Czech Republic sends mixed signals on euro adoption

After a long period on the sidelines, euro adoption is again making a comeback as an issue in the Czech Republic. In the latest intervention, the country’s central bank governor has said that all the criteria can be met but that Czechs could perhaps wait until wages and prices are nearer to the euro zone average.

Jiří Rusnok, photo: CTK

Compared with his predecessor, Miroslav Singer, Czech central bank governor Jiří Rusnok was cast as favourable to the single currency euro. A greater sceptic than Singer would have been difficult to find. But recent comment from Rusnok testify to the fact that his euro enthusiasm has its limits.

Euro adoption is gaining higher profile as an issue in the country. One of the reasons is that with its currency now floating and not pegged, one of the technical obstacles for Czech euro adoption has now been removed. A politically more pressing issue is the faster pace of integration steps being currently prepared by core euro countries. Prime minister Bohuslav Sobotka made these comments last month: "For us to remain at the core of the European Union, sooner or later we will have to respond to the question of not whether but when the Czech Republic will be capable of adopting the common European currency.ʺ

Put on the spot last week at an international conference, bank governor Rusnok said he personally thought that Czechs would not be adopting the euro for five to 10 years. This week, Rusnok filled out his reasoning by saying that while the country filled the technical conditions for euro adoption it would be better to wait until local wages and prices approached those of core euro members.

Rusnok added that while wage rises in some of the main European economies are almost zero now the average wage increase in the Czech Republic is around five percent, so the trend is positive.

Actually, while the nominal rate of wage rises in the Czech Republic was 5.3 percent in the first quarter of the year, the real rate, that means subtracting the rate of inflation, is just 2.8 percent. So that’s a lot less to crow about.

Illustrative photo: Office of Czech Government

Currently, average Czech hourly wage costs, that’s the actual money to paid to workers plus other add-ons such as employment insurance, are around 10 euros an hour. Across the EU 28 the figure is around 25 euros and in the, mostly richer, euro zone countries it’s around 30 euros.

One Czech economist pointed out that even if there was a real 5 percentage point difference in the wage rises, it would take 15 years at that rate for average Czech wages to catch up with those of neighbouring Germany.

The Czech government itself has probed the reasons for the current gaping wages gulf between the likes of Germany and the Czech Republic. It found that overall Czech wages are around 20 percent lower than they should be in terms of the extra value being created. But there are massive differences across the board between companies and sectors with many foreign owned firms up there with the best in Europe in terms of productivity but many, often domestically owned, showing almost no growth over the last decade.

In the end, euro adoption is a political decision. Czech political parties are clearly split on whether they want to wed the euro sooner or later or not at all just four months ahead of lower house elections.