Year in Review: Business

This year's biggest business stories aren't ones with a tidy beginning, middle or end, and indeed, many of them were 2009's biggest stories, and will hold the same title in 2011. The global economic crisis, credit crunch or "great recession" - however you'd like to characterize it - has diffused this year, but it continues to infect and influence all walks of business and politics. The government has managed to push through an austerity budget despite opposition from public workers and even faces pushback from the private sector in its effort to amend legislation that over-incentivized solar energy plants. The Temelín nuclear power plant project has been delayed, and a final winner for the public tender won't be known until at least 2013. But the biggest story - and the one that's likely to have the biggest impact next year - has been the eurozone, which began to show fissures as first one and then two member states asked Brussels for bailouts.

THE EUROZONE: Cracks appear in the common currency system

Greece was the first in what a growing number of economists fear is a row of dominoes: European Union member states wiped out by sovereign debt that must turn to Brussels for big bailouts. In early May, the EU announced a joint deal with the International Monetary Fund (IMF) that would offer 120 billion euros in loans to Greece over three years to end the country's need for borrowing at astronomical interest rates.

The government had to agree to halve its budget deficit - 14 percent at the time - through a series of steep cuts in the public sector that caused rioting in Athens and across the country.

In November, Ireland was felled by a budget deficit that had ballooned to 32 percent of its GDP, pushed up largely by bailouts of national banks at the start of the crisis. In the form of a guarantee, the 85 billion euro ($89.1 billion/1.7 trillion Kč) bailout for Ireland from a reserve in the EU budget and the European Financial Stability Mechanism (EFSM) will include 6.7 billion Kč underwritten by the Czech Republic.

Many economists expect Portugal and Spain to be next in line for financial bailouts, which prompted EU leaders to establish a permanent fund called the European Stability Mechanism Dec. 17 to replace the insufficient EFSM.

At a conference in Prague Nov. 29, Nouriel Roubini, the economist known as "Dr. Doom" for his prescient forecasts of the financial crisis, said economists have underestimated the costs of putting Spain's finances in order.

"[A bailout] happened in Greece. It happened in Ireland, and it's going to happen in Portugal," Reuters reported Roubini as saying Nov. 29. "The official funds are not sufficient for also bailing out Spain."

"Greece only makes up 3 percent of the eurozone's GDP, whereas Spain takes up 10 percent. That's a huge difference," Vladimír Pikora, chief analyst at Next Finance, told The Prague Post following the Greek bailout. "When you start looking at an economy of that size, it's a problem not just for Spain but other markets, as well. It acts as a sort of contagion. I wouldn't be surprised if it spread and meant one-third of the eurozone had problems borrowing money on the markets."

ČNB: National bank changes leadership, keeps policy

The Czech National Bank (ČNB) held a steady course, with only one rate adjustment for the entire year, even as the board itself was reshuffled. Vice Governor Miroslav Singer stepped up into outgoing Governor Zdeněk Tůma's spot when Tůma vacated the seat July 1, eight months before his term expired.

Upon announcing his departure in April, Tůma said he wanted to limit the period of "uncertainty" that would arrive when three other board members' terms were up February 2011, when he was supposed to leave.

Tůma, however, went on to run for Prague City Council as a member of the TOP 09 political party. His party won, but he lost the chance to be mayor when the Civic Democrats (ODS) and Social Democrats (ČSSD) formed a grand coalition.

Monetary policy and direction has remained unchanged under the new leadership. The ČNB changed its two-week repo rate only once this year, when it voted in May to cut it to a record low of 0.75 percent.

Only one board member has considered raising the rate, when Eva Zamrazilová voted to do so at a Sept. 23 bank meeting. Speaking to The Prague Post following the vote, she said pro-inflationary factors caused by the low rate were beginning to emerge, in her opinion.

"It is time to say firmly that the crisis is over, and financial markets should return to a normal, smooth functioning. ... Too-low rates for too long may create risks for financial stability in the future, even if this doesn't seem a very pressing problem at the moment," she said.

