Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area - 2025
The Czech Republic undertook to adopt the euro by signing the Act concerning the conditions of accession of the Czech Republic to the European Union. One of the conditions that must be fulfilled by each Member State in the process of joining the euro area is the achievement of a high degree of sustainable convergence, which is assessed according to compliance with the Maastricht convergence criteria.
Adopting the euro could have a whole range of benefits for the Czech economy. According to a report by the The government's National Economic Council (2024), the most frequently mentioned benefits are the elimination of exchange rate risk and lower transaction costs, which could give a stimulus to foreign trade, and hence closer integration into the EU’s internal market, easier business planning for firms, more affordable and accessible investment financing and simpler management of EU funds for the public sector. On the other hand, there are also economic costs and risks associated with adopting the euro. These stem mainly from the loss of independent monetary policy and the nominal exchange rate channel in an environment where the Czech economy has a different structure to the euro area (asymmetric shocks) and from the loss of autonomous banking supervision and the risk of moral hazard in public finances and financial commitments to the euro area. The individual benefits and risks are very hard to quantify and will differ in size depending on the characteristics of each economy (for example, the elimination of exchange rate risk is of greater benefit to an open economy, whereas the loss of independent monetary policy may pose a greater risk to countries that have little room for countercyclical fiscal policy).
Setting a specific date for joining the euro area is fully within the competence of each Member State, but it should ideally depend on its degree of preparedness. The preparedness of the economy to join the euro area must be assessed mainly from the perspective of its economic alignment and structural similarity with the monetary union, and also from the point of view of its ability to absorb asymmetric shocks using other mechanisms, in particular via fiscal policy, the labour market and the banking sector, after the loss of independent monetary policy.
More than 20 years have passed since the Czech Republic signed the Treaty of Accession to the EU in 2003. During this period, the euro area and the European Union as a whole experienced the global financial crisis and subsequent economic recession in 2008 and 2009. Some euro area countries went through a debt crisis. In 2020 and 2021, the world was paralysed by the Covid-19 pandemic, and in 2022, the energy crisis and Russia’s aggression against Ukraine accelerated growth in the price level. These and other events are affecting other processes of European integration aimed at strengthening economic and fiscal coordination and completing the banking union and the capital markets union. New institutions and rules are thus changing the shape of the euro area and the content of the obligation to adopt the euro. These facts also need to be properly assessed and considered in decisions about the timing of monetary union entry.
In addition to assessing legal compatibility, the assessment of a country’s preparedness for euro adoption and the related rights, obligations, privileges and commitments includes an assessment of compliance with the convergence criteria: the achievement of a high degree of price stability, the sustainability of the government financial position, the observance of the normal fluctuation margins of the exchange rate, and the durability of convergence being reflected in the long-term interest-rate levels.
The Czech Republic did not meet the criterion on price stability in 2024. Inflation fluctuated within the tolerance band around the Czech National Bank’s inflation target in 2024, due to the fading of adverse supply-side factors and the effects of previous monetary and fiscal tightening. However, uneven price growth across EU countries resulted in a low reference value of the inflation criterion.
The Czech Republic met the interest rate convergence criterion in 2024, aided by renewed convergence between the monetary policy settings of the CNB and the European Central Bank.
After the one-off, deficit-widening measures introduced in 2023 to mitigate the impact of the energy crisis on households and businesses faded out, the government continued on a path of reducing the high deficits accumulated during the pandemic. The consolidation package and a gradual recovery in domestic economic activity fostered a drop in the general government deficit. The Czech Republic thus probably met the criterion on the government financial position for 2024 in both the deficit and debt components.
In 2025, the Czech Republic will probably fulfil the reference values for the criteria on the government financial position, the convergence of interest rates and price stability.
The Czech Republic is formally non-compliant with the exchange rate stability criterion, as it does not participate in the relevant exchange rate mechanism.
As regards the Czech economy’s alignment with the euro area and its ability to adjust to possible asymmetric shocks without its own monetary and exchange rate policy, the characteristics of the Czech economy can be divided into three groups.
The first group consists of economic indicators suggesting a relatively low level of risk associated with potential euro adoption in the area analysed. This group has long included the Czech economy’s close trade and ownership links with the euro area, which increase the benefits of euro adoption and foster alignment between the Czech and euro area business cycles. The latter is currently at very high levels. The close trade links are also contributing to a high share of euro financing of Czech corporations. The substantial growth in this financing seen in previous years halted in 2024 amid a falling interest rate differential between koruna and euro rates. Interest rate spreads between Czech and euro area market rates have returned to near pre-pandemic levels, their decline reflecting the convergence of the monetary policy rates of the Czech National Bank and the European Central Bank. The koruna and the euro remain aligned against the dollar. Inflation persistence in the Czech Republic, which remains broadly in line with levels in the euro area, does not pose an obstacle to euro area entry either. As regards the adjustment mechanisms of the Czech economy, the low long-term unemployment rate, which is still among the lowest in Europe, and the high level of economic activity (which does not apply to all groups of the population, however) are positive factors. The situation in the domestic banking sector also remains favourable. It has seen an improvement in its already solid liquidity position and continues to be characterised by a robust capital position, high profitability and a low ratio of non-performing loans. Its resilience to potential negative shocks thus remains high.
