Many scholars have discussed the issues related to Czech Republic’s entry to the EU. The Czech people expressed different opinions regarding economic benefits that they would gain by allowing their country to become part of the EU. Even after the entry of the Czech Republic to the EU, the Czech leaders did not accept euro as the official currency, although in the recent years a few leaders have showed their intent to support the use of euro as the currency of their nation.
One would expect that by adopting European currency, the Czech Republic would be able to achieve notable economic advancement when compared to its experiment with communism. In this paper, an attempt will be made to discuss the process of Czech Republic’s accession to EU as a member country and impact of the use of euro on the economy of the Czech Republic. EU membership process
The process of Czech Republic’s accession to the EU had its modest beginnings as early as 1993 when European Council (EC) declared that Eastern European communist countries could apply for EU membership and they would be accepted to EU only when they demonstrated their intent to support EU political and economic structure by introducing necessary reforms in their countries. In 1996, the Czech Republic applied for the membership of the EU along with other previous communist regimes.
The rules the EU states that the countries that wish to become members of the EU need to prove that they possess necessary qualifications such as ability to introduce drastic economic reforms suggested by the EU and so on. The application of the Czech Republic was reviewed by the committee appointed by the EU. (Fuller et. al, 2002, p. 408) In 1998, negotiation between the applicant (the Czech Republic) and the EU began.
This is another notable procedure before recognizing any European country as the member of the EU. In the year 1998, based on the review of the progress achieved by the Czech Republic, it was decided to accept this country as the member of the EU around 2002. During this period, it was expected that the Czech Republic would introduce significant political and economic reforms in order to impress the EU authorities so that they would agree to incorporate the Czech Republic into the EU.
(Fuller et. al, 2002, p. 408) The above details indicate that it is not easy for any European country to become the member of the EU since the applicant country needs to prove its merits over a period of time by subjecting itself to the EU review, which ascertains the political and economic progress achieved by the applicants. (Fuller et. al, 2002, p. 408) As a result of these developments, by 2004, Czech Republic succeeded in becoming the member of the EU.
The progress achieved by the Czech Republic during the period 1996 to 2002 has been praised by many EU member countries that expressed the belief that Czech Republic along with other Eastern European countries would become important members of the EU. (Fuller et. al, 2002, p. 408) Even before its accession to the EU, as a part of the membership procedure as decided by the EU, the applicants such as the Czech Republic and Hungary signed trade agreements with the EU. This agreement showed that the EU was reasonably satisfied with the progress achieved by the applicant economies.
(EU signs, 2001) This agreement also demonstrated that the member countries were given an opportunity to become part of the single market economy in order to enjoy the advantages of a single market economy and thereby understand the implications of becoming member of the EU. (EU signs, 2001) The trade pacts give an opportunity to the applicant countries to enjoy the benefits of single market economy so that they are able to introduce necessary legislations. Such trade pacts are usually signed among the member countries of the EU. This shows that the EU took the first step in incorporating the applicant countries in the EU.
The trade pacts are expected to remove all hindrances to trade encouraging exchange of goods between the signatory counties. The trade pact covered trade worth 14 billion euros in the case of the Czech Republic, which was given the freedom to avoid certifying and re-testing the products before exporting them to the EU countries. (EU signs, 2001) As suggested by the EU, the Czech Republic has introduced substantial political and economic reforms in order to achieve the member status of the EU. These attempts have been naturally praised by the EU reviewers who have been impressed by the achievement of the Czech Republic in the economic sphere.
For example, tax reforms of the Czech Republic have brought it close to the EU standards although a few EU officials criticized the speed of Czech tax reforms. (Czech reforms, 1999) Impressed by the tax reforms introduced by the Czech Republic, the German leaders have assured their support to the accession of the Czech Republic to the EU. The Czech Republic has introduced reforms in the form of investment incentives, tax depreciation, and duty-free zones and zero-rates custom duties, subsidy for job creation and training, reduction of corporate and personal income tax rates and so on.
(Czech reforms, 1999) By introducing the above mentioned reforms, the Czech Republic has demonstrated its intent to attract foreign investment particularly from various European countries. The investors are given tax incentives so that they are tempted to increase their investment in the Czech Republic. The Czech Republic has been able to achieve European standards through various tax reforms. (Czech reforms, 1999) Finally, in the year 2004 after completing all procedures, the Czech Republic was accepted by the EU as its member. (Yilmaz, 2005, p. 74) Introduction of euro
After submitting its membership application to the EU, the Czech Republic has been able to show its ability to become part of the European market economy. In spite of becoming member of the EU, the Czech Republic did not use euro as its currency and instead the Czech Republic continued to use its own currency. This showed that the Czech Republic followed a cautious approach towards the euro, the currency of the EU. Recently, the Czech Republic showed its intent to use euro as the single currency. There are various advantages of disadvantages of the Czech Republic accepting euro as its currency.
