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Dash to adopt euro slows growth

Caution increases about Czech target date for single currency

By František Bouc
Staff Writer, The Prague Post
June 9, 2005


Macroeconomic indicators from the Czech Statistical Office (ČSÚ) could provide new ammunition for euroskepticism in the country.

The ČSÚ reported in its annual analysis of macroeconomic development dated May 30 that the Czech drive last year to meet the Maastricht criteria for adopting the single European currency, the euro, cost the country faster growth.

In particular, the ČSÚ analysis of macroeconomic development highlighted slashing the state budget deficit to 93.5 billion Kč ($3.8 billion) making the Czech Republic the first country in the region to fulfill all the single-currency criteria as a factor that put the brake on growth. "The fast drive to reach the Maastricht criteria did not contribute to economic growth in this country," the ČSÚ report tactfully said.

The Czech government declared earlier this year that it aspired to adopt the euro by 2010, wiping out risks from doing business in euro zone countries and relieving a major headache for exporters caused by the strong crown.

The cut in state spending helped bring the annual state deficit below the 3 percent ceiling of GDP required by the Maastricht Treaty for adopting the single currency, the last step for Czech fulfillment of all criteria. Czech inflation, at 2.6 percent in 2004, was already well below the Maastricht limit of 3.1 percent, and overall public debt at 37 percent of GDP came in well below the 60 percent barrier set by the treaty.

The country met the previous Maastricht demand stating that local interest rates cannot differ by more than by 6.1 percentage points from the EU average. Interest rates differed by 4.3 percentage points in 2004.

The broader economic picture, however, is not so rosy. Czech economic growth per capita share has trailed other countries in the region. Czech GDP per capita rose only 1.2 percent in 2004, while Slovakia saw a 21.1 percent increase and Hungary reported a 24.4 increase.

Most business analysts agreed that the government's effort to meet the Maastricht criteria curbed economic growth. "It appears that [the Czech] economy is not yet prepared for working under the conditions of the euro zone," said Next Finance analyst Markéta Šichtařová.

For the first time, leading figures at the Czech National Bank (ČNB) have also voiced reservations about the target adoption date, although the Cabinet still insists on adopting the single currency by 2010.

"The euro represents a significant risk for this country," said ČNB board member Robert Holman.

Holman said slow economic growth could result from euro adoption. "The euro zone has grown very slowly over the past five years and the single currency could be among the major factors," Holman said.

Euro concern

The single currency has also been the target for a wave of criticism following the French and Dutch 'no' votes in EU constitution referenda.

Paul de Grauwe, economic adviser to European Commission President José Barosso, told Belgian financial newspaper De Tijd that the euro was not sustainable in the long term without tighter political integration.

"The current situation is dangerous," Grauwe said. "The euro does not bring advantages to some countries and they actually consider it as a source of economic depression." One Italian government minister even suggested the country drop the euro altogether and reintroduce a national currency.

Out of the new EU member states, Slovenia, Estonia and Lithuania plan to adopt the euro in 2007. Malta, Cyprus and Latvia are likely to follow in 2008.

Based on the Maastricht criteria, the Czech Republic looks ready to join the euro zone, but real adoption of the euro is still a long way off, said ČNB Vice Governor Luděk Niedermayer.

Patria Finance economist David Marek said the Czechs should not rush with euro adoption. "We should closely observe the current recession in Europe and take some lessons from that," Marek said.

Many business representatives say euro adoption poses no major threat.

František Bouc can be reached at fbouc@praguepost.com




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