Czech bank governor could have last laugh over euro opposition

Miroslav Singer, foto: Filip Jandourek

Governor of the Czech National Bank Miroslav Singer has signalled he will not give up his opposition to the European single currency in spite of the positive adoption signals being made by members of the incoming government.

Miroslav Singer, photo: Filip Jandourek
In a blog published Wednesday, Singer set his sights on dismantling what he regards as the myth that Slovakia has performed better than the Czech Republic thanks to the euro. Slovakia joined the club of mostly much richer countries in 2009.

Since then, Slovaks wealth, in terms of comparative purchasing power, has risen slightly to 75% of the EU average in 2012 while Czechs’ performance has slumped over the period from 83% to 79%. It’s still a bit better than the neighbours, but not much.

Singer says, accurately, that the Slovaks were catching up from a much lower economic base and took more courageous steps to cut the tax burden which boosted economic growth.

One of the main arguments in Slovakia for beating its big brother, the Czech Republic, as well as Poland and Hungary, to the euro was that it would make the country more attractive for foreign investments.

The results, according to Singer’s figures, are far from being in favour of the euro. After a surge of investment ahead of the event, incoming foreign investment slumped in Slovakia in 2009. In only one of the following four years did foreign direct investment per person in Slovakia exceed that in the Czech Republic with the Czech level often twice as high.

Singer, who stays on in the top banking job until 2016, can throw out all the facts and statistics he likes at the little loved euro. He is already deeply branded as a eurosceptic, like his model and mentor in most things monetary, Václav Klaus, and his words and warnings will likely be cold shouldered by the government.

For all that, Singer could complicate the Czech path to the euro in his remaining months in office. His weak crown policy is deliberately aimed at encouraging a degree of domestic inflation. Although this should not exceed the bank’s 2.0 percent target, one percentage point on either side of the target though is regarded as permissible.

Even, 2.0% inflation though might be too much for the Czech Republic to join the euro under the existing conditions and current convergence criteria. This calls for the aspirant country not to have an inflation rate which more than 1.5 percentage points above the average of the best EU performers. The current best performers are ironically Greece, with an annual 2013 inflation rate of minus 0.9, Latvia at 0.0%, and Bulgaria and Cyprus at 0.4%. Greece’s deflation is so severe that it is ruled out of the count but the others remain in the frame.

To put it simply, the rules call for the Czechs, currently putting a heavy foot down on the economic fuel pedal and stoking price rises in the process, to fall into line with countries still in reverse gear with austerity measures still shrinking demand.

It’s unlikely, but not totally inconceivable, similar figures will apply four or five years down the line when Czech might really be facing up to meeting the euro membership rules. Even if Singer is long gone as governor, a centre left government whose growth promotion policies are helped by a weak crown and higher inflation might still be around.

If Czechs failed the inflation hurdle in such circumstances then Singer surely would have the last laugh and his criticism of the euro zone as a non-optimal monetary area would be difficult to dispute.