(Smidkova, 2004, p. 302) After becoming the member of the EU, an important task of the Czech Republic is to become the member of the Monitory European Union (EMU). In order to achieve this, the new member country is required to go through a few important tests to show its economic strength and ability to fulfill various economic criteria designed by EMU. After joining the EU, the member countries are expected to fulfill various criteria such as ‘Maastricht criteria’ which analyze the indicators of new member countries’ economic strength.
The analysis of such data has revealed that the Czech Republic was able to fulfill Maastricht criteria. Significantly, the Czech Republic has been able to control inflation and interest rates, important criteria to allow a new member country to use euro as its currency. The present Czech currency has been considered as a stable currency compared to the euro. This has demonstrated the strength of the Czech economy. (Smidkova, 2004, p. 302) In spite of this, the Czech Republic needs greater preparedness so that the Czech Republic would be able to make use of euro for its financial transactions.
The fact that the Czech Republic has been following a cautious approach is proved by the “Czech Euro Area Accession Strategy”, which showed that the Czech Republic was not yet prepared to accept euro. (Smidkova, 2004, p. 302) The slow approach is also suggested by the fact that it has been decided that only in the year 2010 Czech Republic would be able to use euro as its currency. (Smidkova, 2004, p. 302) A few ‘indicators’ suggest that the Czech Republic has not yet reached a stage wherein it is able to absorb external economic shocks in spite of the fact that it is a part of EMU.
The financial structure of the new member countries is different from those of other EU member countries. This shows that the Czech Republic may not be able to stomach external long term shocks. There is a need to introduce further reforms in the economy before introducing euro as the single currency in the Czech Republic. There is a need to give more importance to the role of credit and ‘market capitalization’ in the Czech Republic in order to attract more investment so that the economy of this country would be able to withstand long term economic fluctuations.
(Smidkova, 2004, p. 303) Attitude of the Czech government towards euro is revealed by the document called ‘Czech Euro strategy’ which was approved by the government in 2003. This document is important because it reveals the fact that the Czech government has realized the merits and demerits of accepting euro by replacing its previous currency. An obvious advantage of euro is that it reduces transaction and exchange costs as in the euro domain the government is able to save on exchange costs. (Smidkova, 2004, p.
304) This would also result in increased investment in the Czech Republic since other euro-based economies are encouraged to invest in the Czech Republic. In addition to this, due to ‘transparency in prices’, the Czech Republic is able to compete with other economies. This increases the competitive ability of the Czech business enterprises. (Smidkova, 2004, p. 304) Despite the advantages, one can also identify various disadvantages of accepting euro as the currency of Czech Republic. For example, by introducing euro ‘financial stability’ of the Czech Republic can be endangered.
Therefore, one needs to emphasize cautious approach towards the introduction of euro in the case of the Czech Republic although this approach is different from many other European countries that have decided to introduce euro in their countries at the earliest available opportunity. (Smidkova, 2004, p. 304) The Czech leaders believe that their economy does not possess all the minimum requirements to accept euro as the currency. It is estimated that only by 2009-10, the Czech Republic would be able to fulfill the necessary conditions to become part of the euro regime.
Greater importance, during this period, will be given to control inflation and achieve better financial stability. It has been decided to introduce ERM II (European Exchange Rate Mechanism) only a few years before the accession to the euro regime. (Smidkova, 2004, p. 304) The Czech Ministry of Finance and the Czech National Bank will be responsible to oversee the conditions of the economy to make it eligible to become part of the euro regime. (Smidkova, 2004, p. 304) The details show that compared to other new entrants to the EU, the Czech Republic has been following a cautious approach.
The Czech leaders want to achieve greater control over inflation, prices, and achieve enhanced financial stability so that external economic pressures would not affect the Czech economy in the long run. In this sense, the Czech Republic has taken a right decision by not competing with other new EU members to accept euro as their currency. Obviously, the Czech leaders have realized the implications of being part of the euro regime. It is important to properly evaluate the pros and cons of the Czech Republic accepting the euro currency.
