CNB and MoF recommend not to set euro adoption date yet

The Czech National Bank and the Ministry of Finance have recommended not to set a target date for adopting the euro yet and thus not to attempt to enter ERM II in 2012. This joint recommendation, based on the “Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area”, was adopted by the government at its meeting on 14 December 2011.

The Maastricht convergence criterion on long-term interest rates and the criterion on the ratio of general government debt to gross domestic product are currently being fulfilled, and the outlook for continued fulfilment of those criteria is also realistic. As regards the price criterion, it can be expected that the Czech Republic will temporarily not fulfil this criterion in 2012 owing to an increase in the reduced VAT rate. The Czech Republic does not currently fulfil the exchange rate criterion because it does not participate in ERM II. The Czech Republic is not compliant with the government deficit criterion.

The situation in recent years has been strongly affected by the global financial and economic crisis. The Czech economy has thus temporarily stopped catching up with the euro area economic level. On the other hand, though, it is showing signs of increased alignment with the euro area over the business cycle. As a consequence of the global crisis, the economies of the euro area and other EU countries, including the Czech Republic, have gone into recession and recorded a considerable deterioration in public finance followed by a phase of gradual economic recovery and consolidation of public budgets.

The debt crisis in some euro area countries has led to the establishment of new European institutions and mechanisms which increase the potential costs of euro adoption and considerably extend the scope of the commitment to adopt the euro in the future. For example, on joining the euro area the Czech Republic would probably also become a member – and therefore also a co-financer – of the European Stability Mechanism (ESM). Moreover, upon its establishment, the ESM will probably assume at least the undisbursed and unfunded loans of the current EFSF rescue mechanism. The lower growth in EU countries also implies complications as regards resolving the debt crisis. Going forward, it will be vital to continue to closely monitor and assess the ability of European mechanisms and institutions to deal with the public finance and economic governance problems in euro area countries.

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.

• Analyses of the Czech Republic's current economic alignment with the euro area (pdf, 1.2 MB) - December 2011
• Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area (pdf, 126 kB) - December 2011