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 yesterday 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 progress made in creating conditions for future introduction of the euro. Based on this analysis and in line with the Czech Republic’s Updated Euro-area Accession Strategy (August 2007), the Government agreed with the recommendation of the Czech National Bank and the Ministry of Finance of the Czech Republic not to set a target date for euro area entry yet.
The decision to set a target date for euro adoption, from which the timing of ERM II entry would be derived, is a political one. Last year’s Assessment recommended that the Government should not set a new target date for euro adoption, as obstacles to the launching of this process had been found in the outlook for convergence criteria fulfilment as well as in the area of economic alignment.
This year an improvement was recorded as regards future fulfilment of the Maastricht convergence criteria and partly also economic alignment. However, the current global financial crisis can be viewed as a temporary adverse factor as regards future adoption of the euro. In this context, the outlook for fulfilling the Maastricht convergence criteria and, in particular, for maintaining and further increasing the degree of alignment of the Czech economy with the euro area is highly uncertain. The present global financial crisis is, among other things, increasing the volatility of the koruna’s exchange rate, and so fulfilling the exchange rate criterion after the country potentially joins ERM II may be very difficult under these conditions. Any adverse developments during the Czech koruna’s stay in this mechanism could generate macroeconomic costs and reduce the Czech economy’s alignment with the euro area. At the same time, the longer-term impacts of the financial crisis on fiscal developments and the alignment of the individual Member States’ economies are uncertain.
Compared to the previous annual Assessments, there has been an improvement in the assessment of public finances. The public finance deficit was reduced quite substantially in 2007. The current outlook for public finances expects the deficits to remain quite significantly below the 3% level, although eliminating the structural deficit and ensuring public finance sustainability are still a challenge. As regards economic alignment, the Czech Republic is continuing to gradually decrease the gap in its economic level vis-à-vis the euro area average and the functioning of some other areas of the Czech economy is showing some improvement. On the labour market, some structural improvement is being observed in addition to the cyclical improvement. Some aspects of the business environment are also gradually improving. However, problems persist in the institutional framework on 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 and in the coming few years will fulfil 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 the updated version thereof (August 2007), the document has been prepared this year for the fifth time. 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 ERM II cannot be made before the target date for euro adoption has been set.