Zeman leads the front that is in favour of it, while Babiš and the Čnb governor that of those who are opposed to it. And while they discuss about a possible date for its adoption, the crown devaluation policy is still in place
The Czech Republic, Hungary, Poland, Bulgaria and Romania have in common that they are all members of the EU, but not yet of the Euro zone. And if there is who, like Bucharest, has stated for a long time that it would do everything possible to comply with the Maastricht parameters, in order to join the single currency – and which has set 2019 as the effective date of entry – the other countries involved, however, do not consider the Euro zone as the safe haven of a few years ago. Thus, in the ranks of parliament of the New Europe, there are many who dither. In Prague, however, the atmosphere seems to have changed: at the Castle in April, President Miloš Zeman and Prime Minister Bohuslav Sobotka agreed that there is a need to intensify the debate on the adoption of the euro, in order to speed up entry into the Euro zone.
“It is not feasible, however, to envisage a date prior to 2020”, said Sobotka, who immediately specified that within his government there is no real determination and unity to achieve this goal straight away, and actually passed on the issue to the next executive, which should take office in 2017.
Today, the main obstacle seems to be the Vice Premier and Minister of Finance Andrej Babiš, the toughest among the internal opponents in the Sobotka team. The number one in Ano, together with the Czech Central Bank, have eased-off regarding the possibility of fixing a date for its adoption: “I think this is not a current topic, and even more so in view of the fact that the Euro zone still does not know whether to abandon Greece, or take on responsibility for its debts”.
Meanwhile, as regards the entry criteria, the Czech Republic, is already in a good position and fully respects three conditions out of four: price stability, deficit-to-GDP ratio and long term exchange rates. That leaves us with the political aspect involving the exchange rate of the crown with the euro. At the moment, it is conditioned by the Czech currency devaluation policies that were introduced in 2013 by the Česká národní banka, with the intention of maintaining it for at least another year.
Euroscepticism is still quite strong
Going back to for or against argument, in a country where there is a great deal of Euroscepticism, the first who are in favour of its introduction is Zeman, who took up the chair of president, reversing the position of Václav Klaus, who had always been opposed to its adoption. For the head of state, the time necessary for its adopting could be reduced and carried out even in 2018. A move that would gain support especially from the large foreign investors of the Old Europe with which the Czech Republic does business: Škoda (read Volkswagen) in first place. Anyway, the issue will be strongly debated also in the coming months.
Recently, Zeman, who is responsible for appointing the number one of the Central Bank, said he will choose a pro-euro supporter for the succession. Singer, who is in charge of running the Bank, has repeatedly taken a stand against the adoption of the single currency and in favour of the devaluation of the crown. “The predictable future entry of the Czech Republic into the Euro zone will not necessarily bring any desired benefits to the national economy”, said Singer citing a few Countries that have not adopted the euro yet, but which have grown more economically compared to the Countries within the single currency. And according to the Čnb leader, without the devaluation introduced in 2013, Czech GDP in 2014 would not have risen more than + 0.4% (compared to the actual + 2%) and would have reached a deflation of - 2% (recorded + 0.5%).
Zeman’s position is rather different: “The Čnb decided on the devaluation in order to delay entry into the Euro zone. At the Čnb they do not want the euro, because they would then become simply a branch of the European Central Bank”.
However, to eliminate the obstacle, represented by Singer, the Castle has already decided on a probable successor, supported by Zeman: the likely candidate is Jiří Rusnok, who is already a Čnb adviser and very loyal to the Head of State. Rusnok has declared that, for the Czech Republic, the euro “would surely be a convenient, long term strategic choice. Given the strong economic ties that our Country has with the Euro zone, I see no reason to stay out. Our economy already complies with the Maastricht parameters, so the decision is now purely political”. Political, strategic and one of popularity: public opinion, in fact, is surely contrary. A recent Čvvm survey, gave these results: 4% absolutely in favour; 15% rather in favour; 47% strongly against it; 29% rather contrary.
Doubts over the devaluation
In the meantime, the Central Bank is buying up foreign currency other than the euro: in 2014 it reallocated part of its reserves in Canadian dollars and Swedish crowns. The euro asset is still the prevailing part, but dropped to half of the total compared to over 60% in 2013, when the single currency was purchased in large quantities to start the devaluation of the crown. A move that the Čnb commented only after a while and that might be connected to the weakening policy and the possibility to test the strength of the crown against the euro. In fact, ever since the Swiss Central Bank decided to remove the limit on the exchange rate of the Swiss franc against the single European currency, the focus of the market has shifted to the Czech and Danish crown. This move, along with the quantitative easing by the ECB, has ignited a certain interest towards assets of emerging European markets. All these combined data, might explain Čnb’s decision to test the real strength of the crown by the end of the year or at the end of the devaluation policy measures that will be sustained until inflation starts rising to about 2%.
Singer has declared that, if it is required, the devaluation of the crown will be increased automatically until it is necessary. But Zeman is rather uneasy: imports and holidays, especially close to the summer, have become rather expensive for Czech citizens and the President has not shown any signs that he intends to mitigate his criticism towards the Čnb. The polls are favourable to the decision to end the strategy of weakening the crown, but the markets might think otherwise and consider the long term aspect and a stronger Czech economy.
Meanwhile, in order to maintain a position of strength and stability in the financial sector, the Czech Republic – at the request of Minister Babiš – should also stay out of the EU bank union: “It is preferable to wait and verify any future developments and then see what is the real convenience of the supervisory mechanism of the credit system adopted by the EU”.
by Daniela Mogavero