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Cablegate: Pm Fischer Meets with Amcham and Embassy

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PP RUEHIK
DE RUEHPG #0698/01 3310610
ZNR UUUUU ZZH
P 270610Z NOV 09
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 1966
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 PRAGUE 000698

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SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PGOV EZ
SUBJECT: PM FISCHER MEETS WITH AMCHAM AND EMBASSY

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(U) This message is sensitive but unclassified. Please
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1. (SBU) Summary: Prime Minister Fischer and members of the
American Chamber of Commerce discussed the current investment
climate in the Czech Republic at a November 23 dinner hosted
by the Charge. AmCham said concerns about the lack of
government stability are beginning to take a toll on
investment decisions. AmCham also cited corruption and the
inflexibility of Czech infrastructure providers and offered
recommendations on taxation, promoting tourism, energy
efficiency, euro adoption, research and development funding,
and improving government transparency and efficiency. PM
Fischer said it is unfortunate that a non-political, interim
government such as his exists at all, given the limitations
it faces in making political decisions. He complained that
the current Czech electoral system produced weak coalition
governments unable to enact difficult but needed reforms and
suggested that changes to the electoral system may be needed.
He also bemoaned the poor relations between politicians and
civil servants and society's short term thinking. He
announced plans to put forward a draft package of
anti-corruption measures but was unsure how parliament might
react. He also noted his fiscal conservatism and said he was
proud that the Czech Republic had avoided both protection
measures and stimulating consumption during the economic
slowdown. End Summary

AmCham's Concerns
-----------------
2. (SBU) AmCham Executive Director Weston Stacey noted that
during his 18 years in the Czech Republic he has never before
seen as large a disconnect between politicians and the
business community as that which exists today and thanked the
PM for being willing to start a dialog. AmCham had polled
its members and found that there currently exists a neutral
investment and job climate among international firms in the
Czech Republic, a significant improvement over last year.
Companies are not planning to cut jobs or leave the country.
They are also, however, not planning to hire additional labor
or make additional investments, thus limiting the pace of the
Czech economy recovery.

3. (SBU) Stacey noted that AmCham members had identified
three main concerns that are influencing their long-term
investment plans. First, while political stability used to
be a major selling point for investing in the Czech Republic,
this was no longer the case. Weak governments unable to
enact needed reforms as well as changes in government leading
to significant changes in policy all made it very difficult
for businesses to plan for the future. Second, frequent
corruption scandals have created the perception that a level
playing field does not exist. Third, while foreign
investment in the past had been mainly for large cookie
cutter manufacturing plants, future investment is much more
likely to be by smaller businesses with specialized demands
on Czech infrastructure. It is not clear that the Czech
authorities are able to respond quickly enough to meet these
needs. For instance, the Czech Republic recently lost a
major investment when neither the semi-state electricity
company CEZ nor CzechInvest were flexible enough to quickly
accommodate the energy needs of a potential investor.

AmCham Creates the Council for Czech Competitiveness
---------------------
4. (SBU) Stacey, speaking for the group, briefed the PM on
the creation of the Council of Czech Competitiveness (CCC)
formed by AmCham with the cooperation of other foreign
business associations and presented him with a booklet
outlining the CCC's main priorities and recommendations.
Stacey emphasized that tax policy was the single most
important issue for businesses when making employment and
investment decisions. On behalf of the CCC, he urged the
government to prepare a ten-year tax policy, to clamp down on
the wide-spread tax evasion before raising the taxes of those
businesses who are actually paying, and to create an
effective tax modeling system. (Note: The complexity of tax
policy is a particular concern of both international and
domestic businesses in the Czech Republic. A recent study by
the World Bank and PwC found that businesses must spend on
average 614 hours to prepare their taxes compared to the EU
average of just 232. End note.)

5. (SBU) Stacey also reported that the CCC believes that
tourism has the potential to become a major pillar of the
Czech economy. Government policy on tourism, however, is
split between several different agencies creating duplication
and waste. Most cultural events are also aimed at a local
Czech audience rather than striving to bring in foreign

PRAGUE 00000698 002.2 OF 004


tourists. Thus the CCC is recommending that the government
consolidate tourism policy under one agency, create a
five-year marketing plan, invest in convention tourism,
concentrate on on-line promotions, review Czech visa policy
and fund two major international cultural events a year.

6. (SBU) In regard to the Czech Republic's goal of
transforming itself from an assembly line economy to a
knowledge-based economy, Stacey noted that the CCC is
recommending that the government focus its research funding
on a few priority areas, actively recruit world class
scholars in those priority areas, and create unique research
opportunities. The Czech Republic is too small to try to do
everything or to rely on its scientists alone. Stacey also
urged the Czech government to separate grant-giving and
grant-receiving agencies. Stacey also offered AmCham's
assistance to help the government learn from the experiences
of other countries such as the U.S. on how to sponsor greater
university-business cooperation and the greater
commercialization of research.

7. (SBU) Stacey noted that uncertainly about Czech intentions
regarding the Euro made it difficult for businesses to plan
long-term. Thus the CCC is urging the government to clearly
announce its intent regarding Euro adoption and to establish
a regularly updated timeline and plan toward Euro adoption.
Stacey also noted that the Czech Republic has one of the
worst energy intensity levels in the EU and urged the
government to make energy efficiency a bigger priority.

8. (SBU) Stacey also noted that the large budget deficit and
growing distrust in public officials should compel the
government to become both more efficient and transparent. To
this end, the CCC is recommending the government sign and
implement EU conventions on good government conduct, follow
the Slovak example regarding legislation designed to prevent
the distortion of competition by public agencies, reduce the
wide-spread use of no-bid contracts and eliminate the ability
of government officials to hide their ownership in companies
competing for government contracts through the use of bearer
shares. Finally Stacey, on behalf of the CCC, urged the
government to increase training for judges on the new
bankruptcy law, which was prepared with the help of AmCham
and the Embassy.

