Economic downturn pushes Czech Euro adoption further away

The 16 Nation Eurozone economy shrank 2.5% in the first three months of this year. Most nations see the single currency as a prop in the crisis, and many others want to join, with the Czech republic undecided.

The Czech Republic had met all the necessary parameters of fiscal discipline and euro-adoption readiness until late last year. Now the moment has passed, with inflation and the budget deficit soaring, as the result of the economic crisis.

The Czech crown has come under pressure, hitting the country’s export dependent economy hard. 80% of Czech GDP comes from exports, mainly to the EU market. Exporting companies are now suffering from falling demand. At the same time exchange rate volatility is making them even more vulnerable.

Company turnover is falling according to Fathi Timoumi, managing director of MF Light, a Czech lighting systems importer. Fathi welcomes the prospect of adoption of the euro and says it will cut his costs.

“For the company of course, I think, its going to be a good point. But maybe, the inconvenient, is that some company is going to use the situation – and sure that is going to be to increase the price.”

The Czech republic won’t make it into Europe’s single currency club till 2014, economists say. David Marek, Chief Economist at Patria Finance, says the crisis has highlighted the necessity to switch to the euro but also created serious obstacles to that.

“The main problem for the Czech Republic in thinking about the Euro adoption, is thinking about fiscal policy. Recession increases fiscal deficit to 5% of GDP and the next year it can be even higher – maybe 6% of GDP. And every country thinking about Euro adoption must fulfill a 3% target.”

Some Czech politicians are skeptical about the rapid adoption of the euro. They say a sovereign currency and independent monetary policy can only help when dealing with the crisis. The 16 countries of the euro zone are expected to have an average fiscal deficit of 5.3% this year – higher than the projected Czech fiscal gap.