Czech Republic – Migrant Crisis Raises Political Stakes

The midway point of the current four-year parliamentary term has now been reached, and the partnership of Prime Minister Bohuslav Sobotka’s center-left CSSD, Finance Minister Andrej Babiš’s centrist and euroskeptic ANO, and the conservative KDU-CSL remains intact, as the parties have generally opted for compromise over confrontation. However, the stability of the administration is in part a reflection of the coalition’s failure to grapple with the more contentious reforms that will be required to ensure longer-term fiscal stability in the context of an aging population. It is unlikely that the current government will take on that challenge before the end of its term, but reforms designed to prevent the cost of the pension and health care systems from rising to unsustainable levels can only be avoided for so long before inaction begins to weigh on investor confidence.
More immediately, Europe’s refugee crisis has become the central focus of political debate, and Czech parties across the ideological spectrum are scrambling to adopt the most hard-line position on dealing with the flood of non-European refugees and economic migrants entering the EU. Sobotka has called for a halt to the movement of foreigners across the eastern border of the EU, a position no doubt informed by the perceived need to prove that he is at least as willing as Babiš—who has called for the deployment of NATO forces to keep migrants from entering the EU—to defend the country’s sovereignty and interests, even at the risk of testy relations with the EU.
Thus far, the government has compiled a record of sound fiscal management and economic stability, but the outlook for 2015–2016 has been clouded by the uncertain negative fallout from emissions scandal at the Volkswagen Group, the German firm that owns three Skoda Auto assembly plants in the Czech Republic and is the nation’s largest car manufacturer. The cost of making fixes to some 1.2 million Skoda vehicles will deliver a blow to profitability that points to the likelihood of a large number of layoffs, and a sharp drop in sales of domestically manufactured cars. The full impact of Volkswagen’s difficulties will not be felt until next year, but an anticipated deceleration of growth in the last quarter will hold real GDP growth to less than 4% in 2015.