European Union: The Year of Accession: Prague winter

The Czech Republic’s 30-something prime minister and his cabinet seem more concerned about staying in office than enacting crucial second- and third-wave reforms.

In matters of politics and economic reform, the Czech Republic can seem like a nation of Old Turks and young fogies. “The era of the giants is over,” says Milan Ekert, who at 39 straddles both generations and serves as a parliamentarian with the Social Democratic Partyled government coalition. “There is nobody anymore with a big economic and political vision.”

The brash old political guard, who led the 1989 Velvet Revolution that toppled Communism and carried out the first dramatic wave of economic reforms, has moved to the sidelines. Former president Václav Havel, the playwright-turned-democratic-icon, is in retirement and ailing. Václav Klaus, who as prime minister in the 1990s largely privatized the economy, now holds the mostly ceremonial post of president. And Klaus’s cantankerous, center-left rival, former prime minister Milos Zeman, who created a functioning banking system, has a minuscule political following.

Leading a new, far more cautious generation is Prime Minister Stanislav Gross, 34, who claimed the post when his predecessor, Vladimír Spidla, resigned in June following his Social Democrats’ disastrous fifth-place finish in elections for the European Parliament. It took Gross, also a Social Democrat and Interior minister under Spidla, four weeks of tough negotiations, but he held together the three-party government coalition, thus obliging President Klaus to appoint him prime minister in late July. Gross is the youngest head of government in Europe. And eight of his 18 cabinet members are under 40 -- including Finance Minister Bohuslav Sobotka, a holdover from the Spidla government, who is 33.

But this is not a leadership that is youthful in spirit or scope of purpose. The ultimate goal of these young fogies is political survival, at least until elections scheduled for 2006. That may prove difficult: Polls in July showed the Social Democrats with a record-low 13 percent support. Meanwhile, the right-wing opposition Civic Democrats, led by Senator Mirek Topolánek, are riding high with 30 percent voter approval and may be tempted to precipitate early elections, perhaps before the end of the year. “Topolánek could call for a vote of confidence in Parliament and try to bring the government down,” says Social Democrat Ekert.

Gross has only a one-vote majority in the 200-member lower house of Parliament. Many of his Social Democrats are left-wing populists reluctant to alienate workers and retirees by embracing needed cutbacks in pension and health benefits. The Gross coalition’s junior partners -- the Christian Democrats and Freedom Unionists -- are philosophically closer to the conservative Civic Democrats but maintain their allegiance to Gross because they can exercise more power and claim more spoils in a weak Social Democratled government.

Fragile governments have suddenly become commonplace in the region. In addition to Spidla, two other center-left prime ministers have been forced to resign recently because of troubles within their coalitions -- Poland’s Leszek Miller stepped down in May, and Hungary’s Péter Medgyessy quit in August. In Slovakia, Prime Minister Mikulás Dzurinda’s center-right government survives despite its lack of a parliamentary majority. The consequences of political instability, warn analysts, are a slowdown in economic reforms, especially those linked to deficit reduction and integration into the European Monetary System. “The message is clear for the Czech Republic, Hungary and Poland: Expect further delays in fiscal adjustment and euro entry no earlier than 2010,” says Michael Marrese, who heads economic research for the region for J.P. Morgan Chase & Co. in London.

In the Czech Republic new Prime Minister Gross’s shaky hold on power reinforces his inclination not to risk big economic initiatives. Only two weeks after naming Gross to head the government, President Klaus, the quintessential Old Turk, denounced his economic program on television as “toothless.” Says Jirí Pehe, a political commentator and chairman of New York University’s branch in Prague, “Gross will talk about reforms, but it will be mostly rhetoric to gain votes for the next elections.”

Gross has committed himself only to a tepid second wave of economic reforms inherited from Spidla. These include a shake-up of the judiciary to make business transactions easier, speedier commercial registration for new firms and some further sales of state-owned company shares to the private sector. “But the single most significant reform that must be undertaken is a new bankruptcy law,” Spidla told Institutional Investor in a July interview that was his last as prime minister. (He has since been appointed the Czech Republic’s representative to the European Commission.)

