By Marek Petrus (Reuters, 14.3.2002)

NO NEED TO RUSH TO JOIN EURO - CZECH C.BANKER

PRAGUE, March 14 (Reuters) - The Czech Republic need not rush to join the single European currency when it becomes an EU member and instead should take time to sort out its fiscal and economic imbalances, central bank board member Michaela Erbenova said.

Erbenova, who is in charge of EU and international relations at the central bank (CNB), told Reuters in an interview structural reforms are required to ensure the Czech economy is fit for monetary union before it adopts the euro.

She said this can be seen by the recent strengthening of the crown against the euro, which is not supported by underlying economic fundamentals.

"I think that the current pace of nominal appreciation is unsustainable over the long-term... With a high degree of probability a correction can be expected and the question only is when the correction happens," she said.

"So it is not very wise to tie the question of when it would be suitable to fix our exchange rate (to the euro) to the present development of the exchange rate," Erbenova said.

Erbenova's comments contrast with those of some central bank board members who have said the Czechs should join the euro as quickly as possible.

The crown and other currencies of the leading central European candidate nations have risen strongly with investors attracted by the prospect of economic convergence with the EU.

Ten mostly post-Communist east European countries, including the Czechs, are trying to join the EU by 2004.

Erbenova said the elimination of exchange rate risks would clearly benefit the open Czech economy which is already closely linked to the EU.

Almost 70 percent of Czech exports go to the EU which in turn accounts for 60 percent of Czech imports.

The central bank has been waging a full-blown campaign to combat the crown's strength, even resorting to intervention by buying euros and flooding the market with the domestic currency.

Erbenova said she saw no need to change the CNB's present exchange rate regime in the run-up to EU accession and added the Czechs would most probably enter the euro zone with a freely floating crown.

FISCAL REFORMS NEEDED

Echoing frequent central bank warnings about deep rooted fiscal imbalances, Erbenova said long-term fiscal and other structural reforms were the key areas policy makers must focus on in the run-up to euro zone entry.

She said the yawning fiscal deficit was the thorniest issue in the convergence process and that public finances must be put firmly on a sustainable path before the economy adopts the euro.

The fiscal gap is seen at around six percent of national output at the end of 2002, net of privatisation revenue and transfers to cover the costs of bank and industrial restructuring.

This is twice the maximum size allowed by the Maastricht criteria which group the economic conditions for entry to the euro zone.

"I think we should first make an effort to minimise the risks of entry to the monetary union stemming at the moment from pro-cyclically behaving public finances and their generally very limited flexibility to influence economic cycles," she said.

(C) Reuters Limited 2002.