Few things stir the public sphere as much as the controversial subject of the adoption of the euro in the Czech Republic. Interest in this phenomenon always comes and goes in waves in this country, and now its imaginary surge is peaking. Although one side of the debate always vehemently puts forward arguments in favor of adopting the single currency, while the other side points out the unmissable pitfalls of the euro, one crucial economic argument seems to be continually neglected.
Let us first state what the current consensus of economic science is. Jaroslav Borovička, a leading Czech economist at New York University, describes it briefly by saying that “objectively speaking, it is not possible to decide with a reasonable degree of certainty at present whether the euro would be economically beneficial for the Czech Republic or not“.
It is indeed remarkable, and at the same time somewhat striking, that after more than twenty years of the euro’s existence, we do not have enough empirical evidence to draw clear conclusions about the benefits of its adoption. At the 30th General Meeting of the Learned Society of the Czech Republic, former Governor of the Czech National Bank (CNB) Zdeněk Tůma declared that “the question still remains whether this is a zero-sum game or whether the euro has actually brought positive effects in the form of better price stability and higher economic growth.”
One cannot help believing that the further we move away from the conclusions of the academic literature and the closer we move to the opinions of laymen not versed in economic theory, the more we see the kind of argumentation that either declares that we should adopt the euro unequivocally and without hesitation, or, with similar certainty, argues that we should not even consider adopting the common currency and reject the idea outright. In other words, while the public is sharply divided into two distinct camps with a clearly defined approach to the euro, the scientific research in this area does not provide clear answers to the question of the economic benefits of adopting a single currency.
However, the euro would undoubtedly be beneficial, especially for exporting companies. Adopting the single currency would reduce their transaction costs related to currency conversion and exchange rate hedging. According to available estimates, the size of these costs corresponds to the lower tenths of a percent of domestic GDP (according to an earlier CNB calculation of 0.2–0.4 % of GDP). This amounts to roughly CZK 15–20 billion per year, which may sound like a staggering sum, but from the perspective of Czech economy as a whole, it is not that much. As CNB board member Tomáš Holub says, “from a macroeconomist’s point of view, eliminating these costs is not something that would ensure our undying prosperity.”
Economic theory shows that the wealth of nations in the long run does not depend much on monetary factors. The currency a country has is not crucial for it to become richer and more economically advanced. What matters is much more how a country’s institutions function, the extent of capital accumulation, or the demographic trends it is currently experiencing. To put it another way, it is not so important what is being paid with; what is more important is the ability of the economy to produce the goods that consumers demand, to the greatest extent possible. This is a fact that was already expressed by the eminent Scottish philosopher David Hume in the mid-18th century when he wrote of money: “It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy.”
One problem with monetary policy is its asymmetric nature. No matter how hard its creators try, it cannot increase the potential output of a given economy (i.e. to improve its long-run performance), hence good monetary policy alone cannot ensure economic prosperity. At the same time, however, when a central bank makes fundamental mistakes over the long term and the functioning of monetary policy moves further and further away from the optimum, this can result in a deterioration of the country’s potential output as a whole. So not only is the central bank’s ark forever consigned to floating awkwardly between Skylla and Charybdis (in the form of an inflation rate that is too high and dangerously low), but its further unfortunate fate is that it cannot save the economy on its own, but can only drag it down.
The same fact was expressed somewhat differently by Mojmír Hampl, chairman of the National Budget Council and former CNB governor when he said: “If economic policies fail in a country, not even the euro can save it from trouble (like in Greece). If everything works satisfactorily, the euro is unnecessary (like in Sweden).”
Mervin King, former Governor of the Bank of England, refers to the European Monetary Union (EMU) as the most ambitious project in monetary history. However, he also points out that the euro has sadly ceased to be seen as a means to other ends, having become an end in itself, and the rationality of the economic arguments has largely disappeared from the debate on its adoption. Finally, one cannot disagree with his point that, whatever economic theory may say, the choice of currency is ultimately a purely political decision.
Written by Štěpán Drábek – analyst at CETA.
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