This implies that it will take several years for the Czech Republic to assure itself that it has finally achieved all the conditions for its entry to the euro regime. (Smidkova, 2004, p. 304) Many new member countries of the EU decided to become part of the euro regime because such a decision would give them membership of elite club of European countries so that they would be able to participate in the monetary policy decision taking process. It is also argued that by participating in the euro regime, the countries could significantly enhance their financial strength. (Smidkova, 2004, p. 304)
Most of the countries lacked the financial strength necessary for them to improve their competitive ability, necessary to survive in an open market economy. On the other hand, before joining the EU, the Czech Republic had already achieved limited progress necessary for the strength of its economy. Therefore, unlike other countries that had not achieved substantial economic progress, the Czech Republic did not think it necessary to quicken the process of accepting euro as its currency. One can understand the reasons for the cautious approach adopted by the Czech Republic towards the euro after it successfully became the member of the EU.
Controlling inflation is not principal goal of the Czech Republic because already this goal has been achieved. Therefore, with a long term perspective the Czech Republic has refused to adopt euro as its chief currency. (Smidkova, 2004, p. 304) It is also argued that the Czech Republic is not prepared to benefit from the ‘real convergence process’, which implies that there is need for further reforms in the Czech economy in order to achieve the objectives of enhancing its economic strength with the help of the euro. (Smidkova, 2004, p. 304)
The decision of the new members to accept the euro regime will create problems for the EU because it needs to cater to the needs of those economies that have reached different stages of progress. Therefore, by accepting all the countries to the euro zone, the European Central Bank (ECB) will create unnecessary debate with reference to interest rates. While some countries may demand reduced interest rates, some other countries would like to maintain the same rate, thereby showing differences in the economic progress of various EU members.
(Dedek, 2004) Therefore, due to particular economic problems, different EU members may expect different interest rates and other monetary policies. In order to avoid this, the EU also encouraged member nations to reach a particular economic progress, before applying for the euro zone membership. This implies that the EU membership does not automatically allow the members to obtain entry to the euro zone. They need to prove that they possess the economic strength to manage euro as their chief currency.
Therefore, in this context also, the Czech leaders have taken a wise decision of not joining the euro zone immediately after joining the EU. (Smidkova, 2004, p. 306) The Czech Republic can enjoy the advantages of using a single currency by entering the euro zone. This shows that there are various advantages to be reaped by the Czech Republic by joining the euro zone. It has been suggested that the Czech Republic needs to join the euro zone at the earliest in order to rapidly achieve its economic goals. (Dedek, 2004)
Based on the study of economic model called ‘theory of optimum currency areas’ (OCA), scholars have suggested that introduction of euro in the Czech Republic would not help the Czech economy due to the apparent differences between various EU member countries. It is suggested that in order to benefit from the euro currency, there is a need for the Czech Republic to achieve economic parity with other member countries. (Dedek, 2004, p. 48) The theory that euro currency would not help the Czech economy has been criticized due to the various obvious advantages of using euro as the currency.
For example, the use of euro would enhance business relationship between the Czech Republic and other EU countries. Since these countries use single currency it will be easier for them to maintain cordial business relationship with each other. (Dedek, 2004, pp. 48-49) This implies that after Czech Republic becomes a member of the euro zone, this country is going to benefit due to increased business transactions. Use of euro will attract enhanced foreign direct investment contributing to the phenomenal economic growth of the Czech Republic.
Undoubtedly, economic growth fuelled by foreign investment will generate large numbers of jobs thereby solving the unemployment problem being faced by the Czech youth. This translates to notable difference between pre-euro Czech Republic and post-euro Czech Republic. In the banking sector, the Czech Republic will gain as it can benefit from the monetary policies determined by the ECB. (Dedek, 2004, pp. 48-49) The Czech Republic can save on currency exchange costs and transaction costs since all the countries would be dealing with a single currency.
By using a single currency, the Czech Republic would be able to give greater importance to service and industries and thereby achieve greater economic progress as reflected in the GDP. (Dedek, 2004, pp. 48-49) Based on this analysis, it has been suggested that “These are hard primary facts hinting at many things about the Czech economy and its ability to benefit from the common currency,” (Dedek, 2004, p. 49) This statement enunciates the fact that the Czech Republic would benefit from the introduction of euro as the single currency. There is no doubt that business enterprises would benefit by the introduction of single currency.
