Prague, Czech Republic – What will official membership to the Eurozone mean for businesses in the Czech Republic, and why does the country continue to remain reluctant about adopting the currency?
The euro’s impact on the Czech Republic and businesses
The first question that comes to mind is: does the Czech Republic need the euro? While there are dissenters on both sides of the aisle, Czechia appears to be doing just fine without the euro or its membership. To date, the country forms part of eight EU member states that don’t have membership but are – technically – obliged to join at some time in the future – Hungary, Poland, Romania, Bulgaria, Croatia, Denmark and Sweden account for the remaining seven.
However, despite the Czech Republic’s reluctance to adopt the euro, businesses have been able to flourish under the economic and political machinations of the country. This isn’t to imply that there isn’t an internal drive stemming from those two factors for membership.
The euro’s foothold in Czechia
A recent study revealed what some would deem as a bizarre relationship between companies within the Czech Republic, who were and continue to use the euro to trade between one another. In fact, more than a fifth of transactions between local establishments are conducted with euros, but it’s not just domestic trade, the EU’s common currency is also used for the sale of goods abroad as the currency itself is incredibly widespread.
Tying into this is the fact that the Eurozone accounts for over half of Czechia’s foreign trade. For instance, in 2018, 57% of Czech trade was conducted with Eurozone countries, with a third of it being done solely with neighbouring Germany. This stands in stark contrast to 17% of its trade that was done with non-Eurozone EU members. The message here is quite clear; financially and commercially, the Czech Republic is deeply entrenched in the Eurozone by way of its local trade and its exports. Its reliance on the euro makes it an ideal and natural candidate for euro adoption.
Obligation vs. isolation
The general consensus amongst analysts veers towards membership and not just because it would make financial sense, but also because Prague is legally obligated to do so, according to EU treaties. Naturally the migration process isn’t cut and dry. There are set protocols that need to be achieved, namely price stability, tight control of public finances and exchange rate stability by way of participation with the Exchange rate Mechanism for at least two years. The entry level bar is high, and membership is further debated when one views examples on how EUR-USD is affected, for instance.
At the moment, the Czech Republic and the US enjoy a mutually beneficial trading relationship as the dollar is stronger than the koruna. If the euro were to be officially adopted, this business relationship would drastically change due to the dollar’s relative weakness against the euro. Also, by opting to remain outside of the Eurozone, Czechia faces a strong current of isolation as it will be left out of key decision-making processes regarding European policy.
A strong national pride
At the end of the day, reluctant Eurozone membership can be traced to two main factors – namely sovereignty and politics. The Czech Republic has a strong national pride and many Czechs admire their independent monetary policy which includes a low level of debt and sound public finances, all of which have contributed towards strengthening the economy’s resilience.
And then of course there’s the political reasons for the country’s tip-toeing: in a poll conducted by way of the Eurobarometer, it was found that only 33% of the population supports the euro, making it the non-euro EU member state with the least public backing, although this share appears to have increased in the most recent surveys.