MoF and CNB recommend not to set euro adoption date yet
Ministry of Finance and the Czech National Bank have recommended not to set a target date for adopting the euro yet and thus not to attempt to enter ERM II in 2015. 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 15 December 2014.
The situation in recent years has been strongly affected by the impacts of the global financial, economic and subsequently European debt crisis. The Czech economy has stopped catching up with the euro area economic level. On the other hand, it is now showing increased business cycle alignment with the euro area.
Significant institutional changes have gradually been implemented in the functioning of the monetary union. These changes are fundamentally changing the conditions and obligations arising from the Czech Republic’s potential membership of the euro area. Owing to the ongoing changes, the shape of the framework for the functioning of the euro area has moved away from the situation that existed when the Czech Republic entered the EU. The main features of the new architecture in the euro area are now defined more clearly. The uncertainty surrounding the future form of the basic economic, political and institutional architecture of the euro area, which in past years has been a major obstacle to reliably assessing the costs and benefits to the Czech Republic of joining the euro area, has decreased compared to previous years.
Sustainable fulfilment of the Maastricht convergence criteria and sufficient alignment of the Czech economy with the euro area economy will not be sufficient conditions for adopting the single currency. Euro area entry will 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 would be particularly substantial upon the Czech Republic’s entry into the euro area.
The preparedness of the Czech Republic to adopt the euro has improved compared to previous years. The Czech Republic is currently compliant with the criterion on price stability, the criterion on the government financial position, and the criterion on the convergence of interest rates. The Czech Republic does not formally fulfil the criterion on participation in the exchange rate mechanism because it has not yet joined this mechanism. This criterion thus cannot be assessed. All the Maastricht criteria except for ERM II participation are likely to be fulfilled in the medium term.
However, in order to make fulfilment of the criteria sustainable and to further increase the overall economic preparedness for euro adoption, it is necessary to strengthen the fiscal framework and concentrate on compliance with the medium-term budgetary objective beyond 2015. At the same time, it is appropriate to strengthen public finance sustainability in connection with population ageing. Last but not least, it is also desirable to take measures to increase the flexibility of the labour market and reduce administrative barriers to entrepreneurship.
As regards economic developments in the euro area, the economic recovery is still fragile and the risk of the economy falling into deflation and slipping back into recession persists.
Given the aforementioned facts, the Ministry of Finance and the Czech National Bank conclude that the Czech Republic has not yet made sufficient progress in laying the groundwork for euro adoption to allow it to set a target date for entry into the euro area.
Radek Ležatka
Head of MoF Press Department
Tomáš Zimmermann
CNB spokesman
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