Euro Quietly Overruns Eastern Holdout Tiptoeing on Sidelines

Updated on
  • Czech companies increasingly avoid koruna for domestic trade
  • Central banker warns Brexit may marginalize non-euro members

When it comes to the euro, the Czech Republic is managing to have it both ways. For now.

The European Union member’s 10.6 million people may be overwhelmingly opposed to adopting the euro, but a large part of its economy has already ditched the national currency without making a fuss about it. While household savings and loans are nearly all in the koruna, Czech companies have almost tripled the use of euros when trading with each other since 2012.

The 19-nation currency bloc is also the main destination for Czech exports and home to the owners of its top businesses -- from carmaker Skoda Auto AS to lender Ceska Sporitelna AS. For Czech central banker Oldrich Dedek, staying on the sidelines no longer serves his country’s interests.

“The main argument for adopting the euro is that we are a small and very open economy with lots of external business ties, so having currency stability would be an advantage,” Dedek said in an interview. “Once Britain leaves the EU, this will further marginalize non-euro members. We can either complain about a two-speed Europe, or simply join the core and help shape the rules of the game.”

The creeping currency takeover shows companies are voting with their pocketbooks even before a nationwide debate urged by Premier Bohuslav Sobotka over the pros and cons of euro membership. The ex-communist country is back in the vortex of the neighboring bloc after Europe’s sovereign debt crisis intensified public resistance to euro adoption, and a three-year policy of capping gains in the koruna helped revive the moribund economy.

The authorities now warn, however, that accelerating integration in the currency union may push the Czech Republic to the EU’s periphery. Last month’s end of the one-sided peg, modeled after Switzerland, has once again exposed companies to currency swings and higher transaction costs, which could add to the euro’s appeal, according to Dedek, a board member of the Czech National Bank.

Read more about removal of the Czech currency-cap regime

While the country, which joined the EU in 2004, is obliged to adopt the euro at some point in the future, it has no target date for the move. A 2016 Eurobarometer survey showed 72 percent of Czechs were against the switch, the biggest share among EU nations. At the same time, more than 20 percent of domestic trade between companies is done in euros.

The koruna has gained more than 2 percent against the euro since the central bank announced last month that it would no longer keep the exchange rate artificially weak, the second-best performance in that period among major currencies worldwide. It traded little changed at 26.432 per euro as of 3:10 p.m. in Friday.

The end of the 27 koruna-per-euro cap is expected to renew long-term koruna strengthening that may hurt Czech company earnings in an economy where sales abroad account for about 80 percent of gross domestic product. Besides hedging in the derivatives market, exporters have been increasingly taking out loans in euros and paying their local suppliers in the common currency.

“The spontaneous euroization of the economy will probably continue,” said Jakub Seidler, chief economist at the Prague-based unit of ING Groep NV. “That will gradually limit the central bank’s ability to influence companies’ behavior with its monetary policy, reducing the benefits of keeping the koruna.”

Read more about the appeal and drawbacks of currency wars

Staying outside the euro area has helped insulate the country from Europe’s financial crisis, and allowed policy makers to prop up the economy by weakening the exchange rate.

But Dedek says the intervention regime worked only because most European countries already have the euro, preventing them from “currency wars and competitive devaluations” and forcing them instead to reform their economic and fiscal policies.

“That’s where I see the charm of the euro -- in that it has a civilizing effect by harmonizing the different economies and bringing them closer together,” he said. “The strength of small economies is in finding allies who will help them push their interests. And I think our natural ally is Germany and we can participate in the cultivation of the euro area.”

— With assistance by Peter Laca

(Updates koruna in eighth paragraph.)
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