Members of the board, including Singer, have voiced euroskeptic opinions similar to those of Klaus. According to a Nov. 29 report in the daily Lidové noviny, the bank drew up an analysis on how the Czech Republic could avoid adopting the common currency by negotiating an opt-out.

Pavel Řežábek, a board member of the ČNB, said at a policy meeting Dec. 1 he would not vote to adopt the euro, the daily Hospodářské noviny reported Dec. 2. He pointed out that the eurozone has undergone significant changes since the Czech Republic agreed to eventually adopting the currency, and if things continue as they are now, it would be the wrong decision.

AUSTERITY: 'Legislative emergency' allows gov't to push through unpopular cuts

The European Commission rebuked the Czech Republic three months into the year for its planned austerity cuts, proposed under the caretaker government of Prime Minister Jan Fischer.

"The expenditure targets are not backed up by specific measures, the revenue projections for 2012 are based on favorable macroeconomic assumptions, and no detail is provided on how the deficit will be reduced from 4.2 percent of GDP in 2012 to below 3 percent of GDP in 2013," the report said.

Enter Miroslav Kalousek (TOP 09). The finance minister in Mirek Topolánek's government took up his old post and quickly set about fashioning an austerity proposal that has been strong enough to elicit public worker strikes.

Kalousek, named finance minister June 13, took aim at state expenditures, particularly the generous social welfare system, which makes 50 percent of the population eligible for some form of government aid.

"If a baby is born to the richest Czech, he's eligible for welfare payments, which is quite absurd," Kalousek said on Czech Television July 4.

But following late October elections that boosted the ranks of Social Democrats (ČSSD) in the Senate, the government took emergency measures to pass the austerity bills before the new officials took office.

Nečas himself was even hesitant to declare a state of legislative emergency, but changed his mind after it became clear the opposition would not approve government austerity measures, including changes to income tax laws and cuts to social benefits for families.

"I needed to be sure the Social Democrats would really block the laws from being passed quickly," Nečas said, explaining his change of heart to journalists. "I also wanted to be absolutely sure that all these laws need to have taken effect by the beginning of next year to prevent great economic losses."

On Nov. 12, the Senate passed the four legislative bills that make up the government's 2011 austerity package. The 2011 budget has been planned with a 135 billion Kč deficit, or 4.6 percent of GDP, with expenditures reaching 1.18 trillion Kč and revenues projected at 1.04 trillion Kč.

The government will raise revenues by reducing tax relief for taxpayers for one year. Tax relief is defined as the amount that can be deducted from a worker's salary before income tax is calculated.

On the expenditure side, the government targeted civil servant salaries as a way to cut spending.

The 2011 budget reckons with a 10 percent reduction in spending on salaries, which will likely produce a mix of layoffs and pay cuts to achieve a total reduction of 10 percent.

TEMELÍN: Tender for nuclear expansion delayed - again

The 100-year deal, as the Temelín project has been called, would bind the Czech Republic into a long-lasting and complex partnership with one of three companies and their respective countries of origin.

"The tender simply presents us with a very difficult choice between Russia, the United States and France," said Czech Ambassador for Energy Security Václav Bartuška in an October interview with The Prague Post. "In the end, we will have to say 'no' to two of the major powers, which is one of the reasons the state has to be involved in the decision, because it will shape the future of the country for decades."

U.S. company Westinghouse, French state-owned Areva and a consortium of Russia's Atomstroyexport and Škoda JS are the three bidders on the tender, worth an estimated 500 billion Kč and one of the largest energy projects ever in the region. The project is a complex combination of state and private interests. Energy company ČEZ, in which the government owns a 70 percent share, owns Temelín, and the government will make the final call on which company will build the additional two reactors of the power plant.

On Oct. 19, the government announced it would delay parts of the process, specifically the delivering of technical documents that were expected in late October. Instead, the documents will be delivered to the bidders in 2011. Bids based on the documents will have a deadline in 2012, and the winner will be chosen by the state in 2013.

