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Czech Republic on a loan

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We are by now used to Jiří Paroubek in politics, and we know that he is not stranger to great political somersaults. First he launched radar negotiations with the United States, then he changed his mind and became a staunch opponent of the project. He demonstrated a similar change of heart when it came to sending out Czech troops on foreign missions. At first he was in favour. Then he was against. But his last turnaround was still somewhat surprising. Up until now Paroubek presented himself as a pro-European politician and backed this up by calling for a quick euro adoption. But that is no longer the case.

“I have begun to see this issue differently than three quarters of a year ago,” said the opposition leader in a television debate several days ago, in response to the question whether the ČSSD would try to make a quick transition to the euro. He then explained the reasons behind his change of opinion: By adopting the euro, the Czech Republic commits to maintaining a maximum state budget deficit of 3% of GDP and these “strict” conditions would keep the future government “tethered” when it comes to spending. According to Paroubek, this would lead to “slashing pensions and social spending”, something that is, according to Paroubek, “unacceptable” at a time of financial crisis, which has a negative impact, above all, on “low income groups”.

The Czech Republic has already experienced something similar. The ČSSD along with other parties bombarded the euro for three months before the last parliamentary election in 2006, using a similar argument “protecting the socially weak”. At the time MPs across the political spectrum supported measures that unleashed a spiral of budget deficits (pre-election gifts, such as doubled child benefits and higher social subsidies made a CZK 60 billion gap in the budget) and thus made it necessary to put off euro adoption. The same scenario could be repeated.

The pre-election madness, where parties will try to attract voters through various gifts, has seen several money-wasting measures proposed in the Chamber of Deputies, and some of them stand a chance to succeed: paying out a 13th pension [at the end of the year], increasing child benefits, increasing hospital benefits, freezing rent deregulation, cancelling doctors’ fees, increasing baby bonuses. Let us leave aside the fact that adopting these policies would again move euro adoption far into the future. If MPs decide to support most of these measures over the course of the next five months leading up to the election – and right now that seems likely – this country will accrue debts higher than ever before in its history.

It might be possible to defend the planned deficit if, like in a number of European countries, this speding was about investing into the modernisation that would make the country a more competitive player on the market once the economic crisis passes. For instance, investments into science and research, universities or the pension system. But the majority of the proposals that are now awaiting the approval of the lower house have nothing to do with investments. On the contrary, they would result in the Czech Republic’s accruing massive debts by handing out pre-election gifts and thus move the country into the club of disintegrating economies, following Hungary’s example.

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