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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.

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reflections on the czech debate about pros and cons of single currency

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
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 eurozone1
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
Inflation differentials in Eurozone

Source: Eurostat. Monthly values of yearly averages of harmonised index of consumer prices.

adjustment without exchange rate s
Adjustment without exchange rates

Source:Ahearne, A., Pisani-Ferry, J.: The euro: only for the agile. Bruegel policy brief, February 2006.

euro potential source of inflation
Euro – potential source of inflation ?

Price level (EU-25 = 100)

GDP per capita (EU-25 = 100)

Source: Centrum of economic studies VŠEM, Bulletin 07/2006

euro potential source of inflation1
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 Balassa-Samuelson effect)
critique of maastricht criteria
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 appreciationtolerated
  • One-sided stress on nominal convergence and neglect of the OCA arguments
    • Missing prioritisation
    • Lack of credible reference values
    • Inconclusiveness of the OCA tests
financial 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
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
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