Italian Woes Fail to Deter Czech Businesses Embracing Euro

(Bloomberg) -- The Italian political turmoil testing the strength of the euro area isn’t denting Czech businesses’ enthusiasm for joining the monetary union.

Neither have successive governments in the post-communist nation of 10.6 million, which have spurned the currency club, pointing to the debt and banking crises that have rocked it over the past decade. The leader of the next Czech cabinet, expected to be appointed within weeks, has also pledged to keep the country out of the euro zone, even though the $195 billion economy depends on it.

But with about 65 percent of Czech exports heading to the countries that use the euro, companies are embracing the euro, according to Radek Spicar, vice-president of the Confederation of Industry. It’s a better option than costly hedging against swings in the koruna, and many smaller firms can’t afford it, said Spicar, whose lobby group represents 11,000 companies including Volkswagen AG’s Skoda Auto AS and brewer Pilsner Urquell.

“Our members are, on a massive scale, switching into the euro even for domestic trade,” said Spicar, a 41-year-old former Skoda Auto executive.

A central bank survey said that about a fifth of all domestic payments between companies were denominated in euros in the first quarter, double the amount from six years ago.

Still, political leaders opposed to membership have argued that Czech taxpayers shouldn’t share the burden of bailing out nations with poor finances. The country’s central bankers advocate keeping the national currency as a buffer against shocks and a useful tool to prop up the economy when needed -- like they did with a Swiss-style regime keeping the koruna artificially weak from 2013 to 2017.

The Czech koruna has gained 41 percent against the euro in the past two decades, tied with Swiss franc as the world’s best performing major currency. While Spicar said appreciation alone isn’t a major problem, as long as it’s tied to economic convergence with richer EU states, periods of increased volatility represent a bigger headache for companies. The Czech currency gained nearly 6 percent in 2017, but it’s now 1 percent weaker than at the start of this year.

Apart from the direct financial costs, Czech businesses are also concerned that the country could be left out of the European Union mainstream as French President Emmanuel Macron pushes for closer ties within the bloc.

“We are worried that the euro zone could become the center of gravity in the EU, which would integrate more closely and set the future direction,” said Spicar. “We must be part of the discussion, not the subject of the discussion. We must not exclude ourselves from the decisions about the design of the EU, because we depend on it more than almost any other country.”

Risks inside the euro area surged this month when the Italian populist parties that are trying to form a ruling coalition threatened to further worsen the country’s stretched public finances and hurt ties with the EU. The euro has slumped 3.7 percent against the dollar this month, while investor flight wiped out 66 billion euros ($77 billion) from Italy’s debt market, the fourth-largest in the world.

©2018 Bloomberg L.P.

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