Euro adoption back on the agenda for the Czech Republic

Photo: Štěpánka Budková

For most of the Czech Republic’s 10-year membership of the European Union, the single currency euro has been regarded with at best reserve and at worst the sort of suspicion you would set aside for your biggest enemy. With a new president and the new centre-left government of Bohuslav Sobotka, the attitude has switched again and now might be characterized as cautiously positive. But the debate is still continuing with the example of neighbour and euro-zone country Slovakia often taking central stage.

Photo: Štěpánka Budková
Oldřich Dědek could be described as the Czech Republic’s Mr. Euro. Since 2007 the cherubic former deputy governor of the Czech National Bank has filled the role of national coordinator for the preparation for euro adoption.

It has not been a role that has thrust Mr. Dědek into the spotlight. Civic Democrat Prime Minister Mirek Topolánek in late 2006 dismissed the mooted idea of euro adoption in 2010 and from then on the distance between Czechs and the euro has got greater. At one stage during the depth of the euro crisis, his successor as party leader and prime minister Petr Nečas even suggested that a new referendum on the euro be held before Czech adoption.

Although that call for a referendum has now been enshrined in the Civic Democrat manifesto going into the upcoming European Parliament elections, euro adoption with no extra strings attached and within a reasonable timeframe has now become the Czech mainstream. That position is backed by all three governing parties and the main centre-right opposition, TOP 09. Czech president Miloš Zeman is also looking down benignly from Prague castle. Prime Minister Sobotka’s coalition has even suggested that it will take a decision by the summer on whether to eventually sign up to the tough public finance straightjacket for euro and non euro countries alike - the fiscal compact.

So Mr. Dědek now looks like he has something more meaningful to do than regularly cross off one date to replace it with a more distant one. And Slovakia now looms large in the argument over when the Czech Republic should finally adopt the euro.

“A couple of days ago the prime minister was in Slovakia and I was also preparing a part of his documentation showing the experience of Slovakia. I think that the example of Slovakia is extremely important for the Czech Republic. The countries are quite similar, there is a shared tradition, as well and the gap between these two countries is reasonable. And the message coming from Slovakia that the Slovak people are quite happy with the euro is a quite important to be heard by Czechs. ”

Oldřich Dědek,  photo: Filip Jandourek
But while no one would question the fact that the Slovak economy has outperformed the Czech in recent years, the role of the euro in that catch-up is up for debate. Czech Central Bank governor Miroslav Singer has been one of the principle figures casting doubt on whether the euro has made a major contribution to Slovakia’s growth since it adopted the euro in 2009.

Singer has argued that Slovakia failed to get the foreign investment it expected with euro adoption and that much of its extra economic growth has resulted from higher state debt. Czech president Zeman has accused the central bank of trying to brake euro adoption because it fears for its powers and being downgraded into a sort of branch of the European Central Bank.

Bank governor Singer’s comments about Slovakia’s economic performance have not made him many friends there. Martin Filko is the chief economist at the Slovak Ministry of Finance who was asked about bank governor Singer’s written and verbal interventions. “I am not in a position to comment on senior officials of the Czech National Bank. But let’s put it this way, we were probably looking at different sets of statistics.”

Mr. Filko says euro adoption means that Slovakia is, for better or worse, much more integrated with its biggest trading partner, Germany, due to the euro.

“The delay of our economic cycle compared with Germany is no more than one quarter, so it is not really significant.” Before euro adoption it took around six months for upturns or downturns in Germany to be felt in Slovakia. The ministry chief economist continues:“We are more deeply integrated so it is not just a question of time, it is also a matter of how much we do react to the German economic cycle and the answer is that we do react a lot.”

That meant, for instance, that Slovakia entered the recent recession earlier than the Czech Republic but was also quicker to come out of it. While the Czech Republic has weakened the crown through foreign currency interventions since last November to give a boost to the economy, Slovakia, with no independent currency, has had to find other means to deal with issues about its competitiveness. “Naturally, you lose your own independent monetary policy. You can live without it but you have to be able to do more in your other policies, mostly in two areas, in your fiscal policy and in your structural policies, so your labour market has to be more nimble and your fiscal position has to be sounder. ”

Pavel Mertlík,  photo: archive of Radio Prague
Totting up the pluses and minus of the euro, one fact still stands out for former Czech Social Democrat finance minister Pavel Mertlík and that is the foreign exchange fees that could be saved by Czech companies and are currently contributing quite handsomely to bank profits.

“The Czech Republic is an industrial national which is exporting most of its production to the euro zone countries today. Just the yearly income of banks from fixed transactions which are supporting exports and imports is about 30 million Czech crowns, that is something over one billion euros. So, just from this perspective for Czech importers and exporters, a fixed exchange rate or common currency would be quite an important benefit and it is something which is constant. ”

Along most Czech experts, Mertlík sees the earliest euro adoption by Czechs as 2018 with 2019 more likely. While the economic criteria for entry do not look that problematic, especially if Europe is now bound on slow, but steady, growth, he sees the big problem as mobilizing the Czech population in favour of the move.

“What is more important is some political preparation and to a certain extent also economic preparation. But basically, I think the problem is political today because there is very strong euro skepticism in the Czech Republic. The majority of the population sees the euro as a problem not as a chance for the country and for the politicians this is a challenge for them to do something with it. ”

Indeed, a poll carried out by the European Union’s polling agency eurobarometer last April found Czechs the most negative of all Europeans towards euro adoption. It found that 73 percent believed adoption would have negative consequences and 80 percent opposed joining the euro zone as opposed to just 14 percent in favour. An overwhelming majority of Slovak public opinion, employers and trades unions, the central bank, and all the major political parties approved of swopping the Slovak crown for the euro before that step was taken. And the relatively high conversion rate for the changeover meant that the worst feared inflationary consequences of the switch did not materialize.

Of course, those sort of Czech responses partly stem from a euro crisis when most of the corrective moves seemed too little and too late. A period of euro zone currency stability and growth could do something to change that perception and Mr. Mertlík, now rector of the Prague based Banking Institute, believes that the latest measures have gone a long way to correct past flaws.

Photo: European Commission
In the last instance though, the euro is as much a political project as an economic one, perhaps more so. Slovakia’s Martin Filko again. “I think the most important consideration is that neither the Czech Republic or Slovakia are an island. We are not Great Britain. We do not have nuclear weapons, we do not have our own navy, we are very much integrated with the German speaking world so to say. So it makes a lot of sense for small, open, export oriented countries to be integrated more with our main trading partners.”

At, the moment one of the main weaknesses of the Višegrad bloc of Central European countries is that Slovakia is the sole country in the euro zone looking out while the Czech Republic, Poland and Hungary are on the outside looking in.