Not a scintillating list. Nothing to stir controversy or excitement, as the massive transfer of public assets to the private sector and rollbacks in the welfare state did during the past decade, or as the integration of the Czech Republic into the European Union did in May.

The Gross government has no plans to embark on a third wave of more-profound economic reforms. These would include a makeover of the state-run pension and health benefit systems, which are set to become increasing burdens on the public deficit and already impose heavy costs on employers. “In terms of pension and health benefits, Czech corporations are required to pay 35 percent above wages,” says Weston Stacey, executive director of the American Chamber of Commerce in the Czech Republic.

Although that’s only a slightly higher percentage than firms allot for such benefits in neighboring Slovakia, wages there are about a third less than in the Czech Republic. And Slovakia has committed itself to a partial privatization of its pension system as well as increased private contributions to health costs. “There is much more enthusiasm for reforms in Slovakia,” says Jan Svejnar, an economics professor at the University of Michigan who has often advised the Czech Republic’s Social Democratled government. The opposition Civic Democrats, under Topolánek, haven’t shown much appetite for reform either, beyond promises to cut taxes by unspecified amounts.

A climate of low expectations and lack of excitement would seem to favor Gross’s muted political style and thus enhance his chances of staying in office. Despite a meteoric political career, he displays little of the charisma one might expect of so young and prominent a public figure; instead, he has shown a preference for backroom deal making.

GROSS TOOK UP POLITICS AS A TEENAGER IN Central Bohemia during the Velvet Revolution. Born into a working-class family, he became a locomotive engineer but soon devoted himself full-time to helping organize the then-small Social Democratic Party that was battling the Communists for left-wing votes. By 1993, at age 22, Gross was a member of Parliament. His dogged effectiveness in turning out the vote in general elections and lining up legislative support impressed thenprime minister Zeman, who appointed Gross Interior minister in 1998 when he was not yet 30. He remained in that powerful post even after Spidla, a bitter rival of Zeman, became prime minister in 2002.

Demonstrating his adroitness, Gross has managed to woo both Spidla -- whom he helped topple and then appointed as European commissioner -- and even Zeman, who had blamed Gross for reducing his political role to insignificance. “I will meet with Zeman and find out how we can give him a voice in the Social Democratic Party,” said Gross in a television interview in late June when he was still struggling to form his government coalition.

Gross inherits an economy that is growing reasonably well but which has failed to show fiscal restraint. Real GDP rose by 2.9 percent last year, equal to growth in Hungary, but below Poland’s 3.7 percent and Slovakia’s 4.2 percent. Gross’s most immediate task will be to bring public spending under control. Last year’s budget deficit looked terrible, surging from 6 percent of GDP in 2002 to 12.9 percent. But the jump was mainly the result of a one-time phenomenon: the government’s decision to guarantee nonperforming bank loans assumed by its privatization agency. “It is expected that this year’s deficit will reach 5.3 percent of GDP,” wrote Finance Minister Sobotka in a July e-mail response to questions from II. “The limit of 3 percent of GDP set by the Maastricht Treaty for membership in the European Monetary Union will be achieved by 2008.”

Czech National Bank governor Zdenek Tu°ma agrees with this upbeat assessment. “Fiscal policy has not been expansive over the past few years,” says the central banker in an interview (see box above). “The market understands that even if we have a weak government, the fiscal deficit will not explode.”

But some market analysts remain dubious about whether the government will be able to meet its deficit-reduction targets with elections scheduled for 2006 -- or sooner, if the opposition Civic Democrats decide that Gross is vulnerable enough to a no-confidence vote in Parliament. “Over the next two years, the government coalition will most likely focus on improving its position with voters rather than pushing unpopular economic policies,” says David Marek, chief economist at Prague brokerage Patria Finance. Fanning this skepticism was a government draft paper leaked to the press in August promising to create 100,000 jobs in regions suffering from high unemployment and to use public funds to help finance the purchase of up to 50,000 apartments annually. “Instead of a serious program that takes into consideration the debt-ridden budget, we have a program that promises an easier life,” commented leading daily Mlada fronta Dnes.

