“The Euro is intertwined with the very idea of the European project”

, by Morgan Griffith-David and Chloé Fabre

“The Euro is intertwined with the very idea of the European project”
Oldřich Dědek

The path to the Euro is a long one. As Oldřich Dědek, Chief Coordinator for Euro Adoption in the Czech Republic reminded us, the project for economic integration started in the mid-50s, finally reaching a common currency in 1999. The project is a slow one, but with time, men such as Mr Dědek are paving the way for the enlargement of the single currency.

Seven years after the accession to the EU and three years after the beginning of the Financial Crisis, we went to ask Doc. Ing Dědek, CSc. about the next steps to joining the ’club’, the state of the Eurozone and public perception – we found out that the Euro project might not be what it seems.

Dr Dědek is a lecturer in Economics at Charles University in Prague, has been Vice-Governor of the Czech National Bank, and is now the chairman of the National Coordination Group for the adoption of the Euro in the Czech Republic. Under his guidance, the National Coordination Group, created in 2005, helps to steer each of the ministries and organs of the Czech Republic, and in particular the Czech National Bank, to the eventual switch-over to the Euro. This is happening in every country that is preparing to adopt the Euro, with National Changeover Plans being adopted (for example, one was adopted by the Czech government in 2008), and key issues being debated. A huge amount of work goes into preparing to change over banknotes and coins, adapting information systems, preparing state administration and adjusting legal systems, amongst other issues.

Czech Republic – “one of the best candidates for Eurozone membership”.

Even if this administrative action is not on the top of the Czech agenda, the Czech Republic is a leading contender for Eurozone membership. It is a highly open country, with almost 70% of its foreign trade made with the Eurozone, primarily Germany and Slovakia. Exporters from the Czech Republic would like to see a stable exchange rate between the Czech Koruna and the Euro. Indeed, the variation of exchange rate may lose them important benefits, for instance Škodaexport sending cars and car-parts to the single market. Mr. Dedek adds that the losses are difficult to evaluate but the exporter’s pro-Eurozone lobbying is strong enough to demonstrate their need to join. Plus, the Czech banking sector would benefit from the adoption of the Euro, as most of its banks are head-quartered in the single market – this was a major problem during the crisis due to the withdrawal of capital from the Czech Republic, back to the Eurozone.

The Czech Republic’s next major step may be to join the Exchange Rate Mechanism (ERM II). The European Exchange rate mechanism aims to reduce variation between the exchange rate of two currencies, the Euro and the currency of candidate for the Eurozone, as this can be harmful for trade. The ERM II is a political agreement between the members of the Council to set up a central exchange rate, around which the currencies can vary, between high and low bands. To maintain only minimal variation, the government and Central Bank may have to intervene to support the currency. This intervention “may contradict” the aim of limiting inflation, given that the means of intervention can result in price increases. Mr Dědek gave the example of the Hungarian shadowing of the ERM II and subsequent instability to explain why the Czech National Bank sees no “added value” of joining the ERM II and will thus minimise its involvement and be a member “no day more” than necessary under the Maastricht Treaty’s two year requirement.

The Czech currency has “a very sound track record”, and the Czech Republic nearly fulfils the Maastricht (Euro Convergence) Criteria – its inflation rate, gross government debt to GDP and long-term interest rate are all under control - but not its deficit which is above the 3% limit. To reach the level for being able to join the single currency zone (or even the ERM II), according to Mr Dědek, the government should hold important reforms, such as of pension and healthcare systems to reduce the more than 5 % deficit the Czech Republic has – it is here that the national politics of the Czech Republic work to its advantage. The pension reform is currently on the top of the Czech agenda, and the government coalition is strong.

“We live in a global world”

In December 2010, the Prime minister Petr Nečas refused to set a date to begin the negotiation for adoption and few time before the President Vaclav Klaus declared that the Euro had failed. Don’t let them fool you, the Czech political scene’s social democrats (ČSSD) and neoliberals (TOP 09) are both broadly pro-European. While President Klaus’ former party of conservatives (ODS) are divided between pro-free trade businessmen and a strong Eurosceptic faction, the pro-Euro free trade group are usually dominant. The ruling ODS-Top 09 coalition enjoys enough of a majority to make the necessary pension and healthcare reforms that according to Mr. Dědek, will lead to the reduction in inflation the Czech Republic must make in order to meet the final Maastricht Criterion.

Despite the ČSSD probably coming across as the most pro-European mainstream party, we asked Mr. Dědek about a survey of April 2009 where left-wing voters came across as the most eurosceptic of the electorate. Mr Dědek explained that the single currency is “not a pure economic issue.” We must remember it is often more about “national sentiment, national identity” and that the Euro is “somehow associated with a deeper globalisation, with the deeper liberalisation and the more liberalisation means that the jobs may be threatened, there may be more competition.” Of course, this is Mr Dědek’s personal analysis, but this is the camp which the Communication section of the National Coordination Group must convince of the benefits of the single market. As Mr. Dědek contends, we live in a global, open world, with or without the Euro, and “in order to survive in this global and extremely open and liberal world [our] forces should be united.”

Mr Dědek said that he believes “we should listen to Eurosceptics” and that the reason why he so strongly “believes in the success of the Euro is the weakness of those Eurosceptic arguments” - “persuasive economic theory” helps show that eurosceptic arguments are often unfair and populist. Eurosceptics may chose the Euro as a battleground because it is a “very strong sign of the loss of national currency...[and that] the national currency is a symbol” of their independence. Some may like to see the return to the EFTA arrangement of the 1960s, without the supranational element, but while some criticise Eurosceptic factions, Mr Dědek is pleased to see them, claiming that Eurosceptics “urge us to think more about the costs and benefits of the Euro”.

“When these problems are settled, Euro will be as attractive as it was a couple of years ago”

As in every country, the Greek Crisis did “damage to the general support of Euro adoption in the Czech Republic”. According to an opinion survey of October 2010, 70% of Czech people are against joining the Euro. This result is the highest ever seen in the Czech Republic. To Mr. Dedek, “the debt crisis in Greece probably revealed interconnections amongst European countries” and the selfish reactions of some countries may decrease the confidence of the Czech people in the Eurozone. However, the strong political support for the Euro shown by political leaders demonstrated that the single currency is a very important path or, as put by Mr. Dedek “the euro is intertwined with the very idea of the European project.” Leaders are aware “that the collapse of the Euro would mean the collapse of the total European idea.”

To win back the confidence of the Czech people and other actors in the euro, the Eurozone has to take measures in order to solve the weaknesses of the Euro. To Mr Dĕdek, the Euro needs support from “some fiscal policies”, as the monetary and budgetary requirements are not sufficient to maintain coherence inside the Eurozone. Plus, the Pact for the Euro proposed at the European council of the 12th of March should force every member state into implementing responsible economic policies. This pact is a reinforcement of the Stability and Growth Pact and should compel Eurozones countries to adopt a responsible and respectful attitude toward their partners, strengthening the Eurozone, and making a more attractive proposition for the electorate in candidate countries.

Economically, the case for the Czech Republic’s accession is sound. Within a few years, the deficit will be under control, the Euro Convergence Criteria fulfilled, and accession can take place.

But until then, the project may face constant harrying from Eurosceptic politicians. Currently, the Euro’s core problem is political, not economic. Mr Dědek summed it up perfectly in his closing answers:-

“I am deeply persuaded that objectively the Czech Republic is one of the best candidates for Eurozone membership. But the Euro is not about economics, it is rather about politics, and some trade off, some compromise, some modus vivendi should be found between these economic and political point of view.”

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