By Jason Hovet
PRAGUE, Oct 1 (Reuters) - The Czech centre-right cabinet
approved wage and spending cuts in the 2011 budget draft in
September, defying opposition from the unions who staged the
largest protests in years.
The three-party coalition, which won a May election with
pledges of austerity to avoid a Greek-style debt trap, aims to
cut the budget deficit further in its term while passing deep
reforms to bloated welfare, health and pension systems.
The promises have won market and rating agency approval but
about 40,000 public sector workers marched through Prague on
Sept. 21 to protest against job and wage cuts.
Union leaders have vowed bigger protests and possible
strikes when reforms really start next year. []
Tensions have also grown between the two biggest coalition
members the Civic Democrats and TOP09, as the main right-leaning
parties wrestle before municipal elections in October.
LABOUR PROTESTS
Around 40,000 nurses, police officers, firefighters,
teachers and clerks rallied against austerity measures this
month.
The action was the first big test for Prime Minister Petr
Necas and his cabinet.
The government offered compromises on pay structures but not
the overall goal, and a day after the protests approved a
tighter budget that includes a 10 percent across-the-board cut
in most operating spending which will also slash the wage bill.
Czech unions are weak but may flex more muscle in solidarity
with others in Europe and by allying with the opposition Social
Democrats.
Union leader Jaroslav Zavadil, speaking at a Social Democrat
party event this month, warned of a general strike if the
government changed hiring/firing laws in the labour code.
A September poll showed 55.8 percent of Czechs said planned
budget cuts were rather harsh or too harsh; 30.2 percent said
called them adequate or not sufficient.
What to watch:
-- Will protests affect further reforms, especially in
healthcare and in the pension system, to be drafted next year?
The key time for the reforms will be by mid-2011 when the
government needs to bring them to parliament to ensure approval
in time for the legislation to take effect from 2012.
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-- Will state workers' unhappiness and protest spread into
strikes or action at private companies, which have already faced
job cuts in the economic crisis?
-- Can the protests bite into the will for reform,
especially at Veci Verejne (Public Affairs), the junior
coalition partner?
COALITION TIES BEFORE/AFTER AUTUMN POLLS
The harmony of the coalition is being tested in the run-up
to October municipal and upper house elections. Municipalities
provide thousands of jobs to members of the national parties.
The new conservative TOP09 party won a surprisingly strong
16.7 percent of the vote in the May national election, mostly at
the expense of the leading Civic Democrats.
The Civic Democrats fear TOP09 could take the lead on the
political right, a worry that has grown since respected former
central bank Governor Zdenek Tuma joined the Prague mayor race
as part of the party.
The junior coalition partner, the centrist Public Affairs,
is in parliament for the first time and is seen as a wild card.
What to watch:
-- A strong showing by TOP09, which controls the Finance
Ministry, could embolden it to take a stronger lead in reforms,
causing coalition friction.
FISCAL POLICIES/OUTLOOK
The 2011 budget proposal calls for a fiscal gap around 4.6
percent of GDP, down from 5.3 percent planned for 2010, mostly
through spending cuts. []
Approval in the lower house should go smoothly as the
coalition controls 118 of the 200 seats and there has been no
challenge to the plan from the back benches.
Czech public debt is half the European Union average at
around 37 percent of GDP. But it has grown from 29 percent in
2007 and is rising fast, due largely to structural problems
exposed by the economy's 4 percent contraction in 2009.
What to watch:
-- Slower recovery in Germany could hurt Czech growth and
budget and therefore increase the pressure on the budget and
coalition ties
-- Right-leaning parties will resist tax hikes but may have
to give up ground to avoid more drastic spending cuts next year.
The value-added tax may be raised to pay for pension reform.
ENERGY POLICY
The government will see through the country's largest-ever
tender, and will also set policy on the future energy mix to
meet climate goals and ensure security of supply.
The cabinet has cut subsidies for solar energy plants to
slow a solar boom that threatens to raise electricity prices for
companies and households, creating a drag on the economy.
Power firm CEZ <>, central Europe's biggest firm
with a market capitalisation of $24 billion, is 69.8 percent
state-owned and a significant source of government revenue.
It has opened a tender to build two units at its Temelin
nuclear power plant, and possibly three more at another domestic
site and in Slovakia.
Areva SA <CEPFi.PA>, Toshiba's <6502.T> Westinghouse and
Russia's Atomstroyexport are competing for the deal that could
be worth some $24 billion if all five units are built.
The government's special envoy for the tender, Vaclav
Bartuska, has spoken out against furthering the country's energy
dependency on Russia.
What to watch:
-- Government involvement in the tender, energy security
debate, political pressure to include Czech suppliers and
intensive lobbying that may lead to political tension.
-- The government may sell some of the CEZ stake.
For political risks to watch in other countries, please
double click on []
(Additional reporting by Jana Mlcochova, Editing by Sonya
Hepinstall)
