Czech central bank: Euro adoption not about influence, but consequences for economic policy

It is not true that adopting the euro will bring the Czech Republic the so sought greater influence in the EU, CNB Governor Jiri Rusnok said in an interview with local Mlada fronta Dnes daily today published on the CNB’s website. He noted that the country has almost no influence now and defends its interest poorly. He underlined that the question of the euro adoption is not about gaining influence, but about the practical consequences in terms of economic policy. Rusnok underlined that the fiscal policy should become more flexible and larger reserves be accumulated so as the state, as part of the euro area, to be able to react to potential economic shocks and to intervene in times when the central bank would not be able to react by using its own tools of monetary policy such as interest rates or the exchange rate. This would mean that the government, albeit public finances being in line with the Maastricht criteria, will have to make surpluses in economic good times and use revenue rainfall to reduce the public debt, thus creating manoeuvring space for times when the inflow of EU funds will be lower and investments will have to be carried out with public means to a greater extent, or when the economy will fall into recession again and the state will have to pay more benefits amid declining revenues. Moreover, the labor market should also be more flexible in order to be able to absorb any shocks. He noted that for the country it would be much healthier to adopt the euro only when prices, including wages move closer to those in the euro area.

According to Rusnok, the economy is capable of managing the current rapid wage growth, but that it cannot be sustainable in the long run as the labour productivity would not grow at such a pace. He expects that when the current boom is exhausted wages to increase by 4-5% on average per year which would be sustainable and secure catching up with the euro zone.
Rusnok noted that although there was some political instability, it was normal after the elections, adding that it might hurt the economy only if politicians fail to form a functioning government for a long time. In his personal view, it would be good if the new government shifts taxation more to consumption as it would be fairer, but underlined that major tax cuts are not needed as the country does not suffer any major tax burden. He noted that after the extraordinary strong growth of some 4.5% this year, the economic expansion will slow down to about 3.4-3.5% but underlined that it will still continue to expand and that it must be taken into account the high comparison basis. He also noted that as the labour market is overheating and businesses are suffocating with labour shortages, the upward pressures on wages will continue which creates risk of higher inflationary pressures, but expressed confidence that the economy will adjust.

Rusnok does not think the economy is still being supported by the CNB’s one-sided fx commitment that was ended in early-April saying that the impact of the 5% crown’s weakening with the fx cap introduction has been exhausting already during the fx cap duration, but admitted that it has contributed to the speed and pace of economic recovery.

With regard to the upcoming Dec 21 monetary policy meeting Rusnok said he is still not yet certain how he would vote with the chances being 50-50 to support a rate hike or holding the 2-week repo rate unchanged at 0.50%. Still, he underlined that this was just his personal view and that when deciding the rate-setters will take into consideration a wide range of data, including wage and crown’s exchange rate developments. He noted that at present the CNB is less dependent on ECB’s monetary policy as the Czech economy is in kind of advance in terms of business cycle as both GDP and prices grow at faster rates than those of the euro area.

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