Czech PM calls for target date for euro adoption

By bne IntelliNews April 9, 2015

The Czech Republic should set a definite target date for adopting the euro, the prime minister said on April 8. Bohuslav Sobotka suggested the country can enter the Eurozone in 2020.

The PM spoke following a meeting with President Milos Zeman. Both officials agreed that the euro adoption debate in the country should be revived, Hospodarske Noviny reports. The head of state has led recent calls to return to the issue.

While echoing the president - usually a sworn enemy - Sobotka admitted that the ruling coalition still hasn’t reached consensus on the currency switch. The premier has said recently a lack of support from Finance Minister Andrej Babis’s ANO party - which leads the polls - is preventing the coalition government from setting a target date.

Zeman put the euro adoption debate back in the spotlight earlier this year when he insisted that future board members at the Czech National Bank should support adoption. The president claims that the ongoing policy of the central bank to keep the koruna weak is an intentional move to delay the process.

The bulk of the CNB board was appointed by Zeman's predecessor, Vaclav Klaus, who liked to compare the EU to the Soviet Union. The president - who has exclusive power to appoint the CNB board - will have the chance to change five of the seven members by the end of his first term in 2018.

The Czech Republic is required to join the Eurozone upon meeting Maastricht convergence criteria. The country meets all the Maastricht criteria for joining except for the requirement to be in the ERMII exchange rate mechanism for two years. Poland, which also committed to join the European currency in 2004 as it entered the EU, is in a similar position, and has also seen the debate rise back to the surface amidst rising geo-political tension.

While major Czech companies believe Eurozone membership would be beneficial for the business, opposition among regular Czechs is high. Three-quarters are opposed to the euro, according to recent opinion polls. They fear that they will have to pay for Eurozone casualties such as Greece, or that prices will rise, or they desire a stronger exchange rate for the koruna before they agree to give it up.

In a regular report published in December, both the CNB and the finance ministry advised the government not to set a target date. The Czech upper house of parliament rejected on February 25 a proposal by the opposition, euro-skeptic Civic Democrats (ODS) for a referendum on the euro adoption.

The IMF said in a recent study that while countries joining the euro area in the 2000s could expect to benefit from a significant country risk premium, this has mostly vanished with the euro crisis. “When or whether it will return is uncertain and will depend in part on the success of ongoing reforms of the euro area’s institutional framework,” the report reads.

It also noted that the new EU member states that have maintained exchange rate flexibility and monetary policy autonomy have, in general, made good use of it. “During convergence, nominal currency appreciation supported more balanced growth and restrained credit and asset price booms. In the crisis-induced downturn of 2008–09, depreciation and monetary loosening helped stabilizing demand and, more recently, prevented external deflationary pressure from spilling into domestic core inflation.”

In case the macroeconomic volatility of the past decade recurs, euro adoption would constrain macro-policy options, the analysts warn.

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