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Reflections on the Czech
debate about pros and cons
of single currency
€
Ministry of finance of the Czech Republic
May 2006
Euro - culprit of poor growth
performance in Eurozone ?
Source: EU Growth Trends at the Economy-Wide and Industry Levels,
European Commission, April 2006
Euro - culprit of poor growth
performance in Eurozone ?
Heard-of arguments
Unfulfilled promises of pro-federalist politicians
Another rigidity to already rigid Union
Source of diverging economies
Counter-arguments
Productivity deceleration is a longer-term
phenomenon
The issue already addressed in 2000 Lisbon Agenda
What alternative exchange rate arrangement for
internal market? (wild fluctuations of floating rates?,
managed realignments in EMS?)
Inflation differentials in Eurozone
3
2,5
Percent
2
1,5
1
0,5
0
1996
1997
1998
1999
Standard deviation
2000
2001
2002
2003
2004
Rate of inflation
Source: Eurostat. Monthly values of yearly averages of harmonised index of
consumer prices.
Adjustment without exchange rates
Source: Ahearne, A., Pisani-Ferry, J.: The euro: only for the agile. Bruegel policy
brief, February 2006.
Growth deceleration as symmetric
shock ?
2000
Germany 3,2
4,1
France
3,0
Italy
2001
1,2
2,1
1,8
2002
0,1
1,2
0,4
2003
-0,2
0,8
0,3
2004
1,6
2,3
1,2
Price level (EU-25 = 100)
Euro – potential source of inflation ?
GDP per capita (EU-25 = 100)
Source: Centrum of economic studies VŠEM, Bulletin 07/2006
Euro – potential source of inflation ?
 Supporting arguments
 Loss of the exchange rate channel during the catching up
process with the EU price level
 Empirical evidence from some Baltic countries (Latvia approx. 7
%, Estonia 5 % inflation, but robust growth as well)
 Caveats
 Empirical evidence from Eurozone countries (Portugal, Greece,
Ireland 2 – 3 %)
 Price differentials mainly observed in non-tradable sector while
tradable sector is exposed to sharp competitive pressures
 Shrinking non-tradable sector and extending tradable sector
 The closing of price gap through the exchange rate channel can
continue until Eurozone accession (depends on the ERM-II)
 More thorough analytical work still needed (extent of BalassaSamuelson effect)
Critique of Maastricht criteria
Some technical parameters are outdated or
questionable
Inflation - who are the outliers?
ERM-II narrow fluctuation band ± 2¼ % - potential for
speculative attacks?
Will be the trend exchange rate appreciation tolerated
One-sided stress on nominal convergence and
neglect of the OCA arguments
Missing prioritisation
Lack of credible reference values
Inconclusiveness of the OCA tests
Trade openness of the Czech
economy
Financial openness of the Czech
economy
Absence of any capital controls (CR is integral
part of the internal EU market)
EU is the major source of foreign direct
investment
Dominant foreign ownership in the Czech
banking sector (CSOB, CS, KB)
High trade and financial openness 
growing weight of the „endogenousness“
OCA argument
Other OCA arguments
 Low synchronisation of business cycles
 Factors spoiling good correlation
• Fast actual economic growth (5 - 6 %)
• Monetary shake-up in 1997 and resulting recession
 Higher frequency of asymmetric shocks
 Very abstract econometric exercise
 How many of them should by properly addressed by the
exchange rate policy? Over-representation of car-producing
industry?
 Insufficient flexibility of labour market
 The OCA is concerned with insufficient cross-border mobility (no
major problem on the Czech side)
 Flexibility of the Czech labour market is not worse than that of
the EU