New analysis reveals risks and rewards of Czech euro adoption

The benefits of swapping the crown for the euro have long been disputed by economists, and the Czech National Bank appears equally torn on the question.

 William Nattrass

Written by William Nattrass Published on 08.12.2021 12:45:00 (updated on 08.12.2021) Reading time: 2 minutes

The adoption of the euro is one of the most fundamental questions relating to the Czech Republic’s EU membership. The country is currently one of a group of eight non-eurozone EU members; a list that also includes Central European allies Poland and Hungary. But with neighboring Slovakia adopting the euro back in 2009, some economists are keen for the Czech Republic to follow suit.

Last December, though the Czech National Bank and Ministry of Finance again recommended not setting a date for the adoption of the euro. Technically speaking, adopting the euro is something the Czech Republic committed to when joining the EU in 2004, but ever since, governments have simply kicked the issue further down the road.

This looks likely to continue under the new government; the coalition’s program for the next four years does not include the adoption of the euro, although their pro-EU stance could lead the country closer to the eurozone than ever before.

“Joining the eurozone under this future coalition government is not realistically achievable,” said incoming Deputy Prime Minister Marian Jurečka in an interview with iRozhlas. “But we have things on the agenda saying we want to move toward meeting the obligations of the Maastricht criteria (for joining the euro), so that we can move toward the eurozone in the future.”

Now, an analysis from the Czech National Bank has revealed the pros and cons of joining the eurozone for the Czech economy. Adopting the euro would bring benefits arising from the country’s strong trade links with other EU countries, while the increasing use of the euro by Czech companies is another factor in favor of adoption.

Other factors defined as “low-risk” for euro adoption are the increased purchasing power parity of the Czech Republic, now approaching the EU average and outstripping some eurozone countries such as Spain and Portugal; as well as the country’s relative economic health and low unemployment rate.

On the other hand, “high-risk” factors relate to economic differences between the Czech Republic and the EU as a whole. The unusually high proportion of industry in Czech national GDP is, according to analysts, a structural difference in the Czech economy which could cause problems in the event of euro adoption.

Other risk factors are the lack of convergence between consumer prices and wages, as well as unwieldy public administration systems and an aging population. A final, perhaps most fundamental drawback in the adoption of the euro is the necessary loss of control over domestic economic policy; a reality faced by all eurozone countries.

Yet for some economists, the adoption of the euro is a necessary step as the Czech Republic becomes one of the EU’s advanced economies. By facilitating smoother trade with EU countries, they argue that joining the euro is the only way to enjoy the full benefits of EU membership. But as the Czech National Bank’s analysis has pointed out, such a future is not without risks.

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