Fischer: Electoral System Creates Weak Governments
---------------------
9. (SBU) PM Fischer thanked AmCham for the critique and
recommendations and expressed strong interest in continuing a
dialog. He noted that his government is non-political and
temporary and was limited in what it could do. He said it
was unfortunate that his temporary government was
unexpectedly entering its second six month period. It is
much harder to plan for two six month periods rather than for
one year. The Czech Republic also needs a strong government
able to make the difficult political decisions. An interim
government should have no place in the Czech Republic and it
is unfortunate that the politicians have not recognized this.
He noted the extension of his government meant that it will
now have to address some of the issues such as certain
privatizations and legislation that it expected to leave to
the politicians and for which, because of its non-political
nature, it is ill prepared to tackle.

10. (SBU) PM Fischer noted that the political system in the
Czech Republic is broken. It produces weak coalition
governments, which have to compromise and are unable to enact
needed reforms or take difficult decisions. He was not
confident that the next election would change this,
suggesting the likely outcome would be another weak coalition
or a weak minority government. This in turn would create
even more public disillusionment with politics. Thus he
thought the Czech Republic should seriously consider changing
its electoral system. He also complained of the large divide
between politicians and civil servants. Partly as a vestige
of the Communist era, civil servants are looked down upon in
the Czech Republic as parasites feeding on taxpayer money.
Politicians often appoint politicians to positions better
suited to career civil servants and generally treat the civil
service very poorly. As a result, civil servants bear a
grudge against politicians. He also complained that the
Czech political scene suffered from short term thinking that
enabled difficult decisions and needed reforms to be
constantly postponed.

Fischer on AmCham Critique
--------------------
11. (SBU) Fischer noted that the perception of corruption was
worst than the actual level of corruption, Nevertheless,

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Fischer announced that his government is planning to
introduce a draft anti-corruption package by the end of the
year, but cautioned that it is unclear how the political
parties and the parliamentarians will receive it. He said he
personally supported Euro adoption. The Czech Republic had
made this commitment and should follow through. His
government is trying to control the budget deficit to make
Euro adoption possible in the near future. Nevertheless, in
the current budget climate (the Czech budget deficit is
expected to exceed 5 percent of GDP for the next several
years) Euro adoption is only a distant dream. He cautioned,
however, that Euro adoption is a political issue that will be
determined by future governments, but agreed that they should
clearly articulate their goals and plans.

12. (SBU) PM Fischer also agreed that tourism offered
untapped potential and noted that visa policy toward the
countries in the Western Balkans would be liberalized in
December. He also agreed that the government should more
energetically promote the transition to a knowledge economy.
University reform needs to be concluded. It makes no sense
for Ceske Budejovice to have two public universities, and all
28 Czech public universities do not need to be research
universities. The Czech Republic also does not educate
people to manage universities and research programs. It is
important to ensure that the government is funding research
programs that are well-managed and competitive in Europe and
globally and that the government is not just throwing money
down a hole.

13. (SBU) PM Fischer also advocated programs like
e-government and consolidating government spending. He said
it makes no sense for each ministry to order cars and
supplies separately. Many ministries could use their
resources better. He questioned why the Czech Republic needs
14 regions, something he admitted he could not change but
called for slimmer and more effective local government. On
energy, he agreed on the need for greater energy efficiency
and noted the desirability of further diversification of
energy supplies and suppliers. On tax reform, he said it was
a pity that the previous government fell before former
Finance Minister Kalousek had completed his ambitious tax
reforms and hoped that the next government would continue
Kalousek's work.

Fischer on the Economy
--------------------
14. (SBU) On the state of the economy, he noted that the
Czech Republic had entered into the recession with two
relative advantages. First, the global crisis did not hit
the Czech financial system and thus the Czech Republic did
not experience any significant problems with toxic assets or
liquidity. Second, the crisis occurred after a period of
very strong growth. He noted that the first victims of
recession are always the forecasters and economic models. As
late as November 2008, all international forecasters were
still predicting that the Czech economy would grow by over
two percent in 2009. Fischer said he was pleased that
unemployment is still lower that he would have predicted. He
cautioned, however, that history shows that in a recession
the first to be hit is industry and businesses followed later
by public finances and then households. Even though real GDP
fell 5 percent in the first half of the year, household
consumption increased. The recovery is following a similar
path with first industry and businesses and then public
finances and only then households showing improvement.

15. (SBU) Fischer noted that he was proud that the Czech
Republic resisted calls to increase spending to stimulate
public consumption. Instead the Czech Republic pursued a
modest program designed to stimulate supply and employment.
He also noted his pride that the Czech Republic had avoided
protectionist policies. He added that the recently passed
package of austerity measures designed to keep the ballooning
budget deficit under control had been far from ideal but was
a compromise agreed between the two main political parties.
To that end it neither reflected Keynesian nor Freemanesque
thinking. He also noted that he was reluctant to make
predictions on next year but thought 1.5 percent growth was
likely to be in the ball park.

Comment
------
16. (SBU) PM Fischer was extraordinarily open and frank about
the limitations of his government and the Czech political
scene. On economic issues it is clear that he is a free
market, fiscal conservative, whose views more closely track
with those of the Civil Democrats (ODS) and TOP 09 than those
of the Social Democrats (CSSD). His honest, pragmatic,

PRAGUE 00000698 004.2 OF 004


low-key approach, apparently devoid of personal ambitions,
has given his government among the highest approval rating of
any government in the Czech Republic's short history.
Thompson-Jones

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