Intelligence

Czech Republic: A Country in Need of a Government

While Italy grabs headlines around the world with its inability to form a new government, it is the Czech Republic which is currently Europe’s champion at failing to put in place an executive. Parliamentary elections took place in October 2017, but the country is still without a new government. Nine parties made it into the House of Deputies but none have so far been able to agree on a coalition pact with the larges, ANO, led by Prime Minister Andrej Babiš (pictured above).  

“The last election brought many surprises: voter volatility increased, creating a more fractured parliament, while the number of people voting for populist parties also rose. These factors make re-establishing order and stability more difficult. And since the election, little has changed,” says Otto Eibl, a professor at Masaryk University.  

“Forming a stable government is more than problematic,” Mr Eibl tells Emerging Europe. “On the one hand, most of the parliamentary parties don’t want to cooperate with Mr Babiš as he is facing prosecution for alleged EU-subsidy fraud. On the other hand, there are parties that would be willing to form a government with him – or at least support him – but these are rather extremist: the Communists and members of Tomio Okamura’s SPD.”  

In April, the Social Democrats (CSSD) decided to end coalition talks with ANO as Mr Babiš was unwilling to make any concessions on the make up of his new cabinet. More recently Mr Babiš and the CSSD agreed on the text of a government programme but lacked enough MPs to form a majority in parliament.  

“Some events from the past few weeks indicate that the Social Democrats are naive – in a way. Babiš is able to bypass them at any time – he votes with the Communists and the SPD (the right-wing opposition have repeatedly pointed to the fact that this is the ‘real’ coalition). Stability is hard to achieve. Andrej Babiš is controversial and to co-operate with him is, in a way, dangerous and toxic,” Mr Eibl adds.  

The European Union has been pushing hard for the formation of a new government but, following Hungary’s lead, the Czechs have begun to bite the hand that feeds them. The Visegrad Group (the Czech Republic, Hungary, Slovakia and Poland) claim that they wish to move in the opposite direction to Emmanuel Macron’s France, which wants to relaunch the European project. Mr Babiš in particular has warned the EU to stay out of eastern European politics and has said that it should not try to shape the politics of individual countries and member states, who should be given more independence to govern themselves. 

“The Czechs were always eurosceptic,” Mr Eibl continues. “For a long time, the EU was a symbol of an ultra-bureaucratic structure from where only stupid ideas emerged, ideas that were intended to harm the sovereignty of our nation. The political elite never says anything nice about the EU – if it has (or wants) to introduce an unpopular agenda, it says that it has been forced to do so by the EU, which is not always the truth. In other words, it is easy to blame the EU for many things and (at least some) people buy it.” 

Business friendly 

While all those ministers-to-be might not agree on a political agenda they do all seem to have a clear idea about how to improve Czech competitiveness and boost foreign investments.  

“The recent presidential and parliamentary elections could be described as turbulent, and a majority government coalition is yet to be formed. Nevertheless it can largely be said that all parties have a pro-business outlook and there are no looming prospects of adverse measures directed towards investor,” Helen Rodwell, a managing partner at CMS Prague, tells Emerging Europe. 

The Czech Republic ranks 30th in the World Bank`s Doing Business Index and 29th in the IMD World Competitiveness Rankings, the only emerging European country in the top 30. 

“The Czech market attracts interest from investors for more reasons than the practical advantages of being in the centre of Europe,” Mrs Rodwell explains. “The current corporate legal framework promotes efficiency and simplicity. Since changes to the law were made in 2014, it is now much easier, cheaper and less time consuming to incorporate a limited liability or a joint stock company and to obtain the necessary business license. Additionally, when these factors are combined with the strong economic growth the country is seeing, business investors rightfully perceive the Czech legal environment as ripe with potential.” 

The European Commission’s forecasts see Czech GDP growing at a rate of 3.4 per cent in 2018 and investments, by both the private and the public sector, are expected to rise by 5.4 per cent.  

The tax wedge 

“The tax system in the Czech Republic needs to be simplified,” says Milan Prokopius, managing partner at Mazars Czech Republic. “According to the World Bank’s Doing Business Index, it takes businessmen 248 hours to complete their taxes, which is a gigantic figure. The introduction of control reports, thanks to which businessmen have a further administrative burden, contributed to Czech Republic dropping a few positions in the index.” 

Mazars, a French audit, accounting and consulting group, has operated in the Czech Republic since 1995, seeing in the tax and financial advisory departments as the greatest potential for the future.  

“Over the last 23 years the system has changed so much that only a few people really know it well. This situation is not sustainable in the long run. The new incoming Czech government is planning to simplify and clarify the system in this regard, to expand electronic communication and to increase the efficiency of the financial administration. We’ll see in the future the degree to which they were successful in fulfilling their plans, or if they just made empty promises,” adds Mr Prokopius.  

Mazars Czech Republic has so far represented a huge success for the whole group, with results among the most promising within the entire emerging Europe region.  

“Twenty-three years ago our group saw developments in the region of central and eastern Europe as an opportunity for further growth. Back then it was a French firm with several hundred employees that was expanding into other European countries. Today the company operates in 86 countries the world over and has around 20,000 employees. Over the years the company has gone from being a purely French firm to becoming an international audit and consulting concern that is able to provide quality services, with the use of local partners, in practically every country in the world,” he tells Emerging Europe. 

Still the greatest challenge is to be working with and motivating people.  

“We have seen more and more that it is currently easier to find a client than to find qualified managers for our audit, tax or accounting outsourcing teams. This is now, from our perspective, definitely more difficult. We have increasingly more work finding suitable candidates, training them, keeping them in the company and so on,” he adds.  

Dutch courage 

While finding highly-qualified, skilled people can represent a challenge in the manufacturing sector, this does not applies to the real estate market, at least not according to DRFG, an investment group. 

“Managing growth and being able to select the right properties is difficult,” says Pavel Iványi, DRFG’s executive director and chairman of the board at the Dutch-Czech Chamber of Commerce. “We are no less dependent on people than anyone else, but so far we have been able to attract the right team.”  

“Economic growth is what is primarily boosting the market,” he adds. “Also, however, some areas don’t have adequate infrastructure yet and as soon as these are realised, the retail market follows suit. New niches are appearing on the market, with a major concentration in big cities. But we are focusing more on traditional markets, outside the cities, where there are more investment opportunities and projects are more reliable and predictable.” 

Not only is the real estate sector growing domestically, but foreign investors – not least from the Netherlands, the most important foreign investor in the Czech Republic with a 29 per cent share of invested capital – are also targeting the real estate market. 

“The Netherlands is one of the three biggest investors and trading partners of the Czech Republic. We understand each other very well. We are often in comparable positions. Both countries need to keep looking for innovation, added value and advanced technologies rather than scale. Both seem to be rather successful at doing this,” Mr Ivany tells Emerging Europe 

Nevertheless, Professor Eibl is concerned that the country’s problems might cast a shadow on the business environment.  

“There are bigger issues in the Czech Republic,” he says. “The rise of populism and the presence of such entrepreneurs in politics (Babiš, Okamura) on the one hand, the partial turn to the East (Russia and China) on the other (Miloš Zeman, the president, is responsible for this). Moreover, at least some people don’t value liberal democracy and are calling for strong leadership, which opens more and more space for politicians like Babiš or Okamura.”