"The tender is connected with significant security, economic and foreign-policy risks," Nečas said at an Oct. 19 press conference. "It's an extraordinarily important issue, an expensive issue. Only the government can deal with this fundamental, strategic issue."

All three bidders insisted they would continue in the process following the government's announcement.

SOLAR: Investors scramble to recoup investments from solar subsidies

Solar energy may well have been the most written-about topic this year in the Czech Republic. As the year began, the country's Energy Regulatory Office had issued 6,032 licenses to solar electricity producers with a total combined output of 462.92 megawatts. As of Dec. 1, more than 12,000 producers were licensed, and output had reached nearly 1,400 megawatts. That surge didn't come cheap, with the government stuck with a corresponding subsidy bill it had promised to foot. That cost would trickle down to electricity bills, analysts and policy leaders warned, with rates in 2011 that would grow nearly 20 percent.

According to Pavel Vlček, a spokesman for the Industry and Trade Ministry, the government spent a total of 3.08 billion Kč on renewable energy subsidies in 2009, is expected to pay 7.76 million Kč this year and will pay even more next year, because of the solar boom. These increases, Vlček said, will raise electricity bills for families who use electricity for lighting only by 2,800 Kč per year, and for those who use it for additional utilities, bills will go up another 6,300 Kč.

In an effort to staunch the outflow of cash into subsidies, which investors have jumped at over the past two years, the government crafted and passed a 26 percent tax on solar-power revenue for the next three years. In addition, the government will tax companies 32 percent of the value of carbon credits awarded to them through 2012, credits that were originally meant to be awarded for free.

"If the government didn't do anything, the power prices for businesses would increase up to 18 percent," Prime Minister Petr Nečas said. "This could mean bankruptcy in some cases."

The government's efforts to redress the original incentives may cost them in the end, however, as solar investors are examining how and if they can recoup investments that won't yield as much as they initially believed.

RAIL & TRANSPORTATION: In attempts to get budget back on track, Transport Ministry halts payments for existing contracts

The Transport Ministry received a growing number of mentions in the press this year, notably after Transport Minister Vít Bárta took office in mid-July and decided to overhaul the way it did business with contractors. Bárta avowed to cancel contracts unless companies offered steep discounts, promised to liberalize the railways and open them up to competition, and even announced a test project with Chinese contractors to find out if the foreign companies could build roads for half the cost, a maneuver he observed from a project in Poland.

The Transport Ministry is under pressure to cut its budget, as are all government ministries, which will have to cut an additional cumulative 10 billion Kč this year.

Road construction companies and workers have been exasperated with Bárta's quick decisions, including an Aug. 31 pronouncement that the ministry had halted all payments to companies with ministry contracts. "We will see what further negotiations will bring," he said, according to the daily Mladá fronta Dnes. The halted payments were meant to force construction companies that are building state roads and railways to agree to discounts on already-existing contracts. Any company that attempted to collect on debts, he added, would be "destroyed."

"I think we absolutely have to refuse Bárta's arguments," Václav Matyáš, head of the Czech Association of Building Entrepreneurs, an organization that represents rail, road and building companies, told The Prague Post Aug. 31. "We live in a country where the law should be respected. When you understand commercial law and listen to the rhetoric of Bárta, you realize it's crazy."

Some private companies are happy with Bárta, however, notably private rail companies. After years of battling for a stake in the railway market, RegioJet and other private operators will have a chance to bid on long-distance routes after a ministry decision to promote liberalization of the market was finalized Oct. 12.

Most recently, in his quest for cheaper road construction, Bárta met with the Chinese ambassador to the Czech Republic Nov. 11 to negotiate a pilot project, a conversation he called "inspiring."

Other politicians are more skeptical about cooperation with China, however, particularly Industry and Trade Minister Martin Kocourek, who told the Czech News Agency he'd be keeping an eye on developments.

"I object to foreign companies stealing work from domestic firms only because they can use subsidies from foreign governments," he said.

Claire Compton can be reached at
ccompton@praguepost.com