WASHINGTON, Nov. 20 (UPI) -- At the Cato Institute's 21st Monetary conference Thursday, Vaclav Klaus, president of the Czech Republic, expressed considerable skepticism about the desirability of the euro, both in general and for Central European potential members such as the Czech Republic.
Klaus signed the EU accession treaty on behalf of the Czech Republic in April 2003, and the country will enter the EU 1st May, 2004. The treaty committed the country to enter the euro, but no timeframe was set. Klaus, formerly a professional economist, is convinced that the euro area is not an Optimal Currency Area, and that euro membership for the Czech Republic is "not for tomorrow or the next day."
Klaus believes that the impetus behind the creation of the euro was and is entirely political, and that the common currency is to its advocates primarily a useful instrument for the creation of a European political union. He quoted European Commission president Romano Prodi as saying that "the introduction of the euro was not economic at all, but a completely political step."
Klaus believes that the greatest part of the benefit of European Union economic integration, the liberalization of trade and industry, has already been achieved, and that "the marginal contribution of further economic integration is close to zero, or even negative."
In order for the euro zone to be an Optimal Currency Area, said Klaus, one would need full labor mobility, wage flexibility, symmetry of exogenous factors (i.e. one part of the zone couldn't suffer a shock that others didn't) and substantial existing fiscal compensation mechanisms (to subsidize regions undergoing economic difficulties.) None of these conditions are currently fulfilled in the Euro zone, and he sees no prospect of them being fulfilled in the near future. Klaus pointed out that, as outlined by a previous speaker Michael Bordo, of Rutgers University, the United States took 150 years to achieve full currency integration, with bank notes in the nineteenth century trading at substantial and widely varying discounts against each other. The EU has put in the mechanisms of a common currency (central bank, single physical currency, transferability) much more quickly than did the U.S., but the underlying economic factors for success are still not present.
For transition countries, such as the eight Central and East European countries due to enter the EU in May 2004, Klaus believes much more economic flexibility is needed than for the core EU countries that have higher levels of economic development. Transition countries should not take actions contrary to their own interests, and will suffer from the loss of an independent monetary policy, which for them should be substantially different than for the EU core (for one thing, it should be far more accommodative to moderate inflation, which in transition countries Klaus believes to be inevitable.)
According to Klaus, it will be economically impossible for transition countries, once part of the euro, to match both the inflation targets of the Maastricht treaty and the fiscal responsibility targets of the Stability Pact. There is also a large chance that the euro entry exchange rate will be set at a large distance from the appropriate equilibrium rate, which would cause heavy economic disruptions. The danger is that early euro membership for the accession countries will create "transfer economies like East Germany, but without the availability of adequate fiscal transfers."
