By Jan Lopatka and Robert Muller
PRAGUE (Reuters) - Czech President Milos Zeman appointed center-left leader Bohuslav Sobotka prime minister on Friday, opening the way for the former finance minister to pursue looser fiscal policies and closer links with the core of Europe.
The 42-year-old trained lawyer was named nearly three months after his Social Democrat party narrowly won an early election, and two weeks after forming a coalition with two centrist parties.
The former finance minister now needs to convince long-time rival Zeman to approve his list of ministers before he can take over governance of the central European country from a caretaker cabinet that has ruled since July.
Zeman has criticized some of the candidates but told Reuters in an interview last week he expected the cabinet to be appointed by the end of January.
Sobotka aims to boost the economy by rolling back what he has called the "deadly spiral" of austerity measures - including cuts in spending and welfare - of the former center-right cabinet, which collapsed under allegations of bribery and illegal surveillance last June.
He wants to raise pensions and the minimum wage and keep the budget deficit below 3 percent of gross domestic product as economic recovery takes hold after a recession in 2012-2013. The previous center-right cabinet had planned to eliminate the deficit.
The recovery will be aided by the central bank's pledge to keep the crown currency weak, a measure to avoid deflation that also makes Czech exports more competitive abroad.
Sobotka favors joining the EU's "fiscal compact" treaty on budget policy, accepted by all EU national governments except the last Czech cabinet and the United Kingdom.
He has also spoken in favor of joining the euro zone around 2020, although the coalition is not planning to set a binding date for the time being.
Any spending plans will be limited by Sobotka's coalition partners, especially the centrist ANO movement led by billionaire businessman and future finance minister Andrej Babis.
ANO rejects corporate tax hikes advocated by Sobotka, and political analysts say the party may become an unstable element in the coalition.
Babis is fighting in court to clear himself of allegations he was an informer for the communist secret police in the 1980s. As the owner of hundreds of firms in the farming, media and chemicals sectors, Babis will also be under close watch for possible conflicts of interest.
Sobotka may be also hampered by poor relations with President Zeman, a former Social Democrat prime minister estranged from the party after a rift in 2003.
The country is used to political instability, having had 10
prime ministers in the past 20 years. Markets have largely ignored politics thanks to a low - albeit rising - debt, which is less than half of the EU average, at around 44 percent of gross domestic product.
Sobotka entered parliament at the age of 25. The balding, bespectacled father of two sons served as finance minister in 2002 to 2006, and oversaw a decline in budget deficits with the major help of strong economic growth in that period.
Sobotka has been criticized by rivals for his handling of a bank and privatizations of a coal mine and an engineering firm during his term at the finance ministry, which have been subject of police investigations because of suspicions they were sold too cheaply. He has not been accused of any illegal activity.
Sobotka has been accused of weak leadership of his party, culminating in an attempt to overthrow him after the October election. He has however since consolidated his grip over the party.
(Editing by Andrew Roche)