Czech economy weathering the storm

The collapse of the Czech government slightly weakened the koruna but did little to sway the Prague stock exchange, a sign that the political crisis is so far having little impact on central Europe's soundest economy.

The centre-right government of Mirek Topolanek, prime minister, was ousted on Tuesday after losing a vote of confidence by a razor-thin 101 votes in the 200-seat parliament. He is scheduled to resign on Thursday after addressing the European parliament, although his cabinet is expected to continue functioning.

Mr Topolanek's management of the economic downturn was one of the reasons for his defeat – the opposition Social Democrats favour a freer spending approach to battling the recession – but the most important cause of his fall was that he had run one of the weakest governments in central Europe. The opposition had tried four previous times to defeat the government, which only controlled 96 parliamentary seats.

Once Mr Topolanek resigns, the initiative moves to Vaclav Klaus, the eurosceptic president. Saying it was his fourth change of government in six years as president, Mr Klaus added: "We have always successfully solved the situation, and I would like to assure the Czech public that it will be resolved this time as well."

Mr Klaus, Mr Topolanek's predecessor as leader of the Civic Democrats, dislikes the prime minister, differing over his more favourable view of the EU. Mr Klaus can name a new prime minister, either calling again on Mr Topolanek, Jiri Paroubek, the leader of the Social Democrats, or someone else entirely.

"Everything depends on President Klaus. No one knows what he will do," said Alexander Mitrofanov, a political commentator at the Pravo newspaper.

The political turmoil could be resolved by early elections, which would need the agreement of the big political parties. But it could also drag on until 2010, when parliamentary elections are next due.

The fall of Mr Topolanek led the koruna to wobble slightly, losing about 1 per cent. However, the Prague stock exchange closed up 3.6 per cent.

Following the fall of governments in Latvia and Hungary, there was a danger that sentiment towards the region could sour again, said Lars Christensen, emerging markets economist at Danske Bank, who added that the end of Mr Topolanek's government should have little impact on the economy.

"The only thing is that if you need to act there is a problem if you have no government. But the Czech Republic is not in a situation that needs crisis management right now," he said.

The country has been hit hard by the steep fall in exports to western Europe, and the government now sees the economy shrinking 2 per cent this year. However, Neil Shearing, emerging Europe economist with Capital Economics, expects a drop in gross domestic product of 5 per cent.

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