to Trade Map, an organization that compiles international trade statistics. At present, Russia is the Czech Republic’s largest export market outside Europe and its seventh-largest export market overall, up from 12th in 2007.
Despite its strong economic integration with the West, the Czech Republic has long been more open to economic ties with Russia than other countries in the region, such as the Baltic states and Poland. Whatever government takes over in Prague will likely try to enhance ties – especially economic ties – with Moscow. Eastern and Central European countries like Bulgaria, Hungary and Romania are becoming more open to the same strategy, given Western Europe’s economic troubles.
At present, the European Union is largely focused on dealing with the economic crisis in the euro zone. Eastern and Central Europe no longer sees the bloc as capable of offering the kind of economic prosperity it did pre-crisis, and EU demands for reforms such as reductions in government spending and privatizations are decreasing its popularity. Russia, by contrast, offers a consumer market without attaching demands for structural reforms in the Czech Republic.
Better ties with Russia are mainly seen
in Prague as a complement to ties with the West, which remain strong.
But as Western Europe continues to lose the desire and ability to
integrate its eastern periphery, deepening ties with Russia could
become a dependence on Moscow.
This edited version of “Economic challenges to a new Czech prime minister” is republished with the permission of Stratfor.