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Czech Republic: New Economic Policy Will Prove Painful

Prague, 29 May 1997 (RFE/RL) - The Czech Republic's three-party ruling coalition last night announced plans for an economic stabilization and recovery and made public several personnel changes in the cabinet.

The coalition's statement provided a devastating official account of the state of the Czech economy. It was issued just hours after one of the coalition partners, Christian Democratic People's Party leader Josef Lux (KDU-CSL), proposed that both he and Prime Minister Vaclav Klaus resign from the government in view of the refusal of the third coalition leader, Michael Zantovsky of the Civic Democratic Party (ODA), to join the cabinet. But Klaus' Civic Democratic Party (ODS) rejected the proposal saying a government without Klaus would be unimaginable.

Foreign Minister Zieleniec quietly rejected calls to take over the finance ministry and thereby vacate his post for Zantovsky, who served as ambassador to Washington. The Polish-born Zieleniec is Klaus' rival both for the leadership of the Civic Democratic Party and the premiership.

Analysts say the announced cabinet changes are merely half-way measures, suggesting continuity. They are particularly concerned about the naming of Education Minister Ivan Pilip as the new Finance Minister, in view of KlausU continued presence at the head of the cabinet. Several opposition politicians have complained that Pilip lacks competence to run Finance Ministry. But Klaus said today on a radio program that Pilip was a trained economist with several years of experience in the cabinet.

Replacing Pilip as Education Minister will be Jiri Grusa, a writer and ambassador to Germany .

The Czech ambassador to Britain, Karel Kuehnl, a former RFE/RL editor, has been nominated by Zantovsky's ODA to succeed Vladimir Dlouhy as Minister of Industry and Trade. Kuehnl has never belonged to any political party.

Petr Necas, chairman of parliament's defense and security committee, is to take over the Interior Ministry from Jan Ruml.

Coalition leaders Klaus, Zantovsky and Lux met this morning with Havel. Afterwards, Havel said he was accepting the coalition's stabilization measures and cabinet nominees. But he said he had told the three leaders they must develop a long-term concept for change. Havel also said the coalition partners admitted responsibility for the current situation.

Klaus told reporters yesterday that a "retreat from the overvalued exchange rate of the Czech crown, which did not correspond to the real performance of the Czech economy, is the price that has to be paid for the many mistakes in economic policy."

Klaus said that the government's attempt last month to make corrections had not solved the existing problems. Klaus said that these include "low efficiency of the banking system, compounded by the state's rescue measures, the financing by the state budget of loss-making activities, large-scale secondary insolvency arising from cumbersome existing legislation that hinders law enforcement, the lack of transparency and clarity of ownership relations, and the absence of a legal and administrative environment where it would pay off for owners to be responsible."

Klaus went on to say these factors resulted in "soft economic environment, the non-existence of a proper business environment and capital market, and the survival of many loss-making companies." He said that the growth of wages has outpaced labor productivity, creating excessive domestic demand. Klaus said the ensuing personal consumption together with rapidly growing investments became the chief causes of a growing imbalance in the country's foreign trade.

Klaus said that he intends to introduce "radical, painful, short-term economic measures" to stop the fall of the crown and stabilize the situation within a few months. He envisaged further decreases in this year's spending on state administration. He also called for cuts in investment and appealed for anti-inflationary policy by the central bank. Wages in the public sector are to be frozen.

Klaus said that those stabilizing measures will result in an economic slowdown. "Instead of economic growth," he said, "we must expect an economic decline accompanied by a marked growth in unemployment."

The government coalition insists this is the quickest and least painful road toward renewed stability and growth.