CNB and MF recommend not to set euro adoption date yet

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The Czech National Bank and the Ministry of Finance have recommended not to set a target date for adopting the euro yet and thus not to attempt to enter ERM II in 2011. This joint recommendation, based on an analysis entitled “Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area” (Assessment_Maastricht_Criteria_2010_EN (.PDF, 193 kB)), was adopted by the government at its meeting on 22 December 2010.

The Maastricht criteria on price stability, long-term interest rates and the government debt-to-GDP ratio are currently being fulfilled, and future fulfilment of those criteria is also realistic. The Czech Republic does not currently fulfil the exchange rate criterion because it does not participate in ERM II. Fulfilment of this criterion in the future will be heavily dependent on the timing of ERM II entry and on the volatility of the Czech koruna. On the basis of the convergence scenario, moreover, the koruna is expected to appreciate against the euro in nominal and real terms in the long run. The Czech Republic is not compliant with the government deficit criterion. This situation is likely to persist until 2013 given the approved outlook for bringing the government deficit below 3% of GDP by the end of 2013.

Since adopting “The Czech Republic’s Euro-area Accession Strategy”, the Czech Republic had gradually been catching up with the average euro area economic level and had also been showing some signs of alignment with the euro area over the business cycle. In the last two years, however, this trend has been strongly affected by the global financial and economic crisis. The Czech and euro area economies have gone into recession and recorded a considerable deterioration in public finance. Interest rate differentials and exchange rate volatility have increased and financial market integration has loosened. The convergence trend of the domestic price level towards the euro area has been interrupted and cyclical and structural unemployment has risen.

In the light of domestic developments, and taking into account the fiscal problems in the euro area over the last year and the persisting elevated financial market volatility, the current situation does not seem conducive to future euro adoption in the Czech Republic or to taking steps towards it. The Czech economy will benefit from consolidation of public finances and from ensuring their sustainability regardless of adoption of the single currency. Such measures, however, are a necessary condition for euro adoption. In this respect, increasing labour market flexibility will also be of key importance.

In this situation, therefore, it is impossible to conclude that the Czech Republic has made sufficient progress in laying the groundwork for euro adoption to allow it to set a target date for entry into the euro area.

Ondřej Jakob     
MF spokesman      

Marek Petruš
CNB spokesman