Czech Government Won't Commit to Target Date for Joining Euro, Necas Says
An exchange office employee counts 1000 Czech koruna notes. Photographer: Vladimir Weiss/Bloomberg
Czech Prime Minister Petr Necas, in office for less than a month, said his government won’t commit to a target date for joining the euro, resisting pressure from exporters whose sales are being crimped by the rising koruna.
Necas, 45, said the country will benefit from a flexible exchange rate as consumer prices converge with those in richer European Union states, and rapid euro adoption risks fueling inflation. The koruna has gained 3.7 percent against the euro this month, the most among 177 currencies tracked by Bloomberg.
“The government program will not include any target date or a promise to join the euro area,” Necas said yesterday in an interview at his office in Prague. “Exports are important, but this country is not only a country of exporters.”
The Czech Republic, whose largest exporters include units of Volkswagen AG and Hyundai Motor Co., is recovering from its worst recession since communism ended in 1989. Exports account for about 70 percent of gross domestic product, which will grow 1.6 percent this year and 2.3 percent in 2011, after shrinking 4.1 percent in 2009, according to Finance Ministry forecasts.
The koruna reached a high of 24.663 per euro on July 28, the strongest since November 2008, before falling 0.5 percent to 24.780 as of 8:55 a.m. in Prague today.
Skoda Auto AS, the Czech unit of Wolfsburg, Germany-based Volkswagen that sells 92 percent of its cars abroad, has repeatedly said it is suffering from swings in the currency.
“We are in favor of euro adoption as quickly as possible,” Jaroslav Cerny, a spokesman for Mlada Boleslav-based Skoda Auto, said in a phone interview. “The government can see that the volatility of the exchange rate is negatively affecting the trade of export-oriented companies like us.”
Deficit Pledge
Necas’s three-party coalition government took office July 13, after winning May elections with pledges to reduce the public-finance deficit, which widened to 5.9 percent of GDP last year as the global economic crisis reduced demand for Czech exports and curbed revenue.
The government plans to cut the deficit to 4.6 percent of GDP next year and less than 3 percent, the EU limit and a condition for joining the euro, by 2013.
The majority of next year’s deficit reduction will come from spending cuts, with government wages and the Cabinet’s operating costs decreasing by 10 percent, Necas said. Investment will decline by 5 percent, and social spending will drop by more than 10 billion koruna ($528 million) through measures such as tougher conditions for welfare benefits, he said.
‘The Right Things’
Without cuts, the deficit may reach 6.6 percent of GDP next year, Finance Minister Miroslav Kalousek said July 27. The Treasury plans to sell a record 280 billion koruna of bonds this year, including securities denominated in foreign currencies, and says debt sales will rise to 312.9 billion koruna by 2012.
“Sometimes you have to do the right things, even if they are unpopular,” Necas said. “We have to try and explain these steps, and if we fail in this, we have to be prepared to pay the political price. That’s part of life in politics.”
The new government has 118 seats in the 200-member lower house of parliament, giving it the biggest majority since the Czech Republic came into existence in 1993.
All countries that have joined the EU since 2004 must eventually adopt the common currency. The euro area has 16 members, after Slovakia last year became the second former communist state to adopt the currency. Estonia joins in January.
Europe Debt Crisis
The European sovereign debt crisis, sparked by Greece’s ballooning deficit, has cooled enthusiasm for the euro among some eastern EU members. The currency has dropped almost 16 percent against the dollar since November.
“With the current state of the euro zone, it wouldn’t be politically wise to say that we will join on a certain date,” Necas said. “After all, nobody knows what will happen with the euro zone in two or three years, so a cautious approach is appropriate.”
The Czech Republic’s GDP per capita, an indicator of the standard of living, was about 80 percent of the EU average in 2008, compared with 116 percent in Germany, according to data from Eurostat, the EU’s statistics agency in Brussels.
The country would benefit from having its own currency as it seeks to close that gap, Necas said. Therefore, entering the exchange-rate mechanism, in which the Czech Republic would have to prove the koruna is stable in preparation for joining the euro, is “not on the agenda.”
“I don’t see any reason why we should give up the flexible exchange rate, given that we will have to go through the long- term process of converging price levels,” he said.
To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net
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