Czech Government Squabbles: Much Ado about Nothing?
The Czech ruling coalition parties failed to reach an agreement over a cabinet reshuffle and policy changes this week, continuing to fuel speculation over a possible government collapse. The junior coalition partner, the Public Affairs (VV), has threatened to quit the cabinet unless it gets two additional ministerial posts and the 2012 budget gets amended to include new taxes on gambling. The three-party ruling coalition won a strong majority in the mid-2010 elections on its pledge to bring the fiscal deficit below the EU’s ceiling of 3% of GDP by 2013. A government collapse would force general elections earlier than the scheduled 2014 and jeopardize the government’s fiscal consolidation efforts. In RGE’s view, the political realities and the little interest from either of the coalition partners in forcing snap elections means the government will likely stay its course.
Figure 1: Voters’ Preferences (June 2011 adjusted poll results)
Source: Czech Public Opinion Research Center (CVVM)
The ruling center-right coalition, comprised of the Civic Democratic Party (ODS), Top 09 and Public Affairs (VV), have seen a sharp drop in public support owing to a recent string of corruption scandals and an unpopular fiscal agenda. The VV party, whose demands have been rocking the coalition, has the most to lose in the event of early elections. The party’s level of support has dropped below the 5.0% threshold necessary to enter the parliament. Meanwhile, the most recent poll results show that the country’s leftist opposition, the Social Democrats and the Communists, would stand a good chance of winning a parliamentary majority if an election were held now.
Given the political costs of an early vote, the ruling parties are highly likely to bury the hatchet and come up with a compromise solution. Even if the VV party formally defects, we believe that its lawmakers will continue to vote for the minority government’s legislation, blocking the opposition’s attempts to force early elections. Otherwise, the ODS and Top 09 might cave in to the VV demands, resulting in a cabinet reshuffle and changes to the 2012 budget proposal.
Despite the row, the parties recently unanimously approved a pension reform bill aimed at strengthening the private savings component of retirement income. The main test will come this July, when the government plans to send the law to the parliament and link it to a confidence vote. We expect the cabinet to remain on the reform course and note that the markets have rightfully ignored the Czech’s notoriously noisy politics.
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