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Czech News in English » Opinion » Financial crisis, the Czech Republic and the euro

Financial crisis, the Czech Republic and the euro

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Opinion on the scope of the financial crisis has evolved dramatically since last year. In the beginning, it was mainly talked about as a local, American problem. In the spring, experts and politicians began predicting a slight economic slowdown in Europe as well. By summer, it became obvious that the crisis would hit even countries like Russia and China.

Today, it is clear that what started as a US credit crisis will develop into a world-wide recession that will last at least one or two years. An economic depression was averted only thanks to a relatively speedy and well-coordinated response of central banks and governments.

The crown? Nothing special…
For a long time it seemed as though the financial crisis had nothing to do with us. Czech banks had not bought big volumes of toxic shares and conservatively focused mainly on the development of the local market. An economy driven by the export industry maintained a healthy, rapid growth rate.

But the Czech Republic cannot avoid the impact of the crisis. Local exporters are already noticing a significant decrease in demand, particularly from western Europe. The majority of banks and important companies in the manufacturing industry, moreover, have foreign owners, and they are feeling the impact of the financial crisis more strongly than firms on the local market.

Fortunately, the crisis hit the Czech Republic in the upward arc of its economic cycle. This means that we should not see any significant decrease in production or any massive layoffs, but rather a decrease in economic growth, which, in my opinion, will not exceed 3% next year.

It would be a mistake to think that the impact of the crisis will be less drastic simply because our country has not introduced the euro yet. There are a number of countries that also still have their own currency but have been hit hard all the same. Hungary, Ukraine and Iceland are some of the examples. By contrast Austria and the Netherlands remain nearly unscathed. Germany also appears to be quite resilient.

In each country, the impact of the crisis can be exacerbated by local problems. In the Czech Republic, it is the negative effect of the rapid appreciation of the crown. In Russia, it is the outflow of capital following the Georgia conflict. In Hungary, a long period of unbalanced public finances.

In relation to the crisis, I don’t see any specific advantage brought by having the crown. We remain a small open economy, with export focused on EU counties. We can expect to see the crown remain unstable, prone to excessive gains, attacks from financial speculators and uncertainty for foreign investors.

All this will bring new problems for the Czech industry, and that is why it would welcome adopting the euro soon.

Anything will be possible
It would only make sense to doubt the value of a common currency if the eurozone was unable to respond to market developments or if it fell apart. But nothing like that is happening. On the contrary, the EU has shown that it is able to respond quite rapidly. Under normal circumstances, unlimited state guarantees for deposits or the reevaluation of the Stability and Growth Pact would seem like a bad move. But the current crisis is a unique situation that calls for special measures.

Already over the last few months, recent developments have surprised analytics, politicians and central bankers. Few could have predicted such fallout. That’s why it is impossible to rule out any scenarios and response measures in the future. And it is quite clear that the system of regulating the financial sector and governmental economic policies will change following this year’s experiences.

Not to overburden
The Czech industry right now does not need any special measures. It should not demand guarantees, subsidies or tax breaks. It needs to be able to deal with the current economic situation without any aid. Because nothing can compensate for the main problem – the world-wide decrease in demand.

At the same time, the industry should not need to deal with any additional burdens from Brussels or from the Czech government in the form of new expenses stemming from, for example, new environmental regulations.

All planned regulations that could increase companies’ expenses should be postponed. Flexibility on the labour market is important for the industry in a situation when it is very difficult to anticipate future development.

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