Government not to set euro adoption date yet

The Government has acknowledged a joint recommendation of the Ministry of Finance of the Czech Republic and the Czech National Bank not to set a date for adopting the single European currency yet. The recommendation is based on the findings contained in the “Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area”. This document has objectively assessed the Czech Republic’s economic preparedness for adopting the euro since the country joined the European Union.

The assessment is carried out in three areas. The first area focuses on the fulfilment of the Maastricht convergence criteria, which are already 30 years old. They are a necessary but not sufficient condition for entering the euro area. These criteria set fulfilment limits for the fiscal and monetary areas. Their fulfilment is to reduce the risks and costs connected with the absence of independent monetary policy. Successful fulfilment of the relevant criteria should also mitigate the risks of instability and the emergence of imbalances in the monetary union. Amid slowing global economic growth and only slowly easing inflation pressures, the Czech Republic did not comply with the criterion on price stability in 2023. It did not formally meet the exchange rate fluctuation criterion either, as the Czech Republic does not participate in the ERM II exchange rate mechanism. By contrast, last year it met the criterion on the convergence of interest rates and formally also the criterion on the government financial position despite probably not fulfilling the reference value for the deficit, as the European Commission did not propose the opening of an excessive deficit procedure against the Czech Republic.

The second area assesses the Czech Republic’s economic preparedness for euro adoption. The key component of these indicators is an assessment of the economic alignment between the Czech Republic and the euro area and the ability of the Czech economy to dampen adverse shocks using other mechanisms following the loss of independent monetary policy. The Czech Republic has made no substantial progress in this area since the last assessment prepared in 2022. There are still many obstacles on the path towards the single European currency. One of them is the unfinished process of economic convergence of the Czech economy, especially as regards the convergence of prices and wages, whose lag behind the euro area average remains significant. In addition, the structure of the Czech economy still differs considerably from the euro area. This could create problems in a single monetary policy environment. The issue of Czech public finance sustainability is also still unresolved.

On the other hand, the high degree of openness of the economy and its close trade and ownership links with the euro area are particularly positive. The relatively stable exchange rate of the koruna against the euro can also be assessed favourably. Some labour market indicators, especially the low long-term unemployment rate, as well as the banking sector’s resilience to negative shocks, are also positive.

The final area of assessment concerns the euro area itself. The economic heterogeneity of the euro area is high, which was further highlighted by the energy crisis and its impacts on Member States’ economies. Economic alignment of euro area countries is essential for the smooth functioning of the monetary union. The fiscal positions of most euro area countries are also a negative factor.

The institutions and rules of the euro area have changed over recent years, and discussions on further deepening integration are still ongoing. The future potential financial and non-financial commitments relating to the Czech Republic’s entry into the euro area thus cannot be reliably estimated at the moment.

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Government not to set euro adoption date yet

Petra Vlčková
CNB Communications Division

Petra Vodstrčilová
Ministry of Finance of the Czech Republic