Petr Mach: The euro duel: an optimist versus a skeptic

Czech Business Weekly, 12.01.2009

published: 12.01.2009, read: 13012×


Czech business weekly | 12.1.2009 | rubrika: Financial markets | strana: 50 | autor: ROMAN CHLUPATÝ

On the brink of its 10th anniversary, the common European currency faces its first real test. CBW invited two experts with opposing views to evaluate how it has performed so far under the pressure of the financial crisis as well as to predict what awaits the eurozone.

The optimistic perspective is presented by the macroeconomic strategist of Československá obchodní banka, who at the time of writing is a candidate for the post ofminister of finance, Tomáš Sedláček (pictured, page 51). The skeptical position is delivered by Petr Mach (pictured, page 52), the director of the think tank Center for Economics and Politics (CEP) and the expected front man of the future conservative party with a close affiliation to President Václav Klaus.

* Q: How do you think the eurozone has to datemanaged to deal with the financial crisis and the economic slowdown? How has it fared in the test that experts agree is the toughest it has had to undergo during its existence?

Petr Mach: The economic recession unveils the euro’s greatest weaknesses—the fact that it is used in a very heterogeneous territory. I think that this issue will become most apparent this year when we compare Britain and Ireland. The British pound is now falling markedly in reaction to a decline in exports. This could be demeaning for the British economy, but the weakened currency will help get the economy out of the recession fast.

On the other hand Ireland has the euro, it no longer uses the Irish pound, which would otherwise fall given the situation. It will thus be more difficult for Ireland to make its way out of the recession. Everyone will see that the euro does not mean having European money in your wallet but that itmeans serious discussions about the economy and employment.

I think that unemployment will grow in Ireland, and that this will be the case precisely because Ireland will not have a currency that would fall on the euro.

Tomáš Sedláček: So far so good. We are dealing with a global slowdown and the eurozone has, so far, avoided the worst: disunity. Although we have seen a serious slowdown of growth and significant injections of state money into the economy, the crisis has not led states to quarrel and blame each other. On the contrary, we have seen quite an unusual level of unity and a serious attempt to face this situation together. It must be said here that the slowdown is global, and Europe is no exception. The task is not to avoid a slowdown—slowdowns are a natural part of the economic cycle—but to orchestrate a soft landing, to avoid a dramatic crash landing. This has so far been achieved.

* Q:Which strengths and weaknesses did the project of the common European currency unveil in the past year?Where shouldmore be done, and how and where are original visions being implemented?

PM: The euro is a common currency—it is not possible to add or subtract anything. We either have the euro or we don’t, with all its advantages and disadvantages. TS: The key indicator of the euro’s success is that no country has indicated any regret for joining the eurozone. On the contrary, new member states are hastening to join. The logic is simple: in the time of crisis, it is better to be a part of a larger andmore stable monetary unit than to fare along alone. A local currency can have certain advantages, as well as disadvantages, but the fact is that it is safer and less risky to have common currency. It is better to fight a common enemy together and through a coordinated effort than each country on its own.

* Q:What was for you themost interesting ormost surprising news or realization in connection with the eurozone in 2008?

PM: The European Union is trying to repair themain problemof the euro: the EU has a jointmonetary policy but it does not have a joint fiscal policy. It thus cannot compensate for restrictions resulting from a uniform monetary policy with fiscal instruments—which is the case in normal countries with their own currencies. This ‘deficiency’ was partially supposed to be rectified by the Lisbon Agreement, which was rejected; it was to give the EU the authority to determine the economic policy of individualmember states. I put ‘rectify the deficiency’ in quotation marks on purpose as I consider entrusting responsibility for fiscal policy to the European Union even more damaging that making it responsible for monetary policy. For me, it was a surprise that the EU adopted at the December summit a fiscal plan to spend €200million (Kč 5.2 billion) by imposing debt on individual member states regardless of the fact that the Lisbon Treaty had not been approved. The EU is behaving as if the Lisbon Treaty has already taken effect.

TS: That the Czech Republic has still not announced its planned euro target date. Slovak accession, on the other hand has thus far proceeded without any problems. The euro has corrected its strong position vis-a-vis the dollar and this should help the eurozone export somewhat. During the nine years of the euro, the euro has been a successful currency that Europe needed. It would be unthinkable for Europe to be a significant global player with local currencies. In these nine years, including the crisis year of 2008, we have not heard even a hint of any serious debate from any country to leave the eurozone. This is a great success. The slight sigh from Italy a couple of years back was a mere populist move that was not taken seriously even there.

* Q: Some countries are announcing their interest in adopting the euro due to problems with defending their national currencies. Do you thus expect the eurozone to expand soon?

PM: I actually see the problems of many countries that have tied their currencies to the euro, such as Lithuania and Latvia. These countries will have to reassess their early accession to the eurozone.

