Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area

The Government today discussed and adopted an analysis entitled “Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area”, which assesses the Czech Republic’s preparedness for ERM II entry and for subsequent adoption of the euro. Based on the conclusions of the analysis and in line with the Updated Euro-area Accession Strategy (August 2007), the Government stated that sufficient progress had yet to be made in laying the groundwork for euro adoption in order to allow a target date to be set for entry into the euro area. Consequently, no target date for joining the euro area was set and so the Czech Republic will not seek to enter the ERM II in 2008.

The criterion on sustainability of public finances remains a constant problem for the Czech Republic as regards fulfilling the Maastricht convergence criteria. The main obstacle is the excessive deficits, which are not diminishing despite the environment of buoyant economic growth, and which are a result of the unconsolidated public finance position.

The fiscal consolidation path approved by the Government in November in the Czech Republic’s updated Convergence Programme should stabilise public finances and maintain the government deficit below 3% of GDP in 2008. However, it does not ensure a sufficient improvement in the structural characteristics of the budget, nor does it improve the sustainability of public finances. A sustainable reduction of the general government deficit below 3%, i.e. fulfilment of the fiscal deficit criterion, will require not only adherence to the already approved fiscal rules (the fiscal targeting regime and medium-term expenditure frameworks), but also further reforms to prepare Czech public finances for the future challenges associate with population ageing.

Inflation will be affected over the next two years by some inflationary shocks, which will reduce the chances of fulfilment of the Maastricht criterion on price stability. Changes to indirect taxes connected with the reform of public finances and with harmonisation with EU law (a rise in the lower VAT rate, excise duty on cigarettes and the environmental tax) temporarily shift inflation above the likely future reference value of the criterion. After this one-off shock stemming from administrative measures subsides, inflation will return to the lower level observed in previous years. The announced reduction of the CNB’s inflation target for the national consumer price index (CPI) to 2.0%, with a tolerance band of ±1.0 p.p., from 1 January 2010 creates better conditions for the fulfilment of the price stability criterion beyond this horizon. At the same time it is desirable that no substantial inflationary changes hindering the fulfilment of the criterion be made to indirect taxes during ERM II participation.

The analyses of the Czech Republic’s economic alignment with the euro area show that some improvements have occurred recently in the functioning of Czech economy and its preparedness to adopt the euro. However, some of them are linked with the Czech economic cycle. No major changes have yet occurred in the functioning of fiscal policy and in the institutional setup leading to a long-term improvement in the flexibility of the Czech economy, especially the labour market.

Notes to editors:

The Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area is a joint document of the Government and the CNB, prepared by the Ministry of Finance and the CNB. On an annual basis, it assesses how the Czech Republic fulfils the Maastricht criteria (price stability, public finance sustainability, exchange rate stability and convergence of long-term interest rates) and the degree of alignment of the Czech economy with the euro area. In line with the Czech Republic’s Euro Area Accession Strategy (2003) and its updated version (August 2007), the document has been prepared for the fourth time this year. The updated Strategy formulates the economic policy challenges in areas relating to euro area entry and states that the euro adoption date will depend on resolving these problem areas. Therefore, the document results in a statement on whether sufficient progress has been made in laying the groundwork for euro adoption in order to allow a target date to be set for entry into the euro area. In line with the Strategy, the length of stay in ERM II should be as short as possible, so the decision to join the ERM II cannot be made before the target date for euro adoption has been set.

Analyses of the Czech Republic's current economic alignment with the euro area 2007 (pdf, 839 kB)
Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area (pdf, 182 kB)