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June 16, 2020

EUROPE: CEE PULSE

BY Andrius Tursa

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( 4 mins)

The rising number of new Covid-19 cases highlights the risk of a resurgence of the disease in some Central and Eastern European (CEE) countries. Hungary’s government is expected to end the state of emergency by the end of this week as the ruling Fidesz seeks to bleed out the opposition-controlled local governments financially. The Czech cabinet has agreed to amend the proposed digital tax but is struggling to find support in parliament to increase the 2020 budget deficit. Finally, an informal alliance of three center-left opposition parties in parliament makes Romania’s legislative agenda increasingly unpredictable and could undermine the effectiveness of the country’s center-right minority government.

Region

Concerns about a potential resurgence of Covid-19 in several CEE countries are on the rise. Bulgaria, Ukraine and Romania have recorded a jump in new infections during the past week as their governments continue lifting restrictions. Other countries in the region like Poland and Russia are also easing their containment measures without seeing a notable decline in new cases. Governments are reluctant to reimpose restrictions for economic and political reasons but may be forced to do so if the epidemiological situation deteriorates further. Wide lockdowns are unlikely, and any new restrictions would target the most affected areas/sectors.

Hungary

Today, 16 June, parliament unanimously approved lifting of the controversial state of emergency, which has allowed the Fidesz-led government to rule by decree without effective parliamentary oversight since March. Such a vote was not required from a procedural standpoint, but it served as a symbolic move paving the way for the government’s subsequent decree on ending the emergency, which is expected later this week.

Meanwhile, the draft 2021 budget reaffirms the ruling Fidesz’s intentions to weaken the opposition-controlled municipal administrations. The ruling party has proposed to quadruple “solidarity contributions” paid by the most affluent municipalities (such as Budapest) to the central budget, which would then be redistributed to less developed regions. The cabinet has also proposed to permanently redirect tax receipts from vehicle taxes from local coffers to the central budget, although initially this was introduced as a temporary Covid-19 emergency measure. The proposed changes could adversely affect Fidesz-controlled municipalities as well, but they are likely to receive extra-budgetary support through other government programs.

Czech Republic

The minority coalition government led by Andrej Babis (Action of Dissatisfied Citizens) agreed to lower the proposed digital tax rate from 7% to 5% and postpone its enactment by six months to 1 January 2021. The tax will be charged on income from digital services for companies with a global annual turnover exceeding EUR 750mn and an annual turnover in the Czech Republic of at least CZK 100mn (EUR 3.8mn). The bill is expected to be passed in the autumn parliamentary session.

In the meantime, the government is struggling to secure backing for its plans to increase the 2020 budget deficit to CZK 500bn. The Communist Party of Bohemia and Moravia – which usually supports Babis’ minority cabinet – refuses to back the bill unless the cabinet specifies the planned investments and develops a long-term plan of fiscal consolidation. The budget amendments will be discussed in an extraordinary sitting of parliament next Tuesday, 23 June. Babis has mentioned the possibility of early general elections unless parliament reaches an agreement on budget amendments.

Romania

Despite a significant increase in new infections over the past weekend, the minority government led by Prime Minister Ludovic Orban (National Liberal Party) went ahead with the reopening of shopping malls, kindergartens, various sports and entertainment facilities starting Monday, 15 June. However, this week parliament will likely extend the state of alert at least until the end of June and refrain from reopening indoor restaurants for now.

Besides Covid-19, an informal alliance of three center-left opposition parties in parliament – including the Social Democratic Party, Alliance of Liberals and Democrats and PRO Romania – makes the legislative agenda increasingly unpredictable. Holding a majority in parliament, the opposition parties pushed through two bills negatively affecting the country’s business environment. The first one restricts the acquisition and use of agricultural land in the country, while the second one imposes a two-year suspension of selling state-owned shares in domestic companies. Both bills are currently under review by the constitutional court. If approved, their enactment could still be delayed – but not blocked – by the president.

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