Czech Republic Insight

The Czech Republic’s schizophrenic relation with the euro

Prague, Czech Republic – By many accounts, the Czech Republic has a lot to gain by adopting the euro. But a vast majority of the population feels nothing but distrust and contempt for the EU’s common currency.

The Czech Republic and other Central European countries (Poland, Hungary) have refused to join the Euro-zone and indefinitely postponed the adoption date. A recurring topic in Czech politics and public debate, the issue is illustrative of Prague’s broader conundrum regarding the country’s Western integration and future role in the EU.

While its deep economic integration with Western markets has cemented its position at the heart of the continent’s value chains, the issue of euro adoption has come to embody the country and its population’s fundamental yearning to safeguard (what some people see as “what’s left of”) its national sovereignty.

Why do Czech companies trade in euro?

The Czech Republic’s schizophrenic relation with the European common currency was recently illustrated by a study from the Czech Chamber of Commerce, that found that Czech companies were increasingly using the euro to trade between themselves: more than one fifth of all payments made to domestic suppliers are now being carried out in euros.

Talking to Radio Prague, economist Jan Bureš explained why:  “Exporters prefer to stay in euros as a principal payment as far as they can because they sell most of their goods abroad and they get euros for that. So they also prefer to pay their suppliers in euros”. In other words, a pretty sound strategy for export-driven companies to minimize the exchange rate risk.

“In general, I guess the Czech business sector would prefer faster adoption of the euro”, Jan Bureš added, echoing oft-repeated calls from Czech companies to, finally, get on with it.

A legal obligation to join the Eurozone

Most analysts seem to agree that this would, indeed, make sense, and not only because Prague is legally bound to join the 19-member monetary club.

All EU member states (except for the U.K. and Denmark, who negotiated an opt-out) are legally obliged to adopt the euro once they meet all the so-called “convergence criteria”: price stability (to show inflation is under control); soundness and sustainability of public finances; exchange-rate stability through participation to the Exchange Rate Mechanism (ERM II) for at least two years; and long-term interest rates, “to assess the durability of the convergence achieved by fulfilling the other criteria”.

The ratification process and adoption date remain, however, the prerogatives of individual member states, who can therefore choose to postpone it indefinitely at their own convenience: although Sweden, for instance, could have joined two decades ago, the country has been intentionally staying out of the Exchange Rate Mechanism, thereby ‘failing’ to meet one of the adoption criteria.

Last year, the European Commission concluded the Czech Republic currently only meets two criteria (public finances and long-term interest rate) needed for euro adoption.

The Euro-zone accounts for more than half of Czech foreign trade

A closer look at the Czech Republic’s foreign trade seems to make a pretty strong case for the adoption of the common currency: in 2018, more than 57% of the total Czech foreign trade was done with the Eurozone, and nearly a third of total trade turnover is carried out with Euro champion Germany alone, according to data from the Czech statistical office.

In comparison, exchanges with non-euro EU member states accounted for 17% of Czech trade last year. That includes the U.K., set to leave the EU, as well as Bulgaria and Romania, which both took steps to join the Eurozone in five years time.

These figures may only state the obvious: the Czech Republic is deeply integrated with the Eurozone, both through local companies whose main export markets and clients are in the West, or through subsidiaries and branches of foreign companies (mainly German, but also French or Italian) established in the Czech Republic.

A growing risk of marginalization and isolation

By staying out, the Czech Republic also risks being increasingly isolated and left out of key European policy discussions. Until now, extra-euro EU member states still had an important way to make their voices heard: the U.K. But after the Brits leave the EU, the small club of 9 countries will lose its most powerful ally and vocal spokesman at the EU table of negotiations.

As talks about a multi-speed EU intensify, the Eurozone is bound to become one of the main platforms for member states wishing to stay at the core of the bloc: this is obvious from the example of Slovakia, whose membership to the Eurozone is a recurring argument from its leaders to convince European partners of their desire to be an active player in European politics. On the contrary, those who don’t have a seat at the table may risk finding themselves more and more marginalized.

What’s wrong with the euro?

In the eyes of many Czechs, the euro is an issue of sovereignty much more than a purely monetary topic. While the common currency has become synonymous with the debacles of the euro and Greek crises, Czechs pride themselves in their independent monetary policy, their sound public finances and low level of debt, and their deer koruna. All this, they say, has played a strong role in the Czech economy’s strong resilience and growth.

Last week, comments from the head of the Czech Central Bank Jiri Rusnok expressed this widespread mindset among Czech decision-makers, saying that “the euro zone, or some of its less successful parts, aren’t in very good condition”. “Another test of its resilience may come”, according to Rusnok who highlights that high debt is a major problem for euro economies, “and the European Central Bank would be, in that case, in a pretty difficult situation”.

When German think tank Center for European Policy (CEP) published a report arguing that only Germany and the Netherlands strongly benefited from the common currency since its inception, Czech Prime Minister Andrej Babis jumped at the chance: “I don’t want the euro”, he tweeted. “And all of you who want it, come see the analysis of the German CEP”. Regardless of the fact that the study in question has been disputed (in German) by many economists, both pro and anti-euro, Babis’ statements may be  slightly misleading.

As Bloomberg explains, “the biggest problem with the euro, according to its detractors, is that it makes it impossible for adopting countries to devalue their currencies in response to economic shocks”. But in the case of Central Europe and the Czech Republic, “a major devaluation of a national currency won’t do much for competitiveness”, due to its degree of integration with the euro zone and inclusion to regional value chains, mostly German.

After the 2008 financial crisis hit, the Czech, Hungarian and Polish currencies depreciated by around 30% compared to Slovakia, who officially joined the euro on January 1st, 2009. But that didn’t help them as many would have expected: Slovakia even outperformed both Hungary and the Czech Republic (but not Poland, the only EU country who didn’t fall into recession) after 2008.

It’s (not) the economy, stupid!

That brings us to the real reasons why the Czech Republic doesn’t use the euro: the main obstacles are neither fiscal nor monetary, but political. According to the Eurobarometer, support for the euro in the Czech Republic stands at 33% (the lowest among non-euro EU member states), compared to 69% in Romania, 59% in Hungary and 48% in Poland. Openly advocating the country to join the Eurozone would amount to political suicide.

This was clear in 2012, when Czech Prime Minister Petr Necas rejected, mostly for domestic political purposes, the “European fiscal compact” (known as the TSCG in EU jargon) meant to enforce budget and fiscal discipline. Prague was, with London, the only capital not to join the compact: “Everyone understands why the U.K. is against the pact. No one understands why the Czech Republic is against it”, a frustrated pro-European Czech Foreign Minister Karel Schwarzenberg then told reporters.

Current PM Andrej Babis, who was Finance Minister in the previous government and is known for his pragmatic politics, is aware of this and had repeatedly expressed his opposition to the euro: late last year, the Czech government approved the recommendation, jointly issued by the Ministry of Finance and the Czech National Bank, not to set a euro adoption date. Central bankers cited “the unfinished process of real economic convergence of the Czech Republic” as “the main obstacle to joining the monetary union”.

The issue was thereby once again postponed indefinitely, and little changes can be expected before the next elections… or much longer after that.

Headed by Kafkadesk's chief-editor Jules Eisenchteter, our Prague office gathers over half a dozen reporters, editors and contributors, as well as our social media team. It covers everything Czech and Slovak-related, and oversees operations from our other Central European desks in Krakow and Budapest.