8 Years On, Czechs Finally Feel Pain of Free-Market Reforms

PRAGUE, Czech Republic — The summer tourist season is already in full bloom in this fairy-tale capital in Central Europe. But Czechs who typically escape the foreign invasion by taking a vacation of their own are running into an unexpected roadblock.

“Right now, prices are going up between 10% and 20% for trips abroad,” said Marketa Lukavcova at the Intercontact Tourist Agency, located at the foot of the city’s hilltop castle. “Some of our customers are absolutely furious when we break the news to them.”

All across Prague, in shops and restaurants, department stores and car dealerships, merchants are blacking out sales tags and calculating prices anew. Even the U.S. Embassy this week increased the fee for tourist visas by 17%.

The surge in prices is due to a sudden drop in the value of the koruna against the U.S. dollar and the German mark as investors become skittish about worsening economic indicators. The Czech Central Bank reportedly spent $3 billion in a frantic bid to shore up the currency before giving up several weeks ago; the battered koruna dropped 9% against the dollar the next day and now floats freely.

The much-heralded Czech economic miracle has taken ill, and the eleventh-hour remedy offered by the government of Prime Minister Vaclav Klaus is not expected to ease the pain soon. Klaus, the chief physician for the Czech recovery from communism, has been summoned back into the operating room to treat a relapse, to borrow one of the premier’s favorite metaphors.

“It is clear something is wrong here, and it has now been admitted, albeit not very willingly,” said Ladislav Venys of the Center for Democracy and Free Enterprise in Prague. “I wouldn’t say it is a real crisis, but we all know belt tightening awaits us.”

Steeper prices are the first of many doses of bitter medicine that Czechs will probably take in coming months.

An austerity package unveiled this week--the second in as many months--will cut into dozens of government programs, depriving police of new handguns, soldiers of Christmas bonuses and motorists of new roads. Rents in some state-controlled apartments in Prague are scheduled to jump by as much as 50% beginning next month.

Such measures have been common in other former East Bloc countries. But until now, the Czech Republic had been mostly spared. With a stronger industrial base than their eastern neighbors, the Czechs started a step ahead of the pack in 1989--an advantage the immodest Klaus often exploited in promoting the Czech Republic abroad and selling his own doctoring skills to voters at home.

But the public relations campaign foundered when festering economic problems came to a head last year.

With important economic indicators slipping, privatization in shambles, financial and political scandals taking off and the coalition government paralyzed by infighting, opponents began jumping at the chance to bash the once-invincible premier.

Klaus was barely able to form a new government after elections last year, and this week he survived a no-confidence vote in Parliament only because of the defection of a disgruntled opposition deputy. In a remarkable mea culpa, Klaus recently admitted to “a number of mistakes in economic policy”; two years ago, he was boasting that the Czech transformation was largely complete.

“We are experiencing a crisis of expectations,” political analyst Jiri Pehe said. “We have been told over and over again that this country is No. 1 in Central Europe and the reforms were over. Now we are learning there is no transformation without pain.”