Though expectations for major economic initiatives were low even before Gross took office, the business community is hopeful that the new government will press ahead with nuts-and-bolts changes that won’t arouse controversy. Mundane issues -- such as bankruptcy protection and easier company registration -- could determine how quickly the country climbs from emerging-market status to the higher economic rungs of the EU. The Czech Republic has a strong industrial tradition, but cheaper labor in China and Eastern Europe is luring away textile and even electronics manufacturers. Czech economists and bankers think that the government must facilitate the growth of new service-oriented and higher-tech companies (see box, page 107). “These are the kinds of reforms that will create the small and medium entrepreneurial companies this country needs,” says Jack Stack, chief executive officer of leading Czech bank Ceská Sporitelna. Those are also the sort of clients, adds Stack, that his bank sorely needs.

Another part of the Gross government’s agenda will be to ensure that the major, dramatic economic reforms of the past decade continue to thrive. The transformation of banking is one of the most successful.

Ceská Sporitelna illustrates the fall and rise of the financial sector -- and the challenges it currently faces. In the late 1990s some 45 percent of Ceská Sporitelna loans were nonperforming. Other major banks were in similar straits. As a condition for joining the EU, the Czech government agreed to privatize the banks and make them more transparent. By 2000 more than 90 percent of assets in the banking system were foreign-owned. That year Austria’s Erste Bank bought a majority of Ceská Sporitelna’s shares (it now owns 97.9 percent) and named the New Yorkborn Stack, a former Chase Manhattan executive, as its new CEO. Under his aegis the bank went from losses of 6 billion Czech koruna ($174 million) in 1999 to a net income of Kcs7.3 billion last year.

Stack doesn’t purport to be a miracle worker. “What happened was that as part of the privatization agreement with foreign banks, the government assumed all those bad loans, so they aren’t on our balance sheets,” he explains. The problem is that Ceská Sporitelna now has a loan-to-deposit ratio of only 45 percent, and because of the low-interest-rate environment (the prime rate is 2.25 percent), those deposits aren’t very profitable. “A bank our size should have a loan-to-deposit ratio of 65 to 70 percent,” says Stack. “Basically, we have a very liquid banking system in this country, ready to give out loans if we can only find enough creditworthy customers.”

Thanks largely to consumer borrowing, Ceská Sporitelna is predicting its loan portfolio will grow 15 percent annually over the next three years. Tapping into the corporate market is proving more difficult. Multinational firms use their home banks. “We do a lot of business with their suppliers, which are small and medium enterprises,” says Stack. “The SME sector is where we see our corporate loan growth coming from.”

But to find more SME clients, banks need assurances that collateral can be collected if loans go sour. And that requires new bankruptcy legislation. The current bankruptcy law fails to protect debtors or shareholders -- and invites official corruption. No legal protection exists to give businesses a chance to reorganize and regain profitability.

Once a judge declares a company bankrupt, a court-appointed trustee dismantles the firm. “There have been quite a few scandals involving schemes between judges and trustees to force companies into bankruptcy and then acquire the most valuable assets at very low prices,” says Ladislav Storek, a business law specialist at the Prague office of international law firm Salans.

Business complaints about the judiciary go beyond its handling of bankruptcy cases. Many judges received lifetime appointments during the Communist regime, and their legal education is frozen in another era. “They aren’t required to be knowledgeable about new laws -- and that’s a real problem in an economy that is trying to meet EU requirements,” says the American Chamber of Commerce’s Stacey.

Judicial ignorance and venality contribute to the Czech Republic’s notoriously long delays in commercial registration. “Buying a business or property is a very bureaucratic, outdated process involving court proceedings, and is subject to corruption,” says banker Stack. Government officials insist the issue is overblown. “Business registration may take a few more weeks than in some other countries, and yes, it’s a pain in the neck, but it’s not enough to drive away investors,” said Martin Jahn in an interview with II in July, shortly before he left his post as director of the government’s foreign investment promotion agency, CzechInvest. The 34-year-old is now deputy prime minister, advising Gross on economic affairs.

