28-12-2000

Selling off the family silver is an acceptable practice these days, even among Social Democrat politicians, and the Czech government is no exception. This year it has continued on the path set by its right-wing predecessors, and has in fact accelerated the privatization of the main banks, at the same time as setting down the rules for selling public utilities. But, as we discovered at the beginning of the year, one thing is still sacred. The Budvar brewery in the south of the country produces what is probably the best lager in the world, Budweiser, but amazingly, eleven years into capitalism, it is still firmly in state hands. And the prime minister, Milos Zeman, made it clear in February, that things will remain that way. Budweiser is the one state owned firm we cannot possibly sell off, he said, pointing to the danger of the Czech amber nectar ending up in the hands of the American giant Anheuser Bush. They produce their own version of Budweiser, which in terms of quality, most Czechs would compare to dishwater. So beer still remains sacred.

Picture the scene. A group of armed masked men in black surround a bank in Central Prague. They burst in, taking all inside by surprise and take control of the building. No, this isn't a spectacular mafia-style bank robbery, nor is it one of the dramatic scenes during the anti-globalisation protests that accompanied the World Bank meeting in September. Instead it is a rather unconventional way of putting a bank under forced administration. On June the 16th the interior minister, Stanislav Gross, sent a special police unit into the headquarters of one of the Czech Republic's biggest banks, IPB, after it became clear that the bank faced imminent collapse. Within three days the bank was sold to one of its rivals, CSOB. It was rescued from catastrophe, but some observers accused Mr Gross of using a sledgehammer to crack a nut, and saw hidden political and financial interests behind the almost indecent haste with which the finance ministry handed IPB over to its rival. Finance minister, Pavel Mertlik, defended the speed of his actions, warning that some people in IPB's management could have tried to strip the bank of its assets before the sale. The collapse of the bank, he said, would have wiped 3 to 4 percent off the country's GDP.

In fact if we were to sum up the main theme of the year in just one four-letter word, then that word would have to be: BANK. Banks reared their heads again and again, and only rarely without controversy. The year started on a positive note, after the government had achieved something to which its predecessors had only paid lip-service. They committed themselves to completing the privatization of the big Czech banks. Putting that all into practice has not been so easy. Take the biggest Czech bank, Komercni banka. In the 1990s the bank managed to accumulate a staggering number of bad debts, adopting what in retrospect seems like a naive and extraordinarily generous lending policy. In January the government realized that it could only make the bank attractive to potential investors by bailing it out, and that to the tune of 60 billion crowns of tax-payers' money. The debts were transferred to the fully state-controlled factoring bank Konsolidacni banka. At least there was good news for one of the other big Czech banks, Ceska sporitelna, which was brought safely under the wing of its new owner the Austrian Erste Bank.

There was another huge political row in the Czech banking sector this year. For several years tension had been fermenting between the head of the Czech National Bank, Josef Tosovsky, along with his ally President Havel, and the chairman of parliament and former prime minister, Vaclav Klaus, broadly supported by the current prime minister, Milos Zeman. There were several public rows in the course of the year, with Mr Tosovsky defending the bank's tight anti-inflationary policy, and Messrs Klaus and Zeman calling for the parliament and government to have greater control over its workings. Klaus and Zeman won the first round, pushing through a law limiting the bank's independence by giving the government influence over choosing the bank's board, and forcing the bank to consult over many policy decisions. The reforms weren't much welcomed by the European Union, which hinted that they weren't in line with EU standards. Tensions came to a head again at the end of October. Governor Tosovsky suddenly announced his resignation, just a month before the new rules were set to come into effect. President Havel acted fast, and immediately appointed a new governor of his own choice, a man from within the bank with a reputation as an "anti-inflation hawk", Zdenek Tuma. The decision caused a political furore. Both the government and Mr Klaus said that the president had ignored his constitutional obligation at the very least to consult the decision with the prime minister. They put the matter in the hands of the Constitutional Court, and the outcome remains to be seen. With so many peculiar things going on in the Czech banking sector, it's hardly surprising that in July a report by Standard and Poors suggested that the Czech Republic had one of the most vulnerable banking sectors in the developed world. Mind you, the list did also include the United States.

