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 preparedness of the Czech Republic for ERM II entry and subsequent 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 Ministry of Finance of the Czech Republic and the Czech National Bank not to set a target date for euro area entry yet and not to attempt to enter ERM II during 2010.
This year the public finance deficit, which is set to exceed significantly the reference value of 3% in the years ahead, became the main barrier to the fulfilment of the Maastricht convergence criteria. Eliminating the structural deficit and ensuring long-term public finance sustainability are still a challenge in this area. As the one-off inflationary effects that generated the temporary surge in inflation in 2008 have subsided, there has been a marked fall in inflation in 2009 to values allowing fulfilment of the price stability criterion. Its sustainability is being aided by the CNB’s new inflation target which takes effect in 2010. The criterion on long-term interest rates is being – and very probably will continue to be – fulfilled without any problems. The Czech Republic does not fulfil the exchange rate criterion because it does not participate in ERM II. The increased volatility of the koruna exchange rate owing to the global financial crisis is an adverse factor in this respect.
In the area of economic alignment, the preparedness of the Czech Republic for euro adoption has worsened, mainly as a result of the economic crisis. In recent years, the Czech Republic has been gradually catching up with the euro area economic level, but the functioning and flexibility of the Czech economy are not showing any major improvement. There has been no great structural improvement on the labour market and problems persist in the institutional set-up. The business environment is gradually improving. The current recession can be viewed as a temporary adverse factor as regards future adoption of the euro, since it is worsening public finance and may generate increased exchange rate variability. The continuing uncertainty on financial markets does not constitute a favourable environment for joining ERM II.
In this situation, therefore, it is impossible to conclude that the Czech Republic has made sufficient progress in laying the groundwork for euro adoption to allow it to set a target date for entry into the euro area.