CORRECTED COPY: EARLY ELECTIONS SCRAPPED, INTERIM

C O N F I D E N T I A L SECTION 01 OF 04 PRAGUE 000563

SIPDIS

E.O. 12958: DECL: 09/15/2019
TAGS: PGOV PREL EZ
SUBJECT: CORRECTED COPY: EARLY ELECTIONS SCRAPPED, INTERIM
GOVERNMENT FOR FORESEEABLE FUTURE

REF: A. PRAGUE 523

B. PRAGUE 527

C. PRAGUE 532

Classified By: Charge d'Affaires Mary Thompson-Jones for reasons 1.4 (b
) and (d).


1. (C) Summary. Early parliamentary elections have been
halted and it appears the interim government of Prime
Minister Jan Fischer will continue to govern until the
regular parliamentary elections in May 2010, although early
elections are still possible. Fischer is focused on the
economic crisis and passage of 2010 state budget as his top
governing priorities and is seeking a renewed and expanded
mandate from the Parliament in order to govern effectively.
The recent to-and-fro on elections shows that the
sixteen-year old Czech Republic is still working through the
issues of a young democracy. However, there is no indication
of economic instability: markets and businesses seem unfazed
by the political maneuvering. Continuation of PM Fischer's
government probably bodes well for U.S. interests, since the
political parties are focused on domestic political and
economic issues and appear willing to leave foreign policy to
the career diplomats and defense policy to the military. End
Summary.

--------------
Early Elections Derailed, Twice
--------------


2. (C) Mirek Topolanek lost a vote of confidence on March
24, 2009 and resigned on May 8. Jan Fischer was appointed to
run an interim government until early elections could be
held. This was supposed to be on October 9-10. The
legislative procedure for having early elections was the same
procedure that was used in 1998. Since there was precedent,
everyone believed the same procedure could be used again. It
probably would have worked if no one had raised a
constitutional challenge. This time, though, a Member of
Parliament (Milos Melcak) filed a challenge with the
Constitutional Court and the procedure that was used to call
early elections in 1998 was declared unconstitutional by the
Constitutional Court. In a private conversation with an
Embassy official, Milos Melcak said he filed the
constitutional challenge at the behest of his lawyer, Jan
Kalvoda. Kalvoda sat on the committee that drafted the
original Czech constitution and was displeased with the way
the parties circumvented the constitution in 1998 and wanted
this year's attempt to have constitutional scrutiny.


3. (U) In order to get around this constitutional
challenge, the Chamber of Deputies and Senate passed a
one-time constitutional amendment that would allow an
alternative way to call early elections - by dissolving the
Chamber and permitting the President to schedule early
elections. However, after passing the amendment two days
earlier in Parliament, Social Democrat (CSSD) leader Jiri
Paroubek declared that he would not support dissolving the
Chamber on the morning that the motion to dissolve was to be
put on the Parliament's legislative agenda - September 15.
Melcak and fellow MP Juraj Raninec hinted that a second
constitutional challenge might be filed if the resolution to
dissolve the Chamber passed. Paroubek said that this
potential second constitutional challenge to dissolving the
Chamber would leave the nation with no functioning Chamber
and give the Senate sole legislative authority, albeit more
limited than the full Parliament. He said that this would be
unconscionable during the current economic and financial
crisis.


4. (C) However, political analysts speculate that the real
motive was either 1) to avoid having his own MPs vote against
the motion to dissolve and reveal his tenuous leadership, 2)
he believed he might not actually win the early elections if
they had been held in November, or 3) if CSSD did win the
elections they did not want to have to deal with the
financial crisis and be tagged responsible for imposing tough
austerity measures. Former CSSD Prime Minister Milos Zeman
said Paroubek did it so his party would not lose state
subsidies after the Parliament was dissolved. A political
reporter for a respected daily told an Embassy official that
several CSSD members told him that Paroubek had a late
night/early morning meeting with lobbyist and lawyer Miloslav
Jansta the day that he reversed course and, although, no one
is saying what was discussed, Jansta is known to represent
some of the biggest business interests in the Czech Republic.