With the banking sector back home looking more and more like a battlefield, many Czechs found themselves longing for some peace and quiet, but another bank soon put paid to that, this time unconnected with the Czech domestic political scene. In September the World Bank, along with the IMF, held their annual meeting here in Prague, and we witnessed scenes even more spectacular than the police raid on IPB two months earlier. Thousands of demonstrators from all over the world descended on the Czech capital to protest against globalization, and as the annual meeting reached its climax in the Congress Centre, the protests outside descended into a maelstrom of violence, spearheaded by small groups of anarchists and far-left activists, facing off against police in riot gear. Most protestors distanced themselves from the violence, but for the population of Prague the events were a rude awakening to some of the realities of the post-communist world. In the end the IMF and World Bank session saw few major developments, but it was clear that both organizations have become more sensitive to the complaints of their opponents. There was a promise of further debt relief to the world's poorest countries, and both organizations committed themselves to further internal reforms to make them more accountable. During the whirlwind of events around the meeting, President Havel won a great deal of international respect. He took on the role of building bridges between the two sides, and a separate conference he hosted at Prague Castle was widely seen as a success - there he invited both international bankers and representatives of organizations such as Jubilee 2000, which complain that the World Bank and the IMF act against the interests of the poor. Most people in Prague breathed a deep sigh of relief once things returned to normal at the end of the month.

We may have seen violence this year, but the millennium didn't bring the apocalypse predicted by some astrologers. On the contrary, both astrologers and economists in the Czech Republic failed to predict the speed of recovery of the Czech economy. The country is now well and truly out of recession, and nearly all the main economic indicators are pointing in the right direction. After falling for several years running, the GDP showed a healthy recovery, with growth expected at about 2.5 percent for this year and predicted by both Czech and OECD experts to continue rising in 2001. Foreign investment was up this year to 6 billion dollars, three times the figure for 1998, and one of the most encouraging signals of all is a spectacular improvement in industrial productivity in the course of the year. Even unemployment is falling, from a peak of nearly 10 percent early in the year to a figure of around eight-and-a-half percent, but further significant falls are not expected. Czech industry's biggest success story has been the Skoda car manufacturers. For them the year started well, with the new Fabia declared European Car of the Year in its category. In May the government decided to sell its remaining 30 percent stake in Skoda to Volkswagen for 650 million Deutsch Marks, but it will keep a seat on the supervisory board until 2007. In the Czech Republic cars are less sacred than beer.

Traditional heavy industries continued to suffer, most significantly the steel industry in the north east of the country, but in that region there was also some good news: Philips decided to build a huge new plant building television screens, just outside the small town of Hranice. It's predicted that the move will create some 3000 jobs in an area of high unemployment. The construction industry saw a recovery, and there is a growing boom in the high tech sector. And on the subject of high tech, it's estimated that by Christmas, around a third of the Czech population owned a mobile phone, representing a spectacular increase.

And before we leave the subject of industry, in November the paper MLADA FRONTA DNES came up with a rather unnerving statistic. Half the big captains of industry who came onto the scene after 1989 are now facing criminal charges. Examples are Lubomir Soudek, former head of the engineering giant Skoda Plzen, Vladimir Stehlik of the ill-fated Poldi Steelworks in Kladno, and most recently Jiri Marousek, of the heavy engineering company CKD Holding, here in Prague. But the paper concludes that probably none of them will end up behind bars. At the time of their alleged crimes - all associated with asset stripping - laws were in place in the Czech Republic that enabled property transactions that would raise eyebrows in most western countries.

Overall it's been a strangely mixed year in the Czech economy, but, looking into our crystal ball, we can say there is cause for optimism for 2001. The economic recovery looks set to continue, next year's state budget is safely through parliament, avoiding the endless political wranglings around the 2000 budget, and the Nice Summit seems to have given a green light for the country to speed up negotiations on joining the European Union. There are some clouds on the horizon. The EU report on the Czech Republic that appeared in October calls for more rapid reform of Czech institutions, casting some doubt over whether the country will be in the first round of EU expansion; the state budget as approved for next year counts with a deficit of nearly 50 billion crowns, a situation which finance minister Pavel Mertlik, acknowledges will be untenable in 2002; there are still important sectors of the economy that await reform, most significantly the pension system, which some predict could collapse totally in twenty years' time; the health sector is also looking far from secure, and no-one has yet found a way of privatizing and modernizing Czech Railways. And of course there's that evergreen, the Temelin nuclear power plant. We have yet to see whether the 100 billion crowns so far ploughed into the plant, will bear any economic fruit at all. We have a busy year ahead in the Czech economy.

28-12-2000