The Czech Republic and the euro

The study argues that it is not important whether the first candidate countries join the Euro-zone in 2006 or two years later. What is of importance is to make the way to the euro as smooth as possible. This cannot be done without a clear and credible strategy. Once the agents know what they can expect from the authorities they will adjust their behaviour accordingly.

The study calls on the Czech authorities to commit to a certain strategy with an indicative entry date. The advantages of earlier introduction of the euro in the Czech Republic should outweigh the potential costs. Lower level of development does not pose a problem for functioning of a monetary union. Moreover, simple extrapolation of current trends shows that the gap might close not in years but decades. There would be no point in waiting so long.

It is legitimate to question the suitability of common monetary policy for countries that are still to some extent in transition. Moreover, effectiveness of exchange rates as adjustment tools can be discussed. Further, the occurrence and magnitude of asymmetric shocks is not certain.

The study concludes that under a realistic scenario, the new EU members could join the Euro-zone in about 2008, which means that they still have 5 to 6 years to introduce the necessary reforms and adjustments.

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