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Is the euro a write-off?

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“Nothing can be ruled out completely,” says Otmar Issing, German professor of economics and a member of the European Central Bank governing board. “But it will not happen, the euro will not disappear. The costs would be enormous and countries would lose on that in the end.”

Issing knows what he’s talking about. His book about the future of the euro is regarded as the best piece of work of its kind. But Issing admits that many things have turned the wrong way up since the book came out nearly a year ago. There are even unofficial opinions in Brussels saying that some countries might want to leave the eurozone.

“This is indisputably the most difficult moment since the euro was adopted,” Issing said. The question for Czechs is clear: Should they be happy that they still have crowns in their wallets unlike their Slovak neighbours, or should they try to catch up with their eastern neighbour as soon as possible?

Overpriced Dublin

After years of disputes among both economists and politicians, the euro was finally introduced in ten countries in January 1999, and from the very beginning of its existence, it was perceived as the key to a closer European integration.

But now the financial crisis reveals how different the current 16 eurozone members are and shows that the euro does not have to fit some countries at an every single moment. There are even comments in the European press that the eurozone needs a radical change of rules, and populist politicians in Italy and Ireland are talking about the advantages of returning to liras and pounds.

However, leaving the eurozone isn’t that easy. Countries would, for example, violate international agreements and lose the confidence of foreign investors. On the other hand, governments break many rules already now, raising budget deficits to be able to rescue troubled banks and industries.

And yet another aspect is becoming apparent – the effect that the behaviour of a single eurozone central bank had before the crisis broke out. Low interest rates, which the European central bank now prescribes to treat the crisis but which it held basically throughout the whole decade of euro’s history, did not suit everyone. In Germany and France low rates of interest served as a tool to boost GDP growth reaching less than 2% on average, while in Ireland whose GDP grew by an average 6% in the past decade, low rates and the ensuing massive spending caused unusually high inflation.

Czechs holding back

Still five years ago, the Czech Republic seemed to join the eurozone like the Slovaks did, but the entry date had been postponed and now there is virtually no date at all. The year 2013 is being mentioned informally, but it be much later too. And the reason against an early euro adoption? “We would lose part of our sovereignty and the chance to influence our economy,” Czech National Bank (ČNB) governor Zdeněk Tůma has been arguing for many years.

It’s true that the monetary policy is often a tool used to help the struggling economy in times of crisis. Low rates of interest make loans cheaper and deposits disadvantageous, so businesses and households rather invest and spend their money. However, ČNB policymakers cannot enjoy their moment of fame too much. A fortnight ago, the central bank announced its most radical move so far – it not only cut interest rates to 1.75%, the lowest level in the country’s history, but the governor resorted to an unprecedented step: he announced the expected exchange rate of the crown against the euro for this year. No other central bank in the world made such a forecast before, so many economists awaited the experiment to see what happens.

But – no surprise came. The effect on the crown’s rate was negligible. The credit market did not set in motion either – banks now lend money among themselves to a greater extent than they did before, but corporate loans are getting stricter and the distrust persists. “This has shown the real possibilities of the ČNB,” said Martin Kupka, a ČSOB expert focusing on the euro for a long time.

Still, economists agree that the crown does bring benefits to the Czech Republic. At least for now – its exchange rate has been weakening in recent weeks, which is a favourable situation for exporters who have more chances to compete on foreign markets.

The Czech Republic is far from the problems experienced for example by Hungary and the Baltic countries due to their “solo” currencies. The Hungarian forint has lost dozens of per cent over the past six months and all will be hit by that. Businesses as well as many households have taken loans in Swiss francs, but the foreign has weakened by 50% vis-a-vis the franc, which means debt installments will be 50% higher. A vast majority of Czech loans are crown-denominated and their number is much lower.

Czech advice

There is one point, however, which has to be mentioned when talking about the advantages the crown is bringing at the moment. “Like Hungary, also the Czech Republic is a small export-oriented economy with its own currency. By being part of the same region, we are losing investors’ confidence whether we like it or not,” said Jan Bureš, chief economist at Poštovní spořitelna bank. “The advantages of the crown only have a short-lived effect. It is not clear where its exchange rate will move tomorrow, so in the long run we would rather benefit from the stability connected with the euro,” Bureš said.

Adopting a single European currency is a matter of several years, and it does not solve the current problems. But the logic mentioned by Bureš should mean especially one thing – that the Czech Republic will not keep its “hands off” the euro. However, the final decision will be up to politicians. So what has the crisis done with the government plans? “At the moment, there is not any fundamental change,” said Finance Minister Miroslav Kalousek, reminding his promise to announce a binding euro adoption date as early as this autumn. “If I was to decide, I would be for the earliest date possible,” he added.

The euro adoption plans also involve the state budget deficit, which cannot exceed 3% of gross domestic product two years before eurozone entry. And, as experts warn, the Czech Republic could face problems meeting the ceiling given the current economic difficulties. But it’s true that the incumbent Czech government has complied with the state debt limit and Kalousek even warned his EU colleagues against excessive spending.

At the March EU summit on the crisis impacts, which the Czech Republic convened as the country presiding the EU, there will be a huge paradox that will probably not fit in the negotiations – the Czech Republic will moderate discussions about the problems of a currency although it is the only EU country that has not yet set a date for its introduction. Czech politicians will point to large government debts although the Czech state budget is in a relatively good condition. Kalousek said Czechs would also criticise buyouts of bad bank loans despite the fact that Czechs do not have to deal with any such problem in their relatively healthy banks.

“I firmly believe that Czech politicians will make themselves heard in these conditions,” Otmar Issing said. “But it won’t be easy for them at all.”

Translated with permission by the Prague Daily Monitor.

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