Earliest Possible Euro Entry Would Help Czechs, Premier Says

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Bohuslav Sobotka
Joining the euro area will create jobs and lure investment, and the government should do everything it can to prepare the country of 10.5 million to ditch the koruna by 2020, Czech Prime Minister Bohuslav Sobotka said in response to questions from Bloomberg on Wednesday. Photographer: Martin Divisek/Bloomberg

The Czech Republic would benefit from adopting the euro “as early as possible,” even if lack of agreement in the three-party ruling coalition will prevent that from happening during its four-year term, the premier said.

Joining the euro area will create jobs and lure investment, and the government should do everything it can to prepare the country of 10.5 million to ditch the koruna by 2020, Bohuslav Sobotka said in response to questions from Bloomberg on Wednesday. It would also provide currency stability, lower transaction fees and possibly lead to a higher credit rating, he said.

Sobotka’s comments escalate a debate in a country where the global economic crisis, worry over contagion from Greece, and previous governments that have shunned the euro have galvanized public opposition to the currency. While central bank Governor Miroslav Singer insists there’s no reason to switch now, President Milos Zeman holds up the 2009 euro area accession of Slovakia, which split from the Czech Republic more than two decades ago, as an example to follow.

“There are a number of reasons for the earliest possible target date,” Sobotka said in an e-mailed response to Bloomberg questions. “To create jobs, we need investments, and investors are regularly asking us when we will start using the common currency.”

Coalition Conflict

Slovakia is now borrowing at negative yields, earning 0.02 percent for five year debt, compared with the Czech yields of positive 0.03 percent. The koruna traded at 27.5 against the euro at 11:28 a.m. in Prague.

The Czechs have fulfilled all of the economic requirements for euro entry save the two-year stability test candidates’ currencies must pass. Sobotka’s Social Democrat party, which has led the government for just over a year, approved a manifesto in March supporting measures that will prepare for euro adoption five years from now.

The current cabinet, however, won’t be able to begin the process because ANO, the second-largest coalition party led by billionaire Finance Minister Andrej Babis, doesn’t want to set a date, he said.

Having the euro would be fine “in principle” but with respect to the euro area’s challenges, including Greece, adoption isn’t the “most important” topic for the government, Babis said on March 22. Still, ANO is open to debate the issue, he said.

According to a survey of 1,027 people taken a year ago by pollster CVVM, 76 percent of Czechs opposed euro adoption, versus 16 percent who supported it. The poll gave no margin of error.

“The reason why we’re not adopting the euro now isn’t public opinion, but the necessity to prepare and adjust the economy in terms of its relation to the euro area, so that entry happens in the best possible way,” Sobotka said.

Euro Investment

The renewed debate in the Czech Republic began again in earnest in February, when Zeman said he was “very embarrassed” that Slovakia beat the Czechs into the euro area. Zeman, who alone can appoint central bank policy makers, said he’d only name candidates who support entry.

“It’s interesting how the sentiment has shifted, also with respect to events in Greece,” William Jackson, London-based senior economist at Capital Economics said by phone. “Generally, it seems that Czech policy makers would shy away from committing to join the euro and making a firm timetable for doing so. But even if there’s a move toward it, it’s still very long way off.”

Changing Opinions

While the decision falls to the government, the bank is an important contributor to public perception and has defended the country’s decision to avoid surrendering the koruna and its hold on monetary policy. At the same time, large contributors out output, including Volkswagen’s Skoda Auto and CEZ AS, have been calling for adoption for years.

“I believe that opinions will begin to change significantly,” Sobotka said. “Even though many here don’t hesitate to present the euro as a bogeyman, at closer look we’re talking about a normal and comfortable tool to seek social prosperity. The Slovak experience, both in the introduction and in the functioning of the common currency, can be an example to us.”

While Sobotka sided with Zeman on euro adoption, he supported the central bank following an attack by the president against the regulator’s weak-koruna regime, under which policy makers intervened to weaken the Czech unit in 2013 and have pledged to keep it at about 27 a euro at least until 2016.

“The intervention by the central bank also probably saved our economy from deflation in the first months of this year,” Sobotka said.

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