The category of indicators with a neutral message includes an assessment of the alignment of the Czech and euro area financial cycles, which increased slightly in 2023, and the alignment of the Czech and euro area financial markets, which returned to pre-pandemic levels. Most indicators of monetary policy transmission similarity between the Czech Republic and the euro area are also neutral. Although the Czech Republic differs from the euro area average in some of them – such as the structure of households’ financial assets and the structure of housing loans by fixed-rate period – this cannot be considered a fundamental barrier to euro adoption. Neither can the condition of the Czech financial system: the depth of financial intermediation and the level of private sector debt in the Czech Republic are relatively low, which means that the economy is less sensitive to potential shocks from the financial system. As regards the risks associated with potential euro adoption, the assessment of general government debt is also neutral. In 2023, despite continuing public finance deficits, it did not increase, remaining well below the 60% threshold of the Maastricht convergence criterion. Some labour market indicators can also be considered neutral. These include the share of part-time employment, which remains relatively low despite a slight increase, the geographical mobility of the labour force, and the labour taxation system. According to an indicator published by the International Institute for Management Development, the competitiveness of the Czech economy has declined slightly but remains solid.
The third group consists of indicators suggesting economic risks associated with euro adoption in the area analysed. These indicators include the unfinished process of economic convergence of the Czech Republic towards the euro area, especially as regards the price and wage levels, which remain well below the euro area average despite faster convergence of the relative level of Czech prices and wages observed over the last two years. The relatively low structural similarity between the Czech economy and the euro area, consisting mainly in an above-average share of industry in domestic GDP, could also be a risk in the event of euro adoption. As regards adjustment mechanisms, the structural imbalance in Czech public finances is a persisting issue. The general government deficit is expected to fall below the 3% Maastricht criterion in 2024 due to the consolidation package, but it will be desirable to continue reducing the deficit in the years ahead for the Czech Republic to function smoothly in the euro area in the future (according to the Act on Budget Responsibility, the structural deficit should be no more than 1% of GDP in 2028). The room for fiscal policy to have a countercyclical effect is limited by a high ratio of mandatory expenditures to state budget revenue and by the persistent structural government deficits mentioned above. Moreover, long-term public finance sustainability remains unresolved, especially in the context of the fiscal implications of population ageing. As regards labour market flexibility, the relatively low participation of women in some age groups in the labour market has long been a problem.
The risk associated with long-term public finance sustainability has a crucial weight in the considerations of the Ministry of Finance and the Czech National Bank regarding the risks of euro area membership. Moreover, there are still large differences in the structure of economies, which could present challenges under a single monetary policy. Unresolved domestic structural issues related to the current economic model and future challenges (population ageing, infrastructure investment, etc.) pose a significant risk. In the light of EU economic policy and the Government Economic Strategy (2024), it will also be necessary to change the economic model of the Czech economy in order to achieve the objective of higher long-term sustainable growth based on competitiveness and high value added.
Besides the need to address the long-term fiscal impacts of population ageing, further discretionary measures will have to be adopted in the years ahead to eliminate the still high structural deficits, which will additionally be burdened in the coming years by large-scale projects (construction of high-speed railways and new nuclear units). Addressing these long-term challenges which jeopardise the soundness of public finances is crucial, especially given the future strengthening of the role of fiscal policy as a stabilisation mechanism in the monetary union. While potential entry into the monetary union is not expected to have a significant impact on achieving the above objectives, these factors will affect long-term public finance sustainability. Given their urgency and significance, ensuring adequate financing should therefore take precedence over discussions on monetary union membership.
In view of the above, it would thus be desirable to carefully address changes in the structure of the economy and the ways of financing these changes before joining the monetary union, while limiting the risks associated with economic transformation. This would support the smoother adoption of the single currency without any major macroeconomic shocks. Membership in the euro area alone would not eliminate these risks, as the single currency does not have a significant impact on economic growth, as evidenced by the analysis in NERV (2024).
Addressing the current challenges of economic transition and long-term public finance sustainability should therefore be prioritised before making a decision on joining the monetary union.
In view of all the above facts, the Ministry of Finance and the Czech National Bank recommend that the Czech government not set a target date for euro area entry for the time being. Given the complexity of the process of joining the euro area, it is advisable that any decision be made and any target date be set at the beginning of the electoral cycle and the government’s mandate (as recommended by NERV). This will give enough time to implement the necessary economic and legislative measures, allow for stable communication with the public and the business sector, and provide for effective coordination with European institutions. It will also minimise the political risks and ensure the continuity of the key reforms needed for a smooth transition to the euro.
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 9 April 2025.