Czech central bank discusses pros and cons of euro adoption

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The potential adoption of the euro would further increase the benefits accruing from the Czech Republic’s trade links with eurozone countries, according to an analysis by the Czech National Bank.

On the other hand, the adoption by the Czech Republic of the euro would entail risks arising from the loss of the independent monetary policy of the Czech National Bank and the stabilizing role of the exchange rate of the krone.

The Czech central bank divided its assessment into three groups: low risk, neutral and high risk indicators for euro adoption.

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

The Czech National Bank also highlighted the role of the euro in Czech companies, which increasingly use the common currency. 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, the indebtedness of the private sector and the structure of financial assets and liabilities of non-financial corporations and households as 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 the countries of the euro area among the risk factors associated with the adoption of the euro.

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

Another risk factor, according to the bank, is the sustainability of public finances in the future, resulting, among other things, from the aging of the population and the absence of reforms of the pension and health 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, all the potential liabilities that will arise for the Czech Republic in the context of the adoption of the euro are not known. Any decision on when to join the monetary union is therefore always accompanied by significant uncertainties, ”says the document.

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

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