Although SMEs in the private sector stand to benefit the most from a second wave of reforms, the two remaining state-controlled behemoths -- electric power company CEZ and fixed-line telephone monopoly Cesk´y Telecom -- could also use another dose of investor-friendly change. Once a failing state dinosaur, CEZ was revamped in 1993, with the government keeping 67 percent of the shares and selling the rest to the private sector. Relentless cost-cutting and an aggressive sales strategy have made CEZ the tenth-biggest power company in Europe in electricity generation and total customers. It is also the Continent’s second-largest electricity exporter after Electricité de France.

“Given the current market, there really isn’t much pressure to further privatize CEZ,” says David Svojitka, who recently resigned after two years as the company’s chief financial officer. CEZ boasts healthy financials: Revenues rose in 2003 to E2.6 billion ($2.9 billion) from E1.7 billion the year before. Net income fell to E183 million from E260 million, but the decline resulted from the company’s purchase of stakes in eight electricity-distribution companies, which was only partially offset by CEZ’s sale to the government of its 66 percent share in the national electrical grid network. CEZ’s debt is low in comparison with that of other Czech companies. It is the only Czech business that is issuing Eurobonds, and the news just gets better: With virtually all of its power generated by coal and two nuclear plants that started up in the past two years, CEZ has been unaffected by rising oil and gas prices and has no need to make new technology investments before the end of the decade.

“All this means the company will be producing very large piles of cash, which of course should be used for new acquisitions -- as long as they make economic sense,” says former CFO Svojitka. But in a July interview with II at his office, where he was clearing out his desk just hours after submitting his resignation from CEZ, Svojitka said he was quitting because he felt that major acquisitions planned by the company were motivated more by politics than by the bottom line. CEZ management denies any such political considerations. “All our acquisitions are or will be based on financial benefits,” says company spokesman Ladislav Kris.

The most controversial and expensive of the potential purchases is a bid by CEZ for neighboring Slovakia’s state-owned electricity-generating monopoly, Slovenské Elektrárne. Because the sale is a sealed-bid auction with four European participants besides CEZ, no price estimates have been made public. It’s difficult to figure out SE’s true worth, because the company hasn’t made adequate provisions for the eventual decommissioning of its aging nuclear reactors. “So if a contract were signed now, it would send a signal of huge uncertainty to CEZ investors, because the company would be saying it doesn’t know how much it would end up paying for SE,” asserts Svojitka. CEZ management flatly denies there is any uncertainty involved in its bid for the Slovakian company.

Analysts who follow CEZ have raised alerts. “We would view it negatively if CEZ overpaid for SE,” says Pavel Mertlik, a former Finance minister who is chief economist at Raiffeisenbank in Prague. But CEZ, with the blessing of the government, seems intent on becoming a regional power. In July it agreed to pay E280 million for a 67 percent stake in three Bulgarian electricity-distribution firms with nearly 2 million customers. CEZ has also said it plans to bid for distribution companies in Romania. Such acquisitions make business sense, says Jan Slaby, a Prague-based analyst at brokerage Wood & Co., only “if they are aimed at increasing the company’s value for eventual privatization.” But according to former prime minister Spidla, “There is no timetable to privatize CEZ.” The Gross government adds that it plans to keep majority control and sell only an additional 15 percent to the private sector.

CEZ has been dogged by accusations of political interference in its domestic acquisitions, as well. Despite impressive financial results and higher productivity during his time at the helm, CEO Jaroslav Mil was fired by the government last October when he announced plans to participate in a tender for a coal-mining company, Severoceské Doly, that is one of CEZ’s main fuel suppliers. Mil had aroused the ire of Prague, which had designated another preferred investor for the state-owned coal company without seeking other bids. Mil, however, insisted that because CEZ already held a 37 percent stake in the coal producer, he was obliged to take part in the tender just to maintain the value of his company’s investment. “We would have been slaughtered by minority shareholders if we remained silent while the government sold a 63 percent stake in Severoceské Doly below market value,” agrees Svojitka.

