MacroScope

Deficit-obsessed Czechs grapple ahead of vote

By Michael Winfrey
May 20, 2010

If one were to believe the noise coming from right-of-centre politicians in Prague, the Czechs are on the brink of a Greece-style budget meltdown, and victory by the leftist Social Democrats in a May 28-29 election would plunge them into economic collapse.

ODS Greece1An ad in newspapers this week from the right-wing Civic Democrats (ODS) showed masked Greek rioters in front of a burning barricade. “Socialists in Greece – the same as in the Czech Republic”, the headline read. Alongside, a picture of Jiri Paroubek, leader of the Social Democrats (CSSD) bore the caption “CSSD = State Bankruptcy”.

The ad angered the Greek embassy, which summoned ODS’s campaign manager to complain. It also puzzled many analysts as to why a country with relatively sound economic fundamentals could be worried about national bankruptcy in the short term.

The Czechs run in the middle of the pack in terms of European Union budget deficits, and they have one of the bloc’s smallest debt piles overall – only 35.4 percent of gross domestic product, compared with an EU average of 73.6 percent.

On the other hand, they suffer acutely from a fiscal risk common to many EU states. The ageing Czech population is for the first time threatening the country’s unreformed pension and healthcare systems with billion euro deficits each year – a trend that economists say will only worsen unless policymakers reform the systems now.

So, while fellow EU newcomer states like Romania and Hungary are aiming for higher-than-previously estimated budget deficits. The fear of the impending demographic crisis in the Czech Republic has prompted the caretaker government, to propose more spending cuts to make sure the country does not exceed its planned budget deficit of 5.3 percent of GDP this year.

“Otherwise we will really make ourselves huge problems. I am not fearmongering here, that is reality,” Prime Minister Jan Fischer told Reuters in an interview in April.

But is the situation really so serious? Are the worries about the deficit unfounded hysteria, or do the right-of-centre – representative of a Czech intellectual elite that have always followed a German-style save-instead-of-borrowing economic model – have a point? Economists say the answer probably lies somewhere in between.

“If I was looking around central Europe for the next Greece, I wouldn’t start with the Czech Republic,” said Neil Shearing, from Capital Economics. “Action is needed on the deficit, but talk of bankruptcy smacks of politics rather than any kind of rational economic analysis.”

Last week, Moody’s Investor Service warned that the Czechs could potentially face a ratings downgrade if it failed to push through the pension and other reforms. But it also took care to say they compared favourably with other EU states and that they could get an upgrade if they tackled the measures.

“It’s key for the new government to come up with a plan that is credible, that offers details for 2011,” Dietmar Hornung told Reuters.

ODS Chairman  Petr Necas has since used Hornung’s comments as a stick to beat CSSD, although Paroubek has cited a Civic Democrat economic adviser who himself said talk of bankruptcy was nonsense. The Social Democrats want to solve the Czech deficit problem by raising taxes on companies and the rich to boost social benefits in a plan they say will promote growth.

It is still hard to tell who will rule after the election. Although Paroubek’s party leads, some opinion polls show ODS may have a chance to create a government with like-minded right-side parties.

Analysts said one thing was clear, whether or not. After more than a decade of policy deadlock due to weak governments, it was time for Czech politicians to for a government that would push through with pension and other structural reforms.

Comments
One comment so far | RSS Comments RSS

Sovereign indebtedness can only really be solved by three methods: default, austerity, or inflation. More at:

http://wjmc.blogspot.com/2010/05/repairi ng-sovereign-indebtness-get.html

Thank you for the opporunity to comment…

Posted by mckibbinusa | Report as abusive
 

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