site.btaChoice between Krona and Euro Is Related to Strategic Priorities for Czech Republic, Says Prof. Lubos Komarek of Czech National Bank

The Czech Republic is one of seven EU countries that have not yet adopted the European single currency. The other six are Denmark, Sweden, Hungary, Poland, Romania and Bulgaria. All of them, except Denmark, have undertaken to adopt the euro at the moment they meet the so-called Maastricht criteria concerning inflation, government debt, budget deficit and long-term interest rate. Among them is the stable exchange rate of the national currency against the euro, which is "certified" by membership for at least two years in the the Exchange Rate Mechanism II (ERM 2), the eurozone's waiting room.

BTA talked to Lubos Komarek, the person in charge of external economic relations in the Monetary Policy Department of the Czech National Bank, about where Prague stands on the path to the single currency. He is also a professor of economics at Charles University in Prague. The reason for seeking his opinion is that there is a renewed debate in the Czech Republic regarding the adoption of the euro, prompted by Czech President Petr Pavel.

In a New Year's address that provoked much comments from politicians and experts, Pavel said that it was "time to start taking concrete steps that will lead to the fulfilment of this commitment". :For a country with an open and export-oriented economy located in the centre of Europe, the single currency is the logical future," the head of State argued.

The Czech National Bank has, all these years, had a neutral position regarding the adoption of the single currency, Prof. Komarek told BTA. The country has been a member of the EU since 2004, and in the years since then it has consistently met almost all criteria for joining the Eurozone, with the exception of participation in ERM 2. It is generally preferable for a central bank operating in an inflation targeting regime to remain in ERM 2 for a minimum period of two years. This is the best option that preserves the purity of the monetary policy regime. According to Komarek, the application for participation in the Exchange Rate Mechanism is mainly in the field it is up to the government to decide when exactly it should be undertaken.

There is still no target date and a credible timetable for the adoption of the euro in the Czech Republic, said he.

The person responsible for external economic relations in the central bank's Monetary Policy Department pointed out that the determination of a date for membership in the eurozone is accompanied by the preparation of a plan for when exactly the country will become a member of ERM 2 and the Banking Union, where significant (large) banks come under the supervision of the European Central Bank.

Setting a target date, “D-day” and a more detailed timetable for entry into the euro area can be seen as crucial, he added. 

The first reason is that having a timetable would allow the Czech Republic to actively promote a position in European forums. The other is that the attitudes here are that Prague should join the banking union as close as possible to (ideally at the time of) entering the eurozone itself, Komarek pointed out.

"We have a very good state of the Czech banking sector and the quality of national supervision. In other words, preparations for joining the banking union could take place within the framework of the stay in ERM 2, and not be prepared before the actual entry into ERM 2, as happened with Bulgaria and Croatia," said he.

Asked about the advantages and disadvantages of using the national currency in the single market, Komarek said that arguments can be given for both. The use of the national currency makes it possible for individual countries to have their own monetary policy, which allows the central bank to determine the main interest rate, as well as to influence the exchange rate (most commonly devalue it and give advantage to the country's exports), he argued. He added that preserving the national currency is also linked to a sense of preserving national sovereignty.

However, in an he article co-authored with other economists and in the Czech National Bank's 2023 assessment of readiness to adopt the euro ("The exchange rate as a partial indicator of (non)adoption of the euro"), Komarek points out that the actions on devaluation of the national currency through interventions in the foreign exchange market does not give the Czech economy a competitive advantage in the medium term. "In other words, we prove empirically that the weakening of the krona does not lead to a competitive advantage of the Czech economy in a longer horizon," pointed out Prof. Komarek.

Among the advantages of using the single currency he mentions reduction in currency exchange costs, as well as those for hedging exchange rate differences, which, according to estimates, amount to about 0.5-0.7% of GDP, a reduction in barriers related to the single European market and in particular to the eurozone, and greater price transparency. Also, investors can, other things being equal, prefer a country using the euro, he said.

In conclusion, Prof. Komarek said that the use of a national currency within the single market allows for greater economic flexibility and sovereignty but comes at the costs related to currency risks, potential barriers to trade and investment - and little price transparency. "The choice between retaining a national currency or adopting the euro involves balancing these trade-offs based on the country's specific economic conditions and strategic priorities," he said.

According to him, there is no longer a need for what he called "a microscopic quantification of the detailed economic benefits and costs of joining". "That would be an unnecessary academic exercise. After all, the CNB annually assesses our alignment with the euro area in detail in a consistent-sounding document. The Czech Republic is very well aligned with the euro area, especially with its industrial countries. In spite of its associated economic implications, the decision to join the euro area is now a purely political one," said the professor.