TS: From our region, after Slovenia and Slovakia, it should be Poland, which will join next, in the year 2012. This will make the Czech Republic an island of local currency, surrounded by the euro. It is unrealistic to think that we could adopt the euro sooner than 2013. Hungary could be ready, with a lot of effort, by 2014. The Baltic States, however, should be the next ones in line. We also should not overlook Bulgaria and Romania, which could also overtake the Czech Republic when it comes to euro adoption. Both these countries have very ambitious target dates.

* Q: In the Central European region Hungary and Poland have announced plans to join the eurozone soon.

Will they succeed?

PM: Hungary, which currently faces serious fiscal problems, would like to join the eurozone but it is unlikely that the eurozone will want it under the circumstances. TS: These two countries have, along with some others, interpreted the current crisis as an argument for speeding up the adoption of the euro. The Czech Republic is the only country that interpreted the crisis as a reason to delay entry. Poland should be able, as I said, to join by 2012. The country is well-prepared and does well with theMaastricht criteria. Also political will is not lacking. The situation with Hungary is much more complicated because, currently, Hungary is the only country in EU that does not comply with a single Maastricht criterion.

* Q:What do you expect the adoption of the euro tomean for Slovakia, given current turbulences?Will this move benefit or harm Slovakia?

PM: Slovak membership in the eurozone will also be a big test for the Czech Republic. The existence of two similar economies at a time of economic recession inWestern Europe; with one country being able to float the euro and the other being tied to the euro, will be very educational. Both countries have a high concentration of export-oriented automobile industries. The automobile industry is more sensitive to economic recession than any other industry. If vehicle exports to German from both of these countries fall, the Czech economy will be able to react by weakening the crown. The Slovaks will not be able to do so. Slovak production will thus become relatively more expensive compared to Czech production. This could harm Slovakia. TS: I expect this to be a very positive move. It is firstly a prestigious matter; second, it further opens Slovakia to foreign investment and it will be a strong boost to Slovak exports. Letme point out here, that FDI (foreign direct investment) and exports have been the two engines of Czech growth as well. Slovak companies will save billions of Slovak crowns on foreign transactions, will save a lot trouble with double accounting as well as psychological stress with abrupt currency movements. It is not natural when a currency jumps the way we have seen the Czech crown jump in recent times. Too strong appreciation as well as too strong depreciation—which we are now seeing—are not healthy for any economy. That is why most Western European countries have decided to adopt the euro.

* Q: If we take into account Poland’s nearing accession to the eurozone, it is possible that the Czech Republic will become the only country in the region with its own currency.

Will this pose problems?

PM: This would create problems if the crown were fixed to the euro. If it is given the freedom to float according to supply and demand, there will not be a currency crisis. This is the situation of Denmark, which is suffering fromthis today. While the Swedish and Norwegian crowns canmove freely, the Danish cannot, and this is why the Danish economy is growing at a slower rate than the Swedish or British economies.

TS:Well, that would have its costs. It will act as a repellent of FDI. Who would want to invest in the only country around with a local currency? Czech exporters will be at a disadvantage compared to the surrounding region, because our exporters will have to bear much larger costs when exporting. Euro countries will have much cheaper access to both exports and imports. I think this is more important for businesses than the proposed tax cuts.

* Q:What do you think of the crown given the current crisis?

PM: The crown has perfectly passed the test. Before the crisis, it had been growing and this thus dampened inflationary pressure, which would have otherwise been very strong. When the automobile industry began to slow down, it started falling. The Czech economy is protected as a result. If we had the euro, we would have high inflation and an automobile industry incapable of competing.

TS: A currency that jumps up and down radically loses its healthy role: it ceases to be an indicator of developments in the real economy and starts to be a playground for the whims and whips of a global nervous and speculative psychology. There are two ways to get to the eurozone's price level: via currency appreciation or via an increase in inflation. Inflation has a great advantage in the fact that, unlike with currency, nobody speculates with inflation. Inflation is thus a better and more stable and transparent means of nominal convergence.

* Q: Also due to the role that the crown has played and plays in the current crisis: when in your opinion is the adoption of the euro suitable, and when will it actually take place?

PM: As an economist, I say that it will not be a problem to adopt the euro at a time when the Czech economy and the economy of the eurozone are in roughly the same position. Once prices and salaries are equal and once the Czech economy grows just as slowly as the economy of the eurozone. I hope this does not happen before 2020.

TS: I think we should have kept the original date, announced by the government and the ČNB (Czech National Bank) in 2004, which was set to be 2010. Backtracking on this plan was a mistake because we would have met the criteria easily. This date is no longer possible, so I think we should aim at the nearest available, which is, for technical reasons, still quite far: the years 2013– 14.

Foto autor| Martin Siebert

Foto autor| Jakub Stadler

Petr Mach

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