CZECH NATIONAL BANK GOVERNOR FOR EBRD PRESIDENT

C O N F I D E N T I A L SECTION 01 OF 02 PRAGUE 000135 SIPDIS SIPDIS E.O. 12958: DECL: 02/27/2018 TAGS: EFIN ECON PGOV EZ SUBJECT: CZECH NATIONAL BANK GOVERNOR FOR EBRD PRESIDENT REF: PRAGUE 35 Classified By: Political-Economic Counselor Mike Dodman for Reasons 1.4 B + D ¶1. (C) SUMMARY: The Czech Republic will nominate the highly respected Governor of the Czech National Bank (CNB),Zdenek Tuma, to become President of the European Bank for Reconstruction and Development (EBRD) when Jean Lemierre's second term expires in July 2008. While this may be great news for the EBRD leadership competition and for Czech international standing, Tuma's premature departure as Governor would complete President Klaus' politicization of the CNB with like-minded euroskeptics who are in no hurry to adopt the Euro. Despite the recent CNB reshuffle and the overt politicization of Board, analysts agree that the professionalism of the CNB and its monetary policy management remain undiluted. Still, others argue the CNB has no business commenting on politics the way it has since Klaus began stacking the CNB with like-minded economists (libertarians). These critics also argue that the new CNB Board has not been put to the test and that challenges lay ahead as the Czech Republic, along with most of the rest of Europe, faces the dual challenge of slower growth and rising inflation. END SUMMARY. ¶2. (C) Prime Minister Mirek Topolanek announced on February 26 that the government will nominate Czech National Bank (CNB) Governor Zdenek Tuma to become President of the European Bank for Reconstruction and Development (EBRD) after Jean Lemierre steps down in July 2008. Tuma quickly accepted the nomination. Tuma's potential departure only half way through his full term (Klaus appointed him to a second six-year term in 2005) has raised serious eyebrows. Some attribute Tuma's eagerness to the prestige of the EBRD position while others speculate Tuma is hardly pleased about the prospect of being surrounded by Klaus' minions on the CNB Board. Quality of CNB Board Compromised? -------------- ¶3. (C) With the departure of Vice Governor Ludek Niedermayer from the CNB Board at end-February after completing two six-year terms, Tuma is now the only member of the Board appointed by former president Vaclav Havel. In December 2006, rather than re-appointing the two highly-regarded Board members Eva Erbenova and Jan Frait when their first term expired, Klaus named Mojmir Hampl and Vladimir Tomsik to the CNB Board. In addition, one week before Tuma's EBRD nomination, Klaus promoted Mojmir Hampl to replace Niedermayer as Vice Governor and appointed Eva Zamrazilova to the Board. Given this steady progression of appointments and because the new Board members' euroskeptic qualifications outweigh their monetarist qualifications, many regard Tuma's nomination for the EBRD as the final act in the newly re-elected President's determination to establish the Klaus National Bank. ¶4. (C) 32 year-old Mojmir Hampl's promotion to Vice Governor effective March 1 was received with particular surprise and disdain since his qualification for the position compared to other Board members was unclear other than that he is the most extreme libertarian and euroskeptic among them. A common joke within the local economic and financial community is that to get on the CNB Board, you have to be a regular contributor to the libertarian newsletter published by an organization sponsored by Klaus called Center for Economy and Politics (CEP). In fact, when econoff asked who are the likely candidates to replace Tuma, several contacts commented that the only viable names are those that appear in CEP. ¶5. (SBU) Despite the politicization of the CNB, even the toughest critics agree that CNB has been well run and that monetary policy is managed well. Many would attribute this to the leadership of Tuma and Niedermayer, who provided a balance to the Klaus appointees. Having said that, the CNB Board has not faced any serious monetary policy challenges in recent years. As reported in ref B, hard times lie ahead with the dual challenge of slowing economic growth and increasing inflation. Despite the grumblings about the politics behind the latest appointments, no one expects the departure of Niedermayer (and potentially Tuma) to result in a shift in CNB's inflation-targeting monetary policy. On the issue most important to Klaus -- delaying adoption of the Euro -- that date has already been postponed until 2013 due in large part to continued government fiscal policy shortcomings. ¶6. (C) COMMENT: Zdenek Tuma, 47, is widely respected both at home and abroad. He served as EBRD Executive Director representing the Czech Republic, Slovakia, Hungary and PRAGUE 00000135 002 OF 002 Croatia from 1998-1999. According to the Czech government, EU finance ministers will discuss the EBRD appointment in March. The Czech Republic graduated from the EBRD in October 2007 -- the first Central European country to do so. Tuma's full bio (in English) is available on the CNB website at www.cnb.cz. ¶7. (C) COMMENT CONTINUED: Among the various names mentioned during earlier speculation about who would replace Ludek Niedermayer on the CNB Board, Post believes Head of the Office of the President Jiri Weigl is the most likely candidate to replace Tuma. Dr. Weigl, 45, is an economist and a Middle East specialist. He has sufficient management experience to serve as CNB Governor but like the other CNB Board members, his qualification as a Klausian far outweighs his economic or monetarist qualifications. He has reportedly been offered CNB board positions in the past, which he has turned down, but the Governor position may be too appetizing to turn away. Dodman