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 2016. 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 21 December 2015.
The situation in recent years has been strongly affected by the impacts of the global financial, economic and subsequently European debt crisis. In response to the related problems, the governments of EU countries have continued to tighten macroeconomic and budgetary surveillance. Resolution and supervisory mechanisms have been introduced or bolstered and new European institutions have come into existence.
These changes are fundamentally changing the conditions and obligations arising from the Czech Republic’s potential membership of the euro area. 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 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 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. All the Maastricht criteria except for ERM II participation are likely to be fulfilled in the medium term.
As regards the real economy, the alignment of the Czech economy with the euro area over the business cycle has increased, as have some parameters of labour market flexibility.
The main barriers to euro adoption include the unfinished process of real economic convergence of the Czech Republic, including convergence of the price level towards the euro area average. The scope for the stabilising function of public budgets remains limited and the issue of their long-term sustainability given population ageing is still unresolved. In some respects, labour market flexibility remains insufficient, and differences persist in the structure of the Czech economy compared to the euro area. Similarly, the situation in the euro area cannot be assessed as sufficiently stabilised.
Given the aforementioned facts, the Ministry of Finance and the Czech National Bank conclude that sufficient progress has not yet been made in laying the groundwork for euro adoption to allow the Czech Republic to set a target date for entry into the euro area.