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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 €

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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.


Growth deceleration as symmetric shock

Growth deceleration as symmetric shock ?


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


Trade openness of the czech economy

Trade openness of the Czech economy


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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