Euro Appeal Dims for Babis as Koruna Cap Revs Up Economy

After eight months of watching a cap on the Czech currency revive the moribund economy, the country’s finance minister says he’s willing to bide his time before ditching the koruna in favor of the euro.

The Czech Republic is benefiting from having its own currency and doesn’t need to rush to adopt the euro before 2020, said Andrej Babis, the second-richest Czech with a fortune estimated at about $2 billion. The budget isn’t in shape for the switchover even as the government pledges to keep the fiscal deficit below a European Union-mandated ceiling of 3 percent of economic output.

“For us, having the koruna is beneficial,” Babis said in an interview yesterday in his office in central Prague. “The euro would bring some advantages, it would remove some fees or need for hedging. On the other hand, setting the right conversion rate would be a big problem” because the interests of the public and importers would clash with exporters’ demands.

The Czech Republic, Poland and Hungary, the biggest of the EU’s eastern economies, are eschewing euro adoption 10 years after they joined the trading bloc as the euro-area crisis dimmed the currency’s allure and central banks seek to retain independence to fine-tune their policies. Having control over own currency allowed the Czech National Bank to weaken the koruna by intervening in foreign-exchange markets in November for the first time in 11 years as it fought off deflation risks.

Currency Cushion

The central bank in Prague says the koruna is a cushion against economic shocks from abroad. After cutting the main interest rate to what policy makers call a “technical zero” of 0.05 percent in 2012, the bank engaged in unorthodox monetary easing by selling the koruna and setting a Swiss-style limit for its gains.

The koruna was little changed today at 27.434 per euro as of 10:31 a.m. in Prague. Its implied three-month volatility against the euro was 2.4 percent, the lowest after the Swiss franc among 25 major currencies tracked by Bloomberg.

Even as the economy is rebounding from the longest recession on record, the central bank is delaying its shift to tighter policy. The Czech monetary authority said last month that it won’t scrap the limit on the currency’s gains before the second quarter of 2015 because of slower inflation at home and abroad.

The Czech Republic was among the eight post-communist countries that joined the EU in 2004 and committed to adopting the common currency after meeting the entry criteria. The group also included Hungary, Poland, Lithuania, Estonia, Latvia, Slovakia, and Slovenia. The last four have already joined the euro, with Lithuania set to enter the currency union in 2015.

November Interventions

The koruna has weakened 6.2 percent against the euro since the November interventions, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg.

The central bank said it sold about 200 billion koruna ($10 billion) -- equivalent to about 5 percent of gross domestic product -- in the first days of the interventions.

The euro-area’s sovereign debt crisis has intensified public resistance to euro adoption in the Czech Republic, already one of the nations most opposed to surrendering its currency, according to opinion polls. Less than 20 percent support euro entry, with 76 percent opposed, according to a survey taken by the Czech Academy of Sciences in April.

Babis, whose Agrofert AS is the country’s fourth-biggest employer, is a member of a government that supports closer EU integration while refusing to set a target date for entering Europe’s monetary union. ANO, a pro-business party he founded three years ago, is the second-largest in parliament.

Currency Bloc

Exports including sales of cars made by Volkswagen AG’s Skoda Auto AS unit account for about 80 percent of GDP. That makes the euro region indispensable for driving economic growth, with the currency bloc buying two-thirds of the products the country ships abroad.

A weaker currency prevented a fall into a deflation spiral, the central bank has said. The easing also helped boost domestic demand, which suffered in the wake of three years of austerity policies that the current administration is seeking to reverse.

Since November, statistics office data have shown a faster economic expansion, rising retail sales and improved business sentiment.

Czech Economy

The Czech economy gained 2.9 percent in the first quarter, the fastest on an annual basis in three years, after 1.1 percent growth in the previous three months. Retail sales rose for six consecutive months before dropping 0.6 percent from a year earlier in May. The economic sentiment indicator jumped in June to the highest reading since February 2011.

Prime Minister Bohuslav Sobotka, in office since January, said that while he’s in favor of euro adoption, the cabinet needs time to win public support for abandoning the national currency. Sobotka has said 2020 may be a realistic date to hand monetary-policy decisions over to the European Central Bank in Frankfurt.

“Talking about 2020 is a pointless debate now,” Babis said “I don’t see a reason at the moment for entering the euro zone. I’m satisfied with the koruna.”

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