Before the introduction of single currency, a few European entrepreneurs preferred not to invest in the Czech Republic based on the argument that Czech currency was volatile and that investment in this region was risky venture. (Dedek, 2004, p. 49) With the introduction of euro as the currency, this drawback will be erased leading to greater economic relationship between Czech businessmen and European businessmen. This would contribute to increased industrial production and export of Czech goods to various European countries. (Dedek, 2004, p. 49)
Monetary union compared to a ‘fixed exchange rate regime’ and ‘floating exchange rate regime’ has its own advantages. (Dedek, 2004, p. 51) The OCA model, which has advocated the use of alternative exchange rate regimes, has not properly understood the nature of working of the market economy. (Dedek, 2004, p. 51) Therefore, OCA standards are outdated and there is a need to introduce changes to the OCA model in order to apply this theory in the case of the economies such as the Czech Republic. Therefore, based on the OCA model, one cannot suggest that euro currency acceptance by the Czech Republic would not benefit this economy.
There are evidences to state that there are many other advantages of the euro currency and therefore the European countries should continue using euro as their single currency. The Czech Republic has already experimented with the fixed exchange regime and therefore there is no point in re-implementing this monetary model based on OCA theory. (Dedek, 2004, p. 51) It has been suggested that “More and more authors list as a benefit the unique function of the common currency as a protection against globalization risks, and its defensive potential against disruptive capital flows.
” (Dedek, 2004, p. 58) This statement has demonstrated that the Czech Republic would be able to improve its competitive ability compared to other countries by introducing euro as its single currency. (Dedek, 2004) Present state of the economy The Czech Republic has maintained close economic ties with Germany, which has always endeavored to support the attempts of the Czech leaders to introduce reforms necessary to make it eligible for the EU membership. In addition to political contact, the Czech Republic has maintained economic relationship with Germany and many other European nations.
Compared to other new EU members, the Czech Republic has been able to enjoy competitive advantage in labor-intensive industrial sector, thereby dominating the market that needs the labor-intensive products. (Yilmaz, 2005) This has allowed the Czech Republic to improve its economic resources vis-a-vis other new members of the EU, which have been struggling to give competition to other countries. With reference to capital intensive sector, it is found that Czech Republic has been able to assert its superior competitive ability compared to other new members such as Turkey, Hungary, and Bulgaria. .(Yilmaz, 2005, p.
78) At the same time, the Czech Republic has been depending on the EU in order to obtain research-based commodities. These details show that the Czech Republic has been experiencing comparative advantages and disadvantages. Whereas in a few sectors, the Czech Republic has proved its competitive ability, in some other sectors it is yet to achieve comparative advantage. This shows that the Czech Republic although has achieved a few goals, there are many other economic goals that need to be achieved. There is a need to understand the weaknesses and overcome them along with further strengthening the strong points.
(Yilmaz, 2005, pp. 78-79) The Czech Republic, although has comparative advantage in capital intensive and labor intensive goods, it is losing its ground in raw material-based products. This indicates that Czech Republic’s interaction with the EU will hurt its agricultural sector as impetus will be given to strengthen the service and industrial sectors compared to the agricultural sector. (Yilmaz, 2005, pp. 78-79) It is interesting to note that “… the Czech Republic is the only country of the six candidates …that has completed the first stage of export substitution and export diversification process successfully” (p. 85)
This statement shows that the Czech Republic, before 2002, has been able to achieve substantial economic progress and in the future it is expected to further improve its economic record by introducing various reforms suggested by the EU analysts. Already, the paper has mentioned that the Czech Republic introduced various tax and investment incentive reforms that have resulted in the large inflow of foreign capital into the country, thereby assisting the economic progress of the country. By introducing further economic reforms, it is possible to achieve long term economic goals.
(Yilmaz, 2005) The Czech Republic has been able to attract investment from several foreign countries that were impressed by liberalization programs introduced by the post communist regime that concentrated on developing a market economy, an important condition to become part of the EU. In 2005, for example, the country received foreign direct investment of $11. 7 billion. (Background note, 2007) Apart from attracting the foreign investment showing the financial stability of the country, the Czech Republic has been able to keep inflation rate under control as inflation in 2006 was around 2.
6 percent which can be considered as acceptable compared to various other economies of Europe. Significant economic progress has certainly impressed international financial institutions which have given good credits to the Czech Republic showing that in the future this country is expected to achieve greater heights. (Background note, 2007) Conclusion The Czech Republic has strived to become a premier economy of Europe by implementing tax and investment-related reforms. Apparently impressed by these reforms and economic progress, the EU has awarded its membership to the Czech Republic.
The Czech Republic has not yet accepted euro as its currency since it needs to achieve further economic progress, exhibiting that the country has been following a cautious approach as far as euro is concerned. By introducing euro in 2010, the country is expected to enjoy the advantages of being member of the elite ‘European club’. At present the Czech Republic has been achieving enviable economic strides and in the future the country is expected to do better by controlling inflation and maintaining comparative competitive advantage compared to other European economies. References (2007).
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