Czech premier calls for target euro adoption date

By bne IntelliNews April 9, 2015

bne IntelliNews -

 

The Czech Republic should set a definite target date for adopting the euro, Prime Minister Bohuslav Sobotka said on April 8, suggesting that the country could enter the Eurozone in 2020.

The PM spoke following a meeting with President Milos Zeman. Both agreed that the debate over euro adoption in the country should be revived, daily Hospodarske Noviny reported. 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 that a lack of support from Finance Minister Andrej Babis’s ANO party - which leads opinion 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, which is required to join the Eurozone,  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 debate on the issue has also intensified there recently during the ongoing presidential election campaign. 

While major Czech companies believe Eurozone membership would be beneficial for  business, opposition among ordinary 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 eurosceptic Civic Democrats for a referendum on euro adoption.

The IMF said in a recent study that while countries joining the euro area in the noughties 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 said.

It also noted that 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 stabilising demand and, more recently, prevented external deflationary pressure from spilling into domestic core inflation.”

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

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