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Bitter victories of euro advocates

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This must be very frustrating for those opposing the introduction of the single European currency. In the instant they come up with arguments why the Czech crown – whether it is extremely strong or weak – helps the Czech Republic, subsequent developments in the real economy prove that they were wrong.

But these are somewhat bitter victories for euro advocates, especially for those from the ranks of businesses. The constant postponing of the euro adoption date has cost them dozens of billions of crowns that they are lacking now more than ever.

Confused markets

In the summer of last year, first evidence appeared of the big problems that the crown will cause to our open economy. Financial markets then succumbed to the illusion that central Europe will not be hit by the starting crisis. As a result, the crown posted extreme gains that reached as many as 20% and had nothing to do with the performance of the economy. Companies were not able to compensate such a sudden swing by raising labour productivity and by cutting costs. Exporters representing the backbone of our economy started losing competitiveness quickly, they were forced to cut jobs, and the first bankruptcies emerged.

At that time, economists were convincing us that nothing was going on because imports were getting cheaper and companies should find it sufficient to secure themselves against the strong exchange rate at banks. But the losses were bigger than the small compensation in the form of cheap imports. And the insurance turned to be a Greek gift, especially in recent weeks.

Because after a few months, financial markets were wrong again. This time, by contrast, they included the Czech Republic among countries virtually facing bankruptcy. That slashed the crown immediately.

Unpredictable relief

Crown advocates are now coming up with the argument that this is good for the economy and that the weak currency will at least provide a cushion for exporters. But the reality in business is somewhat different again. Many companies (following analysts’ advice) bought insurance for levels around CZK 25 per euro, but the crown during its hefty swings headed quickly in the opposite direction, attacking CZK 30 per euro.

Thousands of companies are now getting less money for the goods they export and on top of that have to deal with increasing prices of imported inputs necessary for production. The weak exchange rate is a relief for the unsecured exporters, though they cannot make much use of it owing to falling orders. Even when they gain a contract at the time of the advantageous exchange rate, they are unable to predict what the exchange rate would be in a week, let alone at the time when they materialise their order.

In a swirl of swings

The biggest problem of the Czech crown, its increasing volatility, is therefore becoming fully apparent. And as more and more EU members will decide to go under the euro’s protection, there will be more attacks against the crown from speculators.

Within its fight against the undesired swings of the crown, the Czech National Bank has been changing rates, coordinating its steps with the neighbouring countries, and intervening verbally. But the effects of all these measures are short-lived and limited. The swings of the Czech currency will continue and planning at companies will still be very difficult. Moreover, we can forget about new investors, for whom stability is the key word for their decisions on investments abroad.

Tool against spendthrifts

The only long-term solution for an open economy like the Czech Republic rests in joining the eurozone that will protect us from speculators and mistakes made by financial markets. Owing to the fight against the crisis, the government will exceed the public finance deficit limit this year. But that is still irrelevant for a euro adoption in 2013. The key factor will be for the Czech Republic to comply with the criteria one year before entring the eurozone.

The current government should set a euro adoption date not only because it would help the Czech economy, but for the government itself. Because it is the best way to secure that the next cabinet, no matter what parties are present in it, does not spend public money carelessly.

The author is the PR director at Škoda Auto.

Translated with permission by the Prague Daily Monitor.

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