Exchange rate debate in Czech Republic
Public debate
Paroubek, in his article, blamed the current government for not doing anything to slow the appreciation of the Czech currency. He said that statements from Czech National Bank (ČNB) Governor Zdeněk Tůma about the possibility of lowering interest rates to prevent further appreciation were a signal of a shift in ČNB policy away from inflation targeting and toward regulation of currency development.
Paroubek stated that the best way to tame the currency was to fix the crown to the euro by entering the European Exchange Rate Mechanism (ERM II) system, designed as a preparatory step or "waiting room" for euro adoption. In the ERM II, a currency is allowed to fluctuate within a band of plus or minus 15 percent with respect to a central rate against the euro.
Topolánek, on the other hand, still supports the policy familiarly called "reforms first, euro later." This means that the government wants to reform the Czech economy and wait until the country's economic development is more on par with the economic development of the European Union.
"We can adapt [the economy] in two ways. Follow Paroubek's suggestion, introduce the euro in two years, increase prices at once and drastically decrease [Czech] economic growth to the level of the eurozone. Or, as it is planned by the government, by gradual convergence via exchange rate mechanisms, with lower inflation and gradual harmonizing of our economic cycles with the eurozone," Topolánek said in reply to Paroubek. He also assigned responsibility for delayed euro adoption in the Czech Republic to previous ČSSD governments, which, he said, had not pursued the necessary economic reforms.
The politics of fear
The current debate between the main political leaders revolves around two basic fears. The first is that inflation might be caused by euro adoption. In Slovenia, which introduced the euro in the beginning of 2007, current Economy Minister Andrej Vizjak ascribed most of the inflation the country has witnessed during the last year to the euro.
"I am sure that euro adoption has contributed to inflation by a significant part, even more significant than has been calculated by others," he said on July 29. In June, inflation in Slovenia reached 6.8 percent y/y, the highest rate in the last six years. However, according to the European Commission (EC), inflation caused by euro adoption was only 0.3 percent; the remaining amount was caused by other factors.
The second issue coloring the debate is the appreciation of the Czech crown against the euro, which is a significant concern for Czech exporters. "At the moment that [politicians] are arguing between inflation and the exchange rate, inflation has the advantage that one cannot speculate with it. It shows the economic development of the country better, and it is predictable, so businesses can prepare for it," said Tomáš Sedláček, chief macroeconomic strategist at bank Československá obchodní banka (ČSOB).
Sedláček also expressed doubts about the inflation pressures of euro adoption. "Nothing would happen if we would introduce the euro here today; inflation would go up only a bit," he said, referring to the 0.3-percent increase in Slovenia estimated by the EC and Slovakia's anticipated maximum one percent increase. Slovakia will join the euro zone from January 1, 2009.
Crown witnesses
Ministry of Industry and Trade (MPO) spokesman Tomáš Bartovsky had the same opinion on the strong crown as Topolánek. "Of course the crown causes [some] problems to exporters; however, when we look at the numbers of exports to the European Union, there is no dramatic decrease," he said.
In 2007, Czech exports to the EU amounted to €76 (Kč 1,800, zł.243) billion; from January to May 2008 the figure stood at nearly €36 (Kč 859, zł.115.4) billion. The MPO, according to Bartovsky, expects exports to the EU to exceed €80 (Kč 1,909, zł.256) billion by the end of the year. He thinks that the strong crown therefore does not have a crippling effect on Czech exporters and that it also lowers the inflation pressures caused by high energy and oil prices. "Significantly increased energy prices would be more deadly [than the strong crown]," Bartovsky said.
ČSOB's Sedláček disagreed with the MPO on inflation, however. "Even the exchange rate we have today did not slow down inflation," Sedláček said, referring to a y/y increase of Czech inflation, which reached 6.7 percent in June 2008. "[Entering the ERM II mechanism would] definitely help the Czech business public because it would give them a strategic plan of where the country wants to go," Sedláček added. But for now, the country will still not adopt this strategic plan because all government members jointly claim that they will not state any particular date for euro adoption.
Disoriented politicians
Even though both sides use strong economic arguments, there is an intrinsically ideological element to the debate on the euro. ODS' Topolánek used an argument centered on inflationary pressures and their impact on average Czech citizens, while ČSSD's Paroubek took the side of Czech exporters, saying the strong exchange rate was harmful for them.
From an ideological perspective, the men appear to be arguing from the wrong ends of the political spectrum. Fighting for businesses is more typical of right-wing political parties, represented in the Czech Republic by the ODS, while championing the social issues affected by inflation is usually the bailiwick of left-wing parties, represented by the ČSSD. "In politics, we can often find examples like this one," said Daniel Kunštát, a political analyst at the Institute of Sociology at the Academy of the Sciences of the Czech Republic (AV ČR). He claimed that it is not surprising that both sides of the political quarrel use arguments that would better suit their opponents.
"More than right-wing and left-wing, this is a matter of the government and opposition, plus the ideological stance [of Czech political parties] toward the European Union," Kunštát added, saying that Paroubek knows very well that ČSSD's voter base does not specialize in political ideology. According to Kunštát, Paroubek is trying to undermine the government's arguments against euro adoption.
| Appreciating Czech worries: Key macroeconomic indicators in the Czech Republic, Jan-June 2008 | |||
| CPI growth y/y | Benchmark inflation rate | €/Kč exchange rate | |
| Jan |
7.5
|
3.50
|
26.05
|
| Feb |
7.5
|
3.75
|
25.38
|
| Mar |
7.1
|
3.75
|
25.22
|
| Apr |
6.8
|
3.75
|
25.07
|
| May |
6.8
|
3.75
|
25.09
|
| June |
6.7
|
3.75
|
24.31
|
|
Sources: Czech Statistical Office, Czech National Bank
|
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By Marcel Bodnár
This is an edited version of an article originally published in Czech Business Weekly.