Analysts also tended to take Mil’s side in the dispute. Raiffeisenbank’s Mertlik cited Mil’s dismissal as worrisome evidence of “the government’s very high involvement in CEZ’s management.” Mil’s replacement, Martin Roman, who took over as CEO in April, is a lawyer by training, with a solid record of managing manufacturing companies. Increasing private investment in the company would presumably ease the concerns over political interference. But even in the unlikely event that Prague decides within the next few months to sell more of CEZ to the public, it would take another year and a half to select an outside financial adviser and carry out the share sale, according to analysts.

By then the Czech Republic will be facing increased pressure to embark on its third wave of economic reforms. The most urgent involve ballooning pension and health costs in one of Europe’s most rapidly aging countries. “It seems clear that the pay-as-you-go pension system isn’t sustainable,” says central bank governor Tu°ma. Like other market-oriented reformers, he advocates a later retirement age, lower retirement benefits and the partial introduction of a privately funded system.

But Prime Minister Gross is unlikely to push for such radical, potentially unpopular changes any time before the 2006 elections -- assuming his coalition survives until then. “Pension and health reforms need much broader political support, and Gross knows he doesn’t have it now,” says NYU’s Pehe. Avoiding coming to terms with the country’s impending retirement crisis, of course, puts the Czech Republic very much in the company of even the wealthiest European states.

The independent thinker at the Czech central bank

During recent months of ineffective, unstable government in Prague, Czech National Bank Governor Zdenek Tu°ma, 44, has emerged as an economic pillar of the Czech Republic. In neighboring Hungary and Poland, central bankers have a partisan image and publicly battle their governments over monetary and fiscal policy. But since taking over as head of the Czech central bank in 2000, this former stock brokerage economist has kept a low profile and sought smooth relations with a succession of Finance ministers.

His credibility is such that when the central bank raised the prime rate by 0.25 percent, to 2.25 percent, in June -- even before the rate increase by the U.S. Federal Reserve Board -- there wasn’t a peep of dissent from the Czech Republic’s warring politicians. The market seems to appreciate Tu°ma’s steady monetary hand and hasn’t punished Czech financial instruments, despite doubts about the government’s ability to maintain fiscal restraint. In July the usually press-shy central banker agreed to an interview with Institutional Investor Contributing Editor Jonathan Kandell at the fortresslike CNB building on the edge of Prague’s Old Town Square.

Institutional Investor: Central bankers and finance ministers haven’t been getting along very well in this region. How have you managed to be the exception?

Tu°ma: I’m not sure there is a single explanation. Even though the Czech National Bank is independent, it doesn’t exist in a political vacuum. It tries to cooperate with the government. For instance, the Finance minister can participate in central bank board meetings and express his opinions on monetary policy. And I have a right to participate in cabinet meetings and express myself on fiscal policy. This makes for good communications between the bank and the government. It’s certainly preferable to criticizing each other in the media. The bank also tries hard to demonstrate that it is apolitical. No board member has held a political post or been a member of any party. You can find central banks in neighboring countries whose governors are former Finance ministers and continue to be perceived as politically motivated.

With the government likely to remain weak and unstable for the rest of the year, do you expect the central bank to assume a stronger voice in economic policy?

I don’t think so, because we will stick to our specific mandate, which is to maintain price stability. A weaker government doesn’t mean the central bank should expand its role. Obviously, monetary policy may become more important. Nevertheless, I think it’s a hopeful sign that prime minister [Vladimír] Spidla’s resignation [in June] didn’t lead to any serious concerns from the financial markets.

Some analysts suggest that one reason the markets have remained calm despite the political turmoil is the strong hand shown by the central bank.

