Eurozone debate divides government

A wave of initial market optimism after the bulk of the the European Union agreed to universal fiscal rules has subsided and, domestically, political lines are drawn as leaders debate whether or not to sign on to the German-orchestrated pact.

Within the governing coalition, a sharp divide has arisen between Prime Minister Petr Nečas' historically Euroskeptic Civic Democrats (ODS) and Foreign Affairs Minister Karel Schwarzenberg's pro-Europe TOP 09 party.

"Questions of fiscal responsibility at the EU level are of a kind that will make the government coalition squeak," said Milan Znoj, a political scientist at Charles University. "It is not clear at all what the result will be."

A lesser debate about whether the Czech Republic will contribute some 90 billion Kč to the International Monetary Fund to help stave off the eurozone sovereign debt crisis has already reared its head.

"I am convinced the prime minister is aware of the enormous responsibility he now bears for the future of the Czech Republic, and he knows the Czech Republic must not and cannot be isolated in Europe," Schwarzenberg said.

Nečas responded that the government should only clear the money if the country faced complete isolation by not doing so. President Václav Klaus will attend a Dec. 14 Cabinet meeting and lobby against granting the loan.

UK Prime Minister David Cameron has drawn the lion's share of criticism in recent days after saying his country would not be party to a tighter, common EU fiscal alliance, with some analysts saying his reticence was tantamount to the first step of the United Kingdom pulling out of the 27-member trade bloc.

"This is not an agreement at 17-plus, but an agreement at 27-minus," European Commission President José Manuel Barroso said Dec. 13. "Last week, most heads of state or government of the member states showed their willingness to move ahead with European integration toward a fiscal stability union. They showed that they want more Europe, not less."

However, the Czech Republic, Sweden and Hungary - none of which is a member of the 17-member eurozone - have also held off on giving the fiscal deal their full endorsement.

"My view is a little bit more cynical," said Philip Whyte, a senior fellow at the London-based Centre for European Reform.

"What does the deal really mean? It means tighter policy coordination and the application of fiscal rules throughout the eurozone. It means synchronized fiscal tightening, at a time when the eurozone is already experiencing growth problems."

Leaders in Brussels say they want a deal pushed through by March in an effort to calm nervous markets. A tighter fiscal union will come via an intergovernmental agreement as changes to actual EU treaties require unanimity, now impossible as Cameron insisted on a series of exemptions to sign any such treaty amendment. In practice, the new agreement could be little more than a means of enforcing rules on deficits that have existed since the eurozone was formed - ones that were repeatedly violated by both large eurozone countries France and Germany but most egregiously by troubled Mediterranean states like Greece.

"It is an attempt to regulate individual behavior so you don't have the emergence of sin again," Whyte said.

Whyte terms the planned changes as "pro-cyclical," meaning they are likely to push the eurozone further "into an economic downturn," and he is not alone among economists skeptical that the Dec. 8-9 Brussels summit has produced meaningful change. 

"The structure itself is flawed, and no attempt to fix that structure is under way," Whyte said. "If you compare the eurozone to the United States, there is no sign that the eurozone is moving toward something like that. It remains an incomplete monetary union."

Skepticism is also strong closer to home.

"Markets do not believe that after the summit we have fewer questions than before," said Vladimír Pikora, chief economist at Next Finance in Prague. "Look at the markets and the [British] pound after the summit. It strengthened heavily, reaching a nine-month high against the euro. The market said isolation is good; it said we will be isolated from the wrong policy and huge debt."

But one key difference between the United Kingdom and the Czech Republic, besides their relative size, is the presence of London, a major international financial center that could give the UK strength to economically stand on its own. Domestic debate centers on whether the Czech Republic can afford divisions with Germany, the destination for 70 percent of Czech exports and a country Whyte terms Europe's "unquestioned leader."

That debate will play out in the coming weeks and could foment a political earthquake. While the coalition government may be divided on the issue, TOP 09 could yet side with the pro-Europe opposition Social Democrats (ČSSD) and Communists to see the Czech Republic join the fiscal pact.

"In principle, TOP 09 could vote with the ČSSD because this matter is not included in the coalition government agreement," Znoj said. "It is such a fundamental question of government policy that I can't imagine the ODS would tolerate it. Should this matter get to Parliament, it would certainly shake the Czech political scene."

Either way, the consequences of the government's decision would chart a course for the country well into the future.

"Not joining these changes and staying out of Europe would be the biggest failure of Czech political elite since 1989," Znoj said.

- Filip Šenk and Cat Contiguglia contributed to this report.

Benjamin Cunningham can be reached at
bcunningham@praguepost.com