Conference marking the 20th Anniversary of the CNB and the Independent Czech Currency

7 February 2013, 9 a.m.

Opening speech by Governor Miroslav Singer

Dear President, dear Speaker of the Chamber of Deputies, dear Ministers, dear Governors and Vice-Governors, esteemed guests, ladies and gentlemen,

I warmly welcome you to this conference dedicated to the twentieth anniversary of the establishment of the Czech National Bank and twenty years of the Czech koruna. I am greatly honoured to be able to welcome some prominent personalities who were not only witnesses to, but also co-architects of, landmark historical events. First of all, I would like to mention President Václav Klaus, who played an undeniable, crucial role in the establishment of the Czech currency and the subsequent creation of the monetary framework of the Czech economy. I also welcome my forerunners on the Bank Board of the Czech National Bank, namely Pavel Kysilka, who was largely responsible for the smooth and trouble-free separation of the Czechoslovak currency, and former Governor Zdeněk Tůma – my predecessor, who was at the helm of the central bank until the middle of 2010, including the period in which our economy was hit by the financial crisis.

I will start by venturing a bold prediction that this conference, dedicated to the independent Czech currency, will, among other things, confirm my conviction that having your own currency is an advantage if you know how to handle it. That is surely no great revelation. However, it is interesting to look back at how we have been reminded of this truth over the last twenty years.

Starting in 1991, the Czechoslovak koruna was one of the pillars of the economic transformation. Its initial undervaluation and its peg against major world currencies was one of the few anchors in an environment characterised by anything but stability. The fixed exchange rate helped to stabilise inflation very quickly, and its undervaluation stimulated the development of the Czech economy’s export capacity. In the first half of the 1990s, an independent and stable currency was a macroeconomic precondition for successfully laying the microeconomic foundations of a market economy.

The separation of the Czechoslovak koruna in 1993, which was performed with technical precision, started a process of divergence between the two successor economies of the former Czechoslovakia. This process was no longer latent, but plain to see. The differences in the relative performance of the two economies started to show up relatively quickly in the exchange rate between the new currencies. I do not wish to speculate on whether the Czech and Slovak economies comprised an optimum currency area at the time. But I would venture to say that the depreciation of the Slovak koruna against the Czech koruna, which reached 20% in some periods, much better suited the economic possibilities and needs of the Slovak economy at the time. With the benefit of hindsight, I consider it to be clear that continued existence of the common currency would in time have harmed the Slovak economy and impeded its growth. I have always considered the currency separation to have been the economically neatest solution to a situation determined by political decisions.

The last two decades, however, have also taught us two hard lessons. What happened between 1996 and 1998 was a textbook example of the costs that can be incurred if one underestimates the risks of undermining the consistency between the exchange rate and monetary policy frameworks. I do not wish to analyse, let alone judge, the degree of involvement of the main parties to those events. However, the currency crisis – consisting in an unsuccessful exit from the fixed exchange rate regime – showed convincingly that having one’s own currency can contribute to the breakout of an economic crisis if the key elements of economic policy are not sufficiently coordinated. Similarly, the economic slowdown at the start of the previous decade is a textbook example of how excessive restriction (caused mainly by underestimating the role, and above all the weight, of the exchange rate in the overall monetary conditions) can slow the economy.

After 2000, our national currency played an increasingly important role in shaping the macroeconomic framework of the Czech economy. Following the switch to inflation targeting, a disinflation process was launched. This steered the economy towards a low-inflation environment and eventually resulted in price stability fully comparable to that in the advanced economies. It was accompanied by a long period of nominal appreciation of the koruna. This new combination of two variables became the key macroeconomic adjustment mechanism and a stable framework for nominal and real convergence towards the advanced economies. Therefore, it was no longer a fixed exchange rate like at the outset of the economic transformation process, but low inflation and solidly anchored inflation expectations that provided the economy with the necessary anchor for most of the last decade. However, not even this relatively long and calm period was free of monetary complications. In addition to the episode of 2001 and 2002 that I talked about earlier, the appreciation bubble of 2008 deserves mention.

I am pleased to say that the independent currency proved its worth as a buffer against exogenous shocks during the financial and debt crisis. The fall in export revenues caused by the sharp decline in external demand was dampened by depreciation of the koruna. Our consistent macroeconomic framework, based on solid economic fundamentals and a sound financial sector, created a barrier to excessive depreciation. Therefore, in contrast to our currency crisis, the exchange rate was not a cause of the subsequent economic downturn.

This mostly favourable review of the two decades of our independent currency is closely linked with its institutional guarantor – the central bank. The inflation targeting regime introduced fifteen years ago has provided a transparent and reliable framework for monetary policy decision-making. By refining this framework over many years and working systematically to make its decision-making as consistent and predictable as possible, the Czech National Bank has acquired a high degree of credibility as well as the very important ability to use its communication to influence the expectations of market participants and thereby also market conditions. This has been greatly aided by the sound condition of the Czech financial sector, which the Czech National Bank supervises with vigilance – since 2006 as the integrated supervisor. I regard it as a happy historical accident that we integrated supervision before the onset of the financial crisis. This enabled us to respond flexibly to the fast-moving situation at the beginning of the crisis.

To conclude, I would like to express my belief that today more than ever before we are aware of the risks stemming from underestimating the close links between financial stability and macroeconomic balances as well as the consequences of adopting inconsistent policies. Hopefully, this also entitles me to say that we at the Czech National Bank currently see no strong reason to get rid of our currency in the foreseeable future – all the more so because at the moment it is not clear enough how the euro area will look and function in a few years from now. However, gazing into the future like this takes us away from the backward-looking focus of this conference. I believe we will hear many stimulating thoughts today, thoughts that will remind Czech participants of the past two decades and give our foreign guests a useful starting point for making comparisons with developments in their own countries.

Ladies and gentlemen, let me welcome you once again to the Czech National Bank and wish you an absorbing conference and an enjoyable day.

Thank you for your attention. I would now like to pass the floor to the main speaker at our conference today, the President of the Czech Republic, Mr Václav Klaus.