Boom Won't Save Czech Premier's Party as Rival Steals Spotlight

(Bloomberg) -- Whatever reason Czech voters have for kicking the ruling Social Democrats out of the prime minister’s office at this weekend’s election, it’s not because of the economy.

Bohuslav Sobotka’s government is leaving things better off than it was four years ago. The Czechs enjoy the European Union’s lowest unemployment, one of the bloc’s fastest growth rates, a budget surplus and the biggest rise in wages in a decade. But it’s his coalition partner, the ANO party led by billionaire and former Finance Minister Andrej Babis, that’s managed to steal the glory and leverage that into an unassailable lead in opinion polls before the Oct. 20-21 general elections.

“The election is more about emotions and political marketing than the economy,” said Jakub Charvat, political analyst from the Metropolitan University in Prague. “Babis has managed to take credit for the improving economy. He has convinced a lot of voters that it’s only his doing.”

The expected change at the top of the government is business as usual in the country of 10.6 million people. The Czechs have had eight prime ministers since 2002 -- Sobotka is the first in 15 years to complete a full four-year term -- and the political instability has done little to knock the country off its path of economic growth. It’s the most successful of the 11 ex-communist countries that joined the EU since 2004 in catching up with its richer western counterparts in terms of living standards, surpassing those of Greece and Portugal.

The proportional voting system has resulted in fractured parliaments that forced prime ministers to forge majorities through coalitions. That’s meant limited room to deviate from the policies that turned the country into a manufacturing hub for international companies including Volkswagen AG, Foxconn Intl Holdings Ltd and Hundai Motor Co.

Instead, past governments have tinkered with taxes and mostly pursued budgets with deficits inside the EU ceiling of 3 percent of gross domestic product. Sobotka’s administration did raise pensions and overturn legislation overhauling the social security system that never caught traction with the wider population. But economic growth has been tied more closely to output in the Czechs’ biggest trading partner -- neighboring Germany -- than domestic affairs.

Accelerating growth has helped the country become one of only 10 EU nations that managed to produce a budget surplus last year. Unlike his counterparts in neighboring Slovakia and Poland, Sobotka’s cabinet has been reluctant to lavish a windfall in budget revenue on voters before the election, even though it pushed the coalition to raise public salaries.

Babis, who Sobotka dismissed as finance minister in June, argues that’s his work. He says he’s improved the efficiency of government operations and legislation he pushed through requiring retailers to declare all sales online has boosted state revenue and cut tax evasion. He is now vowing to use a rise in state revenue to cut taxes while pursuing targeted investment in infrastructure.

If there is an area of frustration among voters, it may be wages, the Social Democrats’ key campaign issue. The government raised state workers’ pay by a blanket 10 percent, with a 15 percent bump for teachers, in September. That brought the average increase in salaries to 18 percent in the four years to June even as, at 29,346 koruna ($1,343) per month, wages remain far below the EU average.

Still the rise of Babis, which has been accompanied by the emergence of protest parties including the anti-immigrant SPD and the Pirate party -- both polling high enough to win seats in parliament -- is unusual given the state of the economy, said Jozef Mlejnek, a political scientist at Charles University in Prague.

“There’s an atmosphere in society that doesn’t at all correspond with the economic reality,” Mlejnek said. “I would understand it if there were a deep economic crisis, double-digit unemployment, if people were losing homes. But given the stellar state of the economy, which is probably undergoing the biggest boom the the country’s history, it’s completely baffling.”

--With assistance from Peter Laca

To contact the reporters on this story: Radoslav Tomek in Bratislava, Slovakia at rtomek@bloomberg.net, Ladka Bauerova in Prague at lbauerova@bloomberg.net.

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Michael Winfrey, Balazs Penz

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