First of all, I would point out that fiscal policy has not been expansive over the past few years. That’s why we have been able to maintain relatively low interest rates. We raised interest rates, but it was three days before the resignation of the prime minister, and our decision was based purely on economic reasons. The market understands that even if we have a weak government, the fiscal deficit will not explode. Maybe reforms will slow down, but there won’t be economic turmoil. Besides, the market didn’t expect prime minister Spidla to make far-reaching reforms, because elections are approaching in two years or less.

Are you setting inflation targets with an eye to eventually joining the euro zone?

Yes and no. We are still in a period of faster-rising labor productivity and higher economic growth than in the euro-zone countries, and this will result in slightly higher inflation than the European Central Bank’s target.

What will be your monetary strategy leading up to adoption of the euro?

We don’t have any exchange rate targeting. Over the past ten years, we saw an average annual appreciation of 4 or 5 percent. But in the future I would expect our currency to appreciate much less. It will depend on financial flows and perhaps political factors. But these factors won’t be enough to lead to a strong appreciation of the currency.

There is a growing debate between economists who advocate faster economic growth and those who push for an early adoption of the euro. Where do you position yourself?

One can argue that adopting the euro as soon as possible is the best strategy, because the benefits of reducing exchange rate risks are quite significant for a small economy like ours. That’s why we are committed to adopting the euro as soon as the economy is ready for it, hopefully by the end of this decade.

What economic reforms are necessary to bring public finances under control?

In the long run it will be necessary to carry out both health and pension reforms. It seems clear that the pay-as-you-go pension system isn’t sustainable. There must be both a change in the parameters -- a later retirement age and a lower ratio of retirement benefits to paychecks -- and the [partial] introduction of a privately funded system. Regarding health care, the government hasn’t been willing to accept the idea that health benefits should be partly financed by private contributions. But in some EU countries, private payments account for 20 to 25 percent, while in our case the figure is only 7 or 8 percent. And because our population is rapidly aging, the deficits in the health and pension systems will become larger in the coming years.

What are the central bank’s inflation and growth projections for 2004?

We aren’t an Asian tiger. We think economic growth will approach 4 percent, based on expectations that investment is accelerating and exports will perform better. We expect inflation to exceed 4 percent this year and moderate to 3 percent to 3.5 percent afterwards.

Hollywood (way, way) East

“If only life were like the movies,” sighs Milan Ekert, a Social Democratic parliamentarian, as he prepares to travel on a hot day from Prague to the International Film Festival in Karlovy Vary, the Czech spa town known abroad as Carlsbad. Ekert isn’t talking about escapist fantasies but rather the down-to-earth pragmatism of the Czech Republic’s film business. The industry has emerged as a model for politicians concerned that the economy is losing markets to lower-cost producers in Eastern Europe and elsewhere.

Prague began to draw foreign film producers as soon as the 1989 Velvet Revolution ended the Communist era. “They realized we had some nice locations, good infrastructure, world-class professionals -- and low costs, of course,” says Pavel Strnad, chairman of lobby group Czech Association of Audiovisual Producers and president of Negativ Film Productions. Filming in the Czech Republic is still at least 30 percent less expensive than in Western Europe. But when Hollywood studio Miramax Film Corp. chose Romania as the location for its Civil War epic, Cold Mountain, pessimists predicted that film producers would stampede to countries with cheaper labor.

Thus far the pessimists have been wrong. By pursuing a higher-value-added strategy, the film business has fared better than have traditional Czech industries. Last year foreign film crews spent $280 million and domestic moviemakers and advertising agencies $40 million to shoot in the Czech Republic -- a combined 15 percent increase over 2002.

Romanians and Bulgarians don’t have a cinematic tradition; Czechs built their first studios in the 1920s. A Czech, Milos Forman, won the Best Director Academy Award, and his film, Amadeus, Best Picture, in 1984; the movie was made almost entirely in Czechoslovakia. The Czechs surpass their eastern neighbors in the quality of crews, studios, film equipment and labs as well as communications and hotels. “At the end of the day, it can be more expensive to shoot in cheaper countries that don’t have the necessary infrastructure,” says Matthew Stillman, who in 1993 founded Stillking Films, now Prague’s biggest production services company.

