CZECH REPUBLIC, December 22 - The Government has approved the joint recommendation of the Ministry of Finance of the Czech Republic and the Czech National Bank not to set a target date for adopting the euro in the Czech Republic yet.

The decision is based on information contained in this year’s “Assessment of the Fulfilment of the Maastricht Convergence Criteria and the Degree of Economic Alignment of the Czech Republic with the Euro Area”. The Government has been assessing this document on the Czech Republic’s preparedness for adopting the euro every year since the country joined the European Union in 2004.

Resolution and supervisory mechanisms have been introduced or bolstered in the European Union in response to issues relating to the European debt crisis. Macroeconomic and budgetary surveillance has been tightened. New European institutions have been and still are being created. These changes are fundamentally changing the conditions and obligations arising from the Czech Republic’s potential membership of the euro area. Sustainable fulfilment of the Maastricht convergence criteria accompanied by sufficient alignment of the Czech economy with the euro area economy is no longer a sufficient condition for adopting the single currency. It can be expected that euro area entry will in reality also be conditional on participation in the new institutions and mechanisms. Based on the current information, the costs relating to joining the European Stability Mechanism would be particularly substantial upon the Czech Republic’s entry into the euro area.

The preparedness of the Czech Republic itself to adopt the euro has improved in recent years. The Czech Republic is comfortably compliant with the criterion on the government financial position and the criterion on the convergence of interest rates. Compliance with the criterion on price stability is not guaranteed this year, as the forecast inflation, while staying in the upper half of the tolerance band of the Czech National Bank inflation target, is right at the limit of the criterion. The Czech Republic is not compliant with the criterion on the exchange rate because it has not joined the exchange rate mechanism. However, it is likely to be compliant with all the criteria except the exchange rate one in the medium term.

The alignment of the Czech economic cycle with the euro area economy increased further last year. However, there are still areas showing misalignment as regards the Czech Republic’s preparedness to adopt the euro. The main obstacles to euro adoption still include the unfinished process of real economic convergence of the Czech Republic towards the euro area, including convergence of the price level and especially the wage level. Given population ageing, the issue of long-term sustainability of public budgets is not fully resolved. Differences also persist in the structure of the Czech economy compared to the euro area. The economic situation in the euro area itself, despite an observed improvement, still cannot be assessed as sufficiently stabilised either.

Given the aforementioned facts, the Ministry of Finance and the Czech National Bank have concluded that the Czech Republic has not yet made sufficient progress in laying the groundwork for euro adoption to allow it to set a target date for the Czech Republic’s entry into the euro area.

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