FACTBOX-Key political risks to watch in the Czech Republic

PRAGUE, Sept 1 (Reuters) - Czech Prime Minister Petr Necas's three-party, centre-right coalition has unveiled details of its budget deficit reduction plans, prompting cheers from investors but also rare labour strife.

Necas, who won an election in May on a platform of austerity and fears of a Greek-style meltdown, aims to cut the public sector deficit to 3 percent of gross domestic product in three years, without raising direct taxes.

Ministers in his cabinet, consisting of the right-of-centre Civic Democrats, the conservative TOP09 and centrist Public Affairs are facing the first protests against the planned cuts.

Tensions have been growing between the Civic Democrats and TOP09, as the parties wrestle for the dominant position on the political right ahead of municipal elections in October.

UNHAPPY WORKERS

The government is facing the first big labour protest against the planned cuts on Sept. 21. Public sector workers will stage a rare demonstration against pay cuts, and have threatened further action.

The government plans a 10 percent across-the-board cut in most operating spending, including the public sector wage bill.

Czech unions are much weaker than their colleagues in some other central and eastern European countries such as Romania, and the government has faced very few labour protests in the past years.

But allied with the opposition Social Democrats, they could show more muscle in the face of the planned cuts.

This year, transport workers forced caretaker PM Jan Fischer to back down from a minor tax hike on railway workers' benefits.

What to watch:

-- The outcome of the Sept. 21 protest. The government has built up political capital after the election victory based on austerity pledges, but the reform zeal may start wearing out in the face of decisive labour action.

COALITION TIES BEFORE AUTUMN POLLS

The harmony of the coalition is being tested in the run-up to October municipal and upper house elections. Municipalities provide thousands of jobs to members of the national parties.

The new conservative TOP09 party won a surprisingly strong 16.7 percent of the vote in the May national election, mostly at the expense of the Civic Democrats.

The Civic Democrats fear that TOP09 could take the lead on the political right. These worries have grown since the respected former central bank Governor Zdenek Tuma joined the party to run for the Prague mayor.

The junior coalition partner, the centrist Public Affairs, in parliament for the first time, is seen as a wild card. Chairman Radek John once said the party was neither left- nor right-leaning, but whatever best suits the country.

What to watch:

-- The 2011 budget must be submitted to parliament by the end of September, and preparations could be hurt or delayed by pre-election posturing by parties over who bears most savings.

FISCAL POLICIES/OUTLOOK

The cabinet aims for a fiscal gap around 4.6 percent of GDP, down from 5.3 percent planned for 2010, mostly through spending cuts.

Czech public debt is half the European Union average at 35.4 percent of GDP. But it has grown from 29 percent in 2007 and is rising fast, due largely to structural problems exposed by the economy's 4 percent contraction in 2009. The finance ministry expects the export-reliant economy to rebound by around 1.6 percent in 2010 and 2.3 percent in 2011.

A faster-than-expected recovery in Germany, the Czech Republic's biggest single export market, brightens the outlook for the small and open economy in the centre of Europe, whose growth is propelled by exporting cars, car parts, steel, and electronics.

What to watch:

-- Rating agency Standard & Poor's said it might upgrade the Czech Republic's A foreign currency rating if the government delivers on its austerity promises. It raised the Czech rating to positive from stable [ID:nN10148072].

-- The 2011 budget will set the pace of fiscal consolidation and show how quickly the country will move back below the EU's deficit limit of 3 percent of GDP.

-- The right-leaning parties will resist tax hikes but may have to give up ground to avoid drastic spending cuts.

-- The parties have varying views on pension reform. Any agreement could be watered down.

ENERGY POLICY

The government will see through the country's largest-ever tender, and will also set policy on the future energy mix to meet climate goals and ensure security of supply.

A generous renewable energy subsidy introduced by the previous political administration led to a boom in solar power generation and is likely to cause a steep rise in power prices, for both companies and households.

An expected rise of 22 percent for households and 34 percent for companies next year could hurt the flagging economic recovery and the government's popularity.

The government has pledged to slow the rise in the electricity rates by making the solar business less attractive, possibly through a new tax.

Power firm CEZ (CEZPsp.PR) has opened a tender to build two units at its Temelin nuclear power plant near the Austrian border, and possibly three more at another domestic site and in Slovakia.

CEZ, central Europe's biggest firm with a market capitalisation of $23 billion, is 69.8 percent state-owned and a significant source of government revenue.

Areva SA CEPFi.PA, Toshiba's (6502.T) Westinghouse and Russia's Atomstroyexport are competing for the deal that could be worth some $24 billion if all five units are built.

The outgoing cabinet has appointed Vaclav Bartuska as its envoy for the tender. Bartuska has spoken out against furthering the country's energy dependency on Russia.

What to watch:

-- Government involvement in the tender, energy security debate, political pressure to include Czech suppliers.

-- The government may sell some of the CEZ stake. The Civic Democrats have not ruled this out, but have no concrete plan.

For political risks to watch in other countries, please double click on [ID:nEMEARISK] (Additional reporting by Jason Hovet, Editing by Sonya Hepinstall)