Czech central bank offers pros and cons of adopting euro currency

Euro and Czech crown money - exchange rate - economy and finance in international business - import and export
By Lucie Ctverakova
3 Min Read

The potential adoption of the euro would further increase the benefits resulting from Czechia’s trade links with the euro area countries, according to an analysis conducted by the Czech National Bank. On the other hand, Czechia’s adoption of the euro currency would bring risks arising from the loss of the Czech National Bank’s independent monetary policy and the stabilizing role of the koruna’s exchange rate.

Czechia’s central bank divided its assessment into three groups: low-risk, neutral and high-risk indicators for adopting the euro.

The document points out that the economic level of the Czech Republic measured as GDP per capita in purchasing power parity approached the euro area average in 2020. However, the convergence of price and wage levels did not progress significantly. That is a factor against the early adoption of the euro.

The Czech National Bank also pointed out to the role of the euro in Czech companies, which use the common currency more and more. Other low-risk indicators include the high level of economic activity of the Czech population and the low unemployment rate.

The analysis considers, for example, the extent of financial intermediation, private sector indebtedness, and the structure of financial assets and liabilities of non-financial corporations and households to be neutral indicators.

In addition to incomplete convergence, especially in terms of prices and wages, the analysis identified a different structure of the Czech economy and euro area countries among the risk factors associated with the adoption of the euro.

“Due to the above-average share of industry on the Czech GDP, differences persist between the structure of the Czech economy and the euro area economy,” notes the document.

Another risk factor, according to the bank, is the sustainability of public finances in the future, stemming from, among other things, the aging of the population and the lack of reforms of the pension and health care systems.

According to the Czech National Bank, when assessing the effects of adopting the euro, it is also necessary to consider the situation in the euro area itself.

“At present, not all potential liabilities that will arise for the Czech Republic in connection with the adoption of the euro are known. Any decision on the timing of joining the monetary union is thus still accompanied by significant uncertainties,” the material states.

The analysis serves as a basis for the joint material of the government and the Czech National Bank on the fulfillment of the Maastricht convergence criteria. Last December, the government again agreed with the recommendation of the Bank and the Ministry of Finance not to set a target date for joining the euro area.

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