The lion crown

Concerns have been increasing about the relative strength of the Czech crown. On Monday, the currency briefly set a new record, trading at 23 crowns to the Euro. But a strong crown is proving to be a double edged sword, with many businesses in the country wanting the government and Czech National Bank to prevent the currency from getting any stronger:

The Czech crown is strong – in fact it is the world’s best performing currency in relation to the euro – gaining almost 12 percent on the Euro year on year. For months, news stories have been touting new records broken by the currency - against the dollar, euro and pound. But while a strong crown is good for Czechs travelling abroad, conversely, it makes the country less attractive for tourists and foreign investors. Also, it is making life increasingly difficult for Czech exporters – as the currency strengthens, they get less money from foreign sales – and this is causing them to grumble. Not long ago, the rate was 28 crowns to the euro, on Monday, the crown briefly rose to 23 crowns. I asked economist Pavel Mertlík to explain what lies behind the crown’s current strength:

“I think there are two issues. Firstly, economic growth in the Czech Republic is roughly twice that of the Eurozone. The Czech Republic also has slightly higher inflation that the Eurozone average. And this is more or less the same situation with most eastern European currencies. The second point is that there are some short-term fluctuations and from the beginning of the year, the Czech crown is excessively appreciating – from the beginning of the year, this has been almost 14 percent, which is certainly not sustainable and causes problems for exporters.”

Many of these aforementioned fluctuations have been based on careless financial speculators, hoping to cash in on the crown’s strength. So just what are the risks and benefits associated with the strong currency?

“The Czech Republic is a small open economy, which is critically dependent on its export competitiveness. So far, in spite of a very strong currency, Czech exports are going very well. But from the longer term perspective, this is definitely a risk. As regards positives, a strong currency helps the country to keep down inflation, particularly because the Czech Republic is a big importer of gas and oil and because these are being imported from Russia in particular and the contracts are denominated in US dollars. So a strong crown helps to keep down prices of gas and oil.”

Pavel Mertlík is of the same view as most Czech economists when he says that rather than continued strengthening, the currency will soon stabilize.

“We expect a correction by the middle of the year – the crown can decline against the Euro to some 26.50 – 26.80. And after that it can be something like 26 crowns per Euro by the end of the calendar year. However, from the long-term perspective, we expect that within two years, the pace of the appreciation of the Czech crown will decline because many of the factors which are beyond the strong appreciation will be gone.”