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 2013. This joint recommendation, based on the “Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area”, was adopted by the government at its meeting on 20 December 2012.
The convergence criteria on long-term interest rates and on the ratio of general government debt to gross domestic product are currently being fulfilled, and the same can also realistically be expected in the future. Following non-fulfilment in 2012 the Czech Republic can probably be expected to fulfil the criterion on price stability in subsequent years. The Czech Republic does not currently fulfil the exchange rate criterion because it does not participate in ERM II. The Czech Republic is not currently compliant with the general government deficit criterion, but should fulfil it from 2013 onwards if the planned fiscal consolidation strategy is maintained.
The situation in recent years has been strongly affected by the impacts of the global financial, economic and subsequently European debt crisis. At the same time, the Czech economy has stopped catching up with the euro area economic level. On the other hand, though, it is now showing increased business cycle alignment with the euro area. As a consequence of the global crisis, the economies of the euro area and other EU countries, including the Czech Republic, have gone into recession and recorded a considerable deterioration in the government financial position followed by a phase of consolidation of public budgets. The main obstacles to the Czech Republic’s readiness to adopt the euro are the unfinished process of real economic convergence; the limited scope for the stabilising role of public budgets and the need to complete structural reforms leading to sustainability of public budgets; and shortcomings in the flexibility of the Czech labour market, including persisting large regional differences in the unemployment rate and high overall labour taxation. In addition, the still uncertain financial market situation does not seem conducive to future euro adoption in the Czech Republic and the taking of steps towards it.
The debt crisis in some euro area countries has led to the establishment of new European institutions and mechanisms which increase the costs of euro adoption. Sustainable fulfilment of the Maastricht criteria and sufficient alignment of the Czech economy with the euro area economy will probably no longer be sufficient conditions for adopting the single currency. Euro area entry will probably also be conditional on participation in the new institutions and mechanisms. Based on the current information, the costs relating to joining the European Stability Mechanism (ESM) would be particularly substantial upon the Czech Republic’s entry into the euro area. In addition, other initiatives are currently under discussion (e.g. the fiscal and banking union) which are significantly adding to the uncertainty regarding the future conditions for euro area entry.
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 Marek Petruš
MoF spokesman CNB spokesman
- Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area - 2012
- A joint document of the Ministry of Finance of the Czech Republic and the Czech National Bank.
- Approved by the Government of the Czech Republic on 20 December 2012.