CEE MONEY-Austere rhetoric may play role in Czech downturn

PRAGUE Sun Jan 6, 2013 2:00am EST

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PRAGUE Jan 6 (Reuters) - Czech Finance Minister Miroslav Kalousek admits to asking himself a frequent question about his hard line on budget cuts: "Have we frightened people too much?"

His determination to preserve the country's reputation for sound finances is widely blamed for an economic contraction that has lasted since the middle of 2010.

But Kalousek's question, disclosed in an interview this week with Ekonom magazine, begs another: why has the Czech contraction lasted so long when the country's emerging European peers have suffered less?

In terms of slashing the budget deficit, the government here has not been as fast or aggressive as Poland's or Slovakia's.

Yet these other economies are growing, the Czech Republic's is not, and data suggests that notoriously thrifty Czech consumers have reacted more anxiously to spending cuts and tax hikes than Poles or Slovaks.

Some people say the government's approach may play a role.

"The recession is definitely because of the government," said Daniel Nosek, a 68-year-old private business owner. "People are very bitter and they are busy counting how much every new government measure will cost them."

In the third quarter of last year, a 2.4 percent annual fall in household consumption and a 9.4 percent drop in gross capital formation undercut a rise in exports, creating a third straight quarter of recession.

Czech consumer confidence is also at its lowest point in 13 years, highlighting a palpable sense of fear that has caused Czechs to hunker down and companies to stop spending, worsening the downturn.

"The small Czech saver is so terrified and so afraid of the future - and this concerns companies too - that to a certain extent we are worsening an already not-so-good situation," Mojmir Hampl, deputy governor of the central bank, said on Czech Radio on Tuesday.

RHETORIC

The government has prided itself on its deficit cutting zeal, noting that its borrowing costs have fallen to below those of many euro zone countries, saving it billions each year in debt maintenance.

Investors agree, paying just 13 basis points over equivalent German bunds for two-year Czech debt, well below the 320 and 550 basis point premiums that investors demand to hold comparable Polish or Hungarian paper.

All these debt cost measures have been at record lows, due at least in part to a "wall of money" created by the world's big central banks trying to revive their economies.

But economists say the Czechs' stringent approach to belt-tightening has bolstered its image as a safe bet, even if Necas and his close ally Kalousek have cut the budget deficit less than their neighbours.

Kalousek has shrunk the budget deficit by almost 40 percent, to an estimated 3.5 percent of gross domestic product (GDP) last year, since the shortfall was biggest in 2009.

But the total 2.3 percentage points of consolidation is less than Slovakia's 3.4 points over the same period, helped by one of the highest growth rates in the European Union. Poland, the region's biggest economy, has cut by 4.4 points to the same level as the Czechs even though they started a year later.

Those two countries have benefited from other factors, including an expansion in car production in Slovakia and billions of euros in infrastructure spending partially funded by the European Union in the runup to the Euro 2012 soccer tournament in Poland.

But government rhetoric has also appeared to play an important role in keeping confidence up and the economy rolling ahead.

While Kalousek has warned the Czech Republic could go the way of Greece if it did not cut its fiscal overhang, Polish officials have mostly focussed on trying to find ways to keep the country's economic expansion alive.

"Clearly it doesn't make sense for (Czech) consumers to be as pessimistic in 2012 as they were in 2009, and they are. They are that or worse. That seems puzzling," said Daniel Hewitt, an economist at Barclays Capital.

"I think it's what the government did. They not only said they were going to do austerity. They did it in ways that was consumption limiting... by cutting wages, affecting pensions and social expenditures. Then they said there will be more to come, lots more to come."

Kalousek and his ally Prime Minister Petr Necas backed off their hard line near the end of last year and allowed the 2012 deficit to widen slightly to an expected 3.5 percent of GDP, from an earlier target of 3 percent.

The finance minister also conceded in the Ekonom interview that harsh rhetoric may have played some role in depressing Czech spending, saying he was able to accept criticism that the government's austerity drive should have also included "some glimpse of hope".

But when asked whether the government could change its rhetoric, he did not abandon his cautious stance.

"This government is, in short, convinced that the consolidation of public finance is essential," he was quoted as saying.

"We have faced a crisis, and ahead of us there is probably a relatively long period that I would mark as a great stagnation. Most of Europe will probably see that for a number of years to come. Everyone will therefore think twice about spending every crown."

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