5. (U) Regardless of the reason, Paroubek changed his mind
and the motion to dissolve never reached the Parliament's
September 15 legislative agenda. Elections will most likely
now occur in May 2010. The Constitution requires that the
regularly scheduled elections take place the month before the

PRAGUE 00000563 002 OF 004


end of the election term, which is June 3, 2010. Thus, the
elections must occur in May, as Friday and Saturday are
election days and the first available days preceding the June
3 deadline are at the end of May. President Klaus met with
Paroubek to discuss his decision to scuttle dissolving the
Parliament. Klaus said he did not give up the possibility of
early elections in January or February and will seek ways to
secure elections sometime in that time frame, but only if the
early elections can be held without the possibility of a
constitutional challenge.

--------------
The Interim Government Remains -- For Now
--------------


6. (C) The Parliamentary session was closed on September 15
with no vote on the motion to dissolve, the parties have
halted their campaigns and the focus has now turned to the
interim government and the 2010 state budget. PM Fischer
immediately called for a renewed, expanded mandate if he is
going to govern for the next eight months (which would
probably require a vote of confidence) and put the state
budget forward as his top agenda item. Paroubek has
announced his support for Fischer's interim government and
said that the interim government "won it (a vote of
confidence) some four months ago." ODS leader Mirek
Topolanek, who fulfilled his promise to resign from
Parliament if the vote to dissolve the Parliament did not
pass, said that Fischer's ability to secure passage of the
2010 state budget could be viewed in itself as a vote of
confidence for the interim government. However, failure to
gain parliamentary approval for the budget by the end of the
calendar year (the Czech budget year coincides with the
calendar year) will raise serious questions about PM
Fischer's ability to govern and could trigger a no-confidence
vote.

--------------
Interim Government Focuses on Getting Economic House in Order
--------------


7. (SBU) PM Fischer and his interim government are clearly
focused on the 2010 state budget. His Finance Minister,
Edward Janota, has worked up two budget proposals: One with a
projected 230 billion CZK deficit (USD 13.5 billion) which is
about 7 percent of GDP, and one with a 170 billion CZK
deficit (USD 10 billion) which is slightly more than 5
percent of GDP. Fischer has made it abundantly clear that he
wants the 170 billion CZK proposal, which includes tough
austerity measures such as increased taxes, freezing state
salaries, and cutting social benefits. The various political
parties seem to be in agreement that the projected 230
billion CZK deficit must be tackled and is clearly the most
pressing priority.


8. (C) The battle will come in deciding how the deficit is
tackled. Topolanek and the Civic Democrats (ODS) will push
for a cut in the mandatory services budget and higher VAT
taxes, while Paroubek and CSSD will push for an elimination
of the flat tax, introduction of progressive taxation and a
cut in state projects such as environmental cleanup. The
Chamber is set to debate the budget and austerity package on
September 24 and can pass legislation necessary for the
austerity package with a single vote instead of the usual
three readings, due to an emergency procedure invoked by the
Chamber. These austerity measures will require legislative
changes and PM Fischer needs the support of a majority in
both houses of Parliament to pass the necessary legislation.
Instead of drawing a 170 billion CZK line in the sand,
Fischer may need to compromise to ensure a budget is passed
before January 1.

--------------
Political Uncertainty Not Affecting the Economy
--------------


9. (C) The political uncertainty has not appeared to have
had any negative effects on the economy. Ceska Sporitelna
Bank researchers noted that experience has shown that the
Czech economy and financial markets do not react to domestic
political turbulence. According to ING Bank London analyst
Agata Urbanska, the Czech Republic stands out within emerging
Europe to the "extent which foreign investors are prepared to
ignore political developments." Only if the political
instability were to lead to continuous problems with budget
deficits and a build-up of public debt, did she believe this
would change. Even though the 2010 budget deficit was likely
to be very large, she argued that foreign investors were
taking this rather well, given the economic recession and the
Czech Republic's relatively low level of public debt (around
30 percent of GDP).


