By James M. Gomez and Douglas Lytle (Bloomberg, 28.7.2009)
Czech policy maker Mojmir Hampl warned against rushing under the “umbrella” of the euro because the central bank’s monetary policies are “credible” and will help revive economic growth.
“As long as the authority is able to have a reasonably credible monetary policy, it doesn’t make much sense to hurry into the euro zone,” said Vice Governor Hampl, 34, in an interview at the Prague-based Ceska Narodni Banka yesterday.
The Czech Republic is the only eastern state in the European Union to shun setting a target date, while others want to enter the euro region as quickly as possible after the global recession rocked their economies. Hampl said the common currency shouldn’t be used as a safe haven and countries that are clamoring most to get in may be the least ready to be members.
Of the 10 former communist nations to join the EU since 2004, only Slovenia, a former Yugoslav federation, and Slovakia, once part of the defunct Czechoslovakia, use the common currency. The Czechs meet all criteria for switching currencies, a requirement of their EU membership, except for the fiscal deficit, which is seen at 5.5 percent of gross domestic product this year, well above the 3 percent limit.
The Baltic states of Lithuania, Latvia and Estonia, whose pegs to the euro in the exchange-rate mechanism leave them without the ability to control their own currencies or inflation, are buried in the EU’s worst recessions.
Baltic Crash
Lithuania’s GDP contracted 22.4 percent in the second quarter, the deepest in the 27-nation EU, while Latvia’s economy shrank 18 percent in the first quarter and Estonia’s 15.1 percent. Making the currency switch by about 2012, authorities there argue, would shield them from future economic shocks after the worst downturn since their independence from the Soviet Union. The Czech economy will decline 4.3 percent in 2009, the Finance Ministry said on July 22.
At the same time, Polish Prime Minister Donald Tusk and central bank Governor Slawomir Skrzypek are locked in a dispute about whether Tusk’s plan to adopt the euro by 2012 is too aggressive. Fitch Ratings on April 16 forecast an adoption date for the Czech Republic of 2014.
Hampl said picking a date is a political decision and the Czech Republic would be correct in taking its time. At the same time, the koruna has been gaining on the euro, rising 5.5 percent since the beginning of the year, which he said is within “fundamentals.”
‘Big Umbrella’
“I would be only happy if we can retain the ability to think about the timing from more than the need to hide under a bigger umbrella,” said Hampl, 34. “I want this umbrella that works here, this smaller umbrella, to work at least for some time until a big part of the” Czech Republic’s economic “convergence is over. It leaves some room to maneuver.”
Prime Minister Jan Fischer said on May 12 he wouldn’t set a target date during his term as head of the caretaker government. The previous government of former Premier Mirek Topolanek was supposed to announce a date on Nov. 1.
“For me the timing is not a question of life and death,” Hampl said. “The questions of life and death are the macroeconomic policies in this country in the years to come, and macroeconomic stability.”
Hampl also said he is leaning toward holding the Czech benchmark interest rate unchanged at a record-low 1.5 percent when policy makers meet on Aug. 6.
Quarterly Forecast
The central bank on the same day will also release its next quarterly economic forecasts, which may show that the future is a “bit brighter” than it did a “couple of weeks and months ago and the past is a “bit darker” than previous predictions.
“I don’t want to be strict, but generally speaking at this point, I’m not convinced deeply that we should further ease” monetary policy, he said.
Five of nine economists polled by Bloomberg predicted the two-week repurchase rate will be held, while four believe it will be cut by a quarter of a percentage point.
The economic recession, which pushed the Czech economy down 3.4 percent in the first quarter, has also tamed inflation, which has fallen to 1.2 percent in June from 7.5 percent in January 2008, pushing it below the central bank’s midpoint inflation target of 3 percent.
“Inflation expectations are well anchored here and I do not seem to believe that there are any big risks either on the pro-inflationary or the anti-inflationary front,” he said. “So I don’t see any reason to change the general feeling we don’t have to bother about the inflation target.”