beyondbrics

The current global economy has provided lots of surprises in recent years – almost all of them nasty – so unexpectedly positive news has a big impact, as can be seen today in the Czech Republic.

After the unforeseen victory of the centre-right in parliamentary elections which ended Saturday, the Czech koruna reacted dramatically early this morning, strengthening by 1.45 per cent against the euro to 25.52, this after a steep fall towards the end of last week as analysts became increasingly worried about a new government being formed by tax-and-spend Social Democrats supported by the country’s unreconstructed Communist Party.

Instead, voters turned to economic conservatives who promised to cut spending and increase taxes;  in one of the European Union’s soundest economies, where this year’s deficit is expected to come in at 5.5 per cent of gross domestic product and the public debt is only at 35 per cent of GDP.

Although the Social Democrats had the largest vote total, with 22 per cent support, that was a lot lower than the 30 per cent that had been predicted in pre-election polls. The centre-right Civic Democrats (ODS) won 20 per cent of the vote, but the real surprise were two new parties which entered parliament despite existing only a few months – a sign of Czechs’ discontent with the two big parties which had dominated politics since 1993.

TOP09, fronted by genial former foreign minister and prince Karel Schwarzenberg, took 16.7 per cent despite campaigning on a platform of austerity, while the anti-corruption Public Affairs party scored 11 per cent.

If the parties do manage to combine to form a coalition government, it would control 118 seats in the 200-member parliament, the largest majority ever. The upshot is also likely to be a policy of budget cuts, and reforms to the health care and pension system, which pose a grave long-term threat to Czech finances.

Analysts were very enthusiastic about the new configuration of Czech politics.

“We expect that the election outcome would be supportive for the CZK, since two main investors’ fears should be addressed now,” says Anna Zadornova, in a research note from Goldman Sachs, explaining that the formation of a government should be relatively swift (in 2006 it took seven months), and that the coalition will act to reduce the deficit.

“It’s clearly a positive from the markets’ perspective,” says Lars Christensen, chief analyst with Danske Bank, although he points out that the Czech Republic is probably the European country which least needs radical action to fix public finances. At BST 810 the koruna was 25.49 against the euro.

So, leery investors need no longer fear.

Related reading:
Czech centre-right in coalition talks, FT
Czech elections characterised by uncertainty, FT beyondbrics