Prague became etched in the minds of contemporary audiences when its medieval streets, majestic palaces and sculptured bridges starred alongside Tom Cruise in Mission Impossible. Undamaged by modern wars, it is lately a favorite backdrop for movies with historical themes. “If you are shooting a film set in a 19th-century European city, you can probably find more and better locations here,” says Stillman.

More recently, foreign producers have also been filming interiors in the Czech Republic. Running Scared, a U.S. film scheduled for release next year, is using Prague Studios, the largest such complex in the country, to evoke gritty urban America. “We are re-creating a real New Jersey environment,” says Tomás Krejcí, founder and partner of Prague Studios, without a hint of irony. His studios are in hangars where MiG jet fighters were once built.

Czech producers believe the lion’s share of their future revenues will come not from Hollywood but from the European Union. France, Germany and the U.K. are simply closer than the U.S. And now that Czechs have joined the EU, they can send film technicians to work on projects in Western Europe.

The Czech film industry has thrived without government assistance. But industry officials say tax breaks will be needed to grow. Such incentives have aided producers in Canada, New Zealand and, more recently, Hungary. But with the Social Democrats struggling to maintain their coalition and the prospect of weak government, there isn’t much hope of tax subsidies for filmmakers. “It’s pretty difficult to even get the government’s attention,” concedes producer Strnad. -- J.K.

Classic Prague

To visit Prague without savoring its classical music scene would be like skipping gourmet food in Paris or Broadway hits in New York. Street vendors hawk tickets for recitals and chamber orchestras as if they were rock concerts. This city of only 1.2 million inhabitants boasts three opera houses, two concert halls and a score of smaller performance venues.

About $40 will buy you a center orchestra seat at the Prague State Opera (Legerova 75; [420] 296-117-111; www., with its gorgeous, neorococo interior of red velvet and creamy plaster swirls. For $25, expect similar seating at the premier concert hall, the Rudolfinum (Alsovo nábrezí 12; [420] 227-059-111;, built in neo-Renaissance style.

For more intimate surroundings, spend about $10 at the Klementinum (Karlova 1; [420] 312-660-092), a small chapel with mirrored walls and superb acoustics for voice recitals and string quartets; or try the National Museum (Václavské námestì 68; [420] 224-497-111), where aficionados pay $10 to $15 to sit on a lushly carpeted staircase and enjoy chamber music performances on the mezzanine landing below.

Though great music can be had cheaply, fine food is no bargain in Prague. Overcooked Central European fare remains all too common. Among the haute cuisine exceptions is Kampa Park (Na Kampé 8b; [420] 257-532-685; all major credit cards accepted), located at the foot of the famed Charles Bridge and offering spectacular views of the Old Town across the Vltava River. An appetizer of grilled veal sweetbreads with braised porcini mushrooms, a main course of baked guinea fowl with asparagus and morel sauce, a dessert of forest berries with fig sorbet and a couple of glasses of good Czech wine come to about $80, including the usual 10 percent gratuity.

For comparable quality, though at higher prices, there is Restaurant Flambée (Husova 5; [420] 224-248-512; all major credit cards accepted), located in an 11th-century cellar in the labyrinthine Old Town quarter famously evoked by Franz Kafka. Flambée (not to be confused with the adjoining café of the same name) offers some extravagant tasting menus. `A la carte, an appetizer of prawns marinated in lime and carrot juice, a main course of roasted duck breast and confit leg, a dessert of strawberries with marzipan dumplings and two glasses of Czech wine come to about $120, including a 10 percent tip.

Arguably, the most luxurious and business-friendly hotel is the Four Seasons Hotel Prague (Veleslavínova 2a/1098; [420] 221-427-000), located on a bank of the Vltava River, with stunning views of Prague Castle. Its 161 rooms start at $400, including tax and service charge. -- J.K.