Velvet revolution loses luster Czechs: The Czech Republic quickly became the darling of foreign investors and Western artists under Prime Minister Vaclav Klaus. But his libertarian streak hastened a downfall just as fast.

Sun Journal

December 03, 1997|By David Rocks | David Rocks,Special to The Sun

PRAGUE, Czech Republic -- With the velvet of Prague's revolution already frayed by economic malaise and deep public discontent, a quick rip of political scandal was all it took to tear the Czech government apart.

Once the darling of Western artists, politicians and investment bankers, the Czech Republic has over the last two years lost much of its sheen: Political infighting, an economic downturn and murky financial markets all served to tarnish the country's once-lustrous image. The weekend crisis that brought down the government of Prime Minister Vaclav Klaus was surprising only in its swiftness.

Klaus -- the region's longest-serving leader and the only prime minister the country has ever known -- resigned from office Sunday in the wake of allegations that his party maintained an illegal slush fund in Switzerland and had received campaign donations of some $225,000 from a businessman buying a state-owned steel mill.

"I guess this means this is a country like any other," lamented Miroslav Singer, an economist with the Prague brokerage Expandia Finance.

Klaus may be down, but he's not out. Until a national congress of his Civic Democratic Party, scheduled for mid-December, Klaus will continue to lead the country as caretaker prime minister. And while he won't serve in the new government, he intends to fight to retain his post as chairman of the party he founded -- which may well splinter it.

That's not the way things were supposed to happen after the Velvet Revolution that brought down the country's communist rulers in 1989, but Klaus never really believed in velvet anyway.

While the world's eyes were riveted on Vaclav Havel, the playwright-turned-president who was the spiritual and philosophical father of the revolution, the "other Vaclav" -- the brash and confrontational Klaus -- was busy formulating an economic program based on the policies of Margaret Thatcher.

After launching his political career as finance minister of Czechoslovakia, Klaus presided over the disintegration of the Civic Forum movement that led the revolution. Then as Czech prime minister he oversaw the partition of Czechoslovakia.

And as he concentrated on economic policy and winning friends abroad, the swaggering Klaus alienated and offended many of those close to him. Even Saturday evening, as his supporters shouted "Vaclav, don't resign" outside the party headquarters, Klaus came to the window and asked them to go home.

"Thank you for your kind words," he told the crowd, "but the shouting is starting to become counter-productive."

"His arrogance was a major mistake," said retiree Josef Novak. "And he's a smart man, so why didn't he understand? He should be close to the people, but he's always felt like he was above us."

He may, however, have been what the country needed, at least for a time.

The trim and polished Klaus -- who speaks near-perfect English and passable German -- won many friends in the financial community abroad, helping sell the Czech Republic as a hot location for foreign investment. He launched a voucher privatization program that saw nearly 2,000 state-owned companies sold in a matter of three years. And his concentration on macro-economic stability kept the currency stable and inflation low.

But, in the end, his libertarian streak hastened his downfall. The voucher privatization program, while popular with voters, changed the owners of companies but left inefficient managers in place, slowing restructuring. And Klaus refused to permit any regulation and oversight of the financial sector, trusting in the invisible hand of the market. But a series of financial schemes sapped the confidence of foreign investors in the country.

After Klaus, in a typical burst of hyperbole, declared two years ago that the economic transformation was finished, Czechs started buying ever more cars, televisions and refrigerators from abroad. That ballooned the country's trade deficit and led to a currency crisis in May that sent the crown plunging and caused a sharp downturn in the economy.

Now, with a delay of at least two weeks before the political stalemate can be resolved, the Czech economy is headed for more trouble. "There will be quite a bit of uncertainty, more

accusations, more lawsuits, more news about secret bank accounts," says Jan Sykora, a trader with the Prague brokerage Wood & Co. "All this will probably come out in the next two weeks, a lot of information that probably won't add much to stability."

And the deadlock may last longer than two weeks. One factor that has kept Klaus in office is that there has been no obvious alternative to him. It remains unclear whether a viable government can be formed even after the party congress. Any new government is likely to be backed by the same three-party coalition that supported Klaus' administration, but those parties hold only 100 seats in the 200-seat Parliament.

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