PRAGUE 00000563 003 OF 004



10. (C) Patria Finance's David Marek pointed out to us that
the political maneuvering has not led to a weakening of the
crown or the stock market. In fact, since September 15, when
CSSD announced it would not support early elections, the
crown has actually appreciated to its highest level against
the dollar since November 2008. The Prague Stock Exchange
Index has increased from 1134 to 1161. Marek did not believe
that international investors cared whether the 2010 draft
budget would have a deficit of 5 percent of GDP or 7 percent.
Much more important will be whether the next government will
be willing to tackle the longer term structural reforms (e.g.
pensions, health care),needed to ensure long-term fiscal
stability.

--------------
Likewise, Election Day Has Little Impact on Czech Foreign
Policy
--------------


11. (SBU) As noted above, PM Fischer has focused on
domestic budgetary issues. His Foreign Minister, Jan Kohout
and his Minister of Defense, Martin Bartak are both seasoned
professionals who have adhered to the same path as the
previous Czech government. Indeed, Minister Bartak, has made
clear publicly that even during these strained financial
times when all of the Czech Ministries have been asked to
make 10 percent cuts in their budgets, the MoD has every
intention of continuing its ongoing commitments to
international efforts in Afghanistan. Bartak reaffirmed this
commitment to General Petraeus on September 15. (Note: The
2010 Czech foreign deployment bill passed smoothly through
parliament in June 2010. End Note.) With respect to foreign
policy, the Czech Republic establishes broad priorities for
five-year periods. FM Kohout has not changed this approach.
The Czechs' commitment to advancing bilateral relations with
the U.S. remains strong, as does their engagement within the
EU and NATO.

--------------
Things to Watch in Czech Foreign Policy
--------------


12. (SBU) While the Czech parliamentary election delay has
not noticeably affected foreign policy, there have been other
events which have, or may have, a substantial effect on Czech
foreign policy. One obvious change is now that the Czech EU
Presidency has come to a close, the Czechs have assumed a
slightly lower profile within EU internal discussion. This
is a natural result of handing over leadership of the EU, but
the Czechs are always interlocutors eager to listen to USG
thinking. While the Czech interest in our opinions
continues, Czech ability to influence EU decision-making is
not the same as when they led the EU. The conclusion of the
U.S. missile defense policy review will affect on our
bilateral relationship, at least in the short term. As a
final note, the Czechs had slated several embassies for
closure in 2007, but delayed acting upon this because of
their responsibilities to speak on behalf of the EU
Presidency in third countries. We have every reason to
expect that the Czechs may now act on this and close several
small embassies (mostly in Africa)

--------------
Comment: Young but Stable
--------------


13. (C) Fischer and his cabinet have done an admirable and
statesman-like job of running the country, finishing the EU
Presidency and tackling tough issues like extremism. So far,
the Fischer government appears to be taking a similar
approach to the budget problem. And although most Czechs are
fed up with politicians -- a recent poll showed that only 1.8
percent of Czech citizens believe politicians -- the Fischer
government is relatively popular, with almost two-thirds of
Czechs wanting the Fischer government to rule until
elections. Despite the recent political gyrations,
day-to-day government operations continue normally.


14. (C) Sixteen years after coming into existence, the Czech
Republic is still a young country coming of age and working
through the details of governing. Political scientists
readily agree that the Constitution has its flaws and recent
events may reflect constitutional weaknesses. However, the
Constitutional Court ruling that legislators may not dissolve
parliament in way outside the Constitution is a victory for
rule of law. That parliament and the President grumbled but
heeded it is another. Sorting out imbalances between the
legislative, executive and judicial branches is part of the
growing pains of any democracy. The rule of law still
prevails and we have no demonstrations in the streets -- just
old-fashioned messy politics.


PRAGUE 00000563 004 OF 004


Thompson-Jones