With the Czech Republic’s Act of Accession to the European Union, the country undertook to take steps to prepare itself for entry into the Euro area as soon as possible. The determination of the entry date falls within the competence of each Member State and depends on the degree of its readiness.
In addition to the technical process of aligning national legislation with Articles 130 and 131 of the Treaty on the Functioning of the European Union and the Statute of the European System of Central Banks and of the European Central Bank, a high degree of sustainable convergence is another prerequisite for the adoption of the common currency. Sustainable convergence is a set of criteria including price stability, healthy condition of public finances, convergence of interest rates, and participation in the exchange rate mechanism.
According to the annual report “Evaluation of Fulfillment of the Maastricht Convergence Criteria and Degree of Economic Convergence of the Czech Republic with the Euro Area” by the Ministry Finance and CNB, the Czech Republic currently meets the public finance, interest rate convergence and price stability criteria. Only the criterion of participation in the exchange rate mechanism has not been met (as the country does not participate in the relevant mechanism).
Even though the Czech economy has shown strong performance in recent years, local price and wage levels are still substantially below the older EU member states, “The Czech Republic’s own readiness for euro adoption has further improved, although some shortcomings remain, notably the unfinished process of real economic convergence.” The report also mentions future risks to the public finances, related to the long-term costs of an aging population.
Alongside the indisputable positive effects, such as savings on transaction costs and the elimination of exchange rate risk, adoption of the euro would mean abandoning an independent monetary policy and the Czech crown’s flexible exchange rate as effective stabilizing macroeconomic instruments.
According to the report, although the economic situation in the euro area has stabilized, “the level of economic maturity in Eurozone countries remains uneven. In addition, unresolved debt and structural problems persist in a number of countries. The lack of fiscal discipline from some of its members is a long-term problem for the euro area.” The report also highlights the uncertainty in the future of the Union, as negotiations about the institutional form of the EU are ongoing. “It is not possible to reliably predict the potential future financial and non-financial liabilities for the Czech Republic associated with entry into the euro area,” the report concludes.
The Ministry of Finance and the CNB, therefore, decided not to recommend setting a target date for the Czech Republic’s entry into the euro area. This recommendation implies the conclusion that the government should not yet seek the Czech Republic’s entry into the exchange rate mechanism.