Academic journal article Economics & Sociology

Perspectives of the Accession of the Czech Republic to the Euro Area in Terms of the Price Level Convergence

Academic journal article Economics & Sociology

Perspectives of the Accession of the Czech Republic to the Euro Area in Terms of the Price Level Convergence

Article excerpt


The accession of the Czech Republic to the European Union was also automatically associated with the obligation to replace the national currency (i.e. Czech koruna) with the single currency of the EU (i.e. euro). The euro introduction is subject to the fulfillment of convergence criteria set down by the Maastricht Treaty. In addition to these binding nominal convergence criteria, an economy acceding to the euro area should also monitor the fulfillment of the real convergence criteria. These criteria are not set down by European treaties; however, they result from economic rationality - from the calculation of costs and benefits of replacing the national currency with the single currency of the EU.

Mainly the following three real convergence criteria are most frequently assessed:

* Economic level alignment (GDP per capita) that shows converging competitiveness of integrating economies. The importance of this criterion consists in the fact that it is no longer possible to promote competitiveness through currency depreciation as national currencies cease to exist. Therefore, countries with similar economic level should integrate;

* Business cycle alignment (quarterly changes of the real GDP compared on a yearto- year basis) that expresses the current state of expansion/recession stages within individual monetary union countries. This development is beneficial due to the disappearance of former national monetary policies and their replacement with the single monetary policy of the monetary union single central bank. Therefore, countries with synchronized business cycles should integrate;

* Price levels convergence, which is important in terms of the development of inflation. In case significant price levels differences exist, there is a risk of sudden surge of the low price level of the acceding member towards the higher euro area price level. Therefore, countries with the same price levels should integrate.

In terms of the perspective of the euro introduction in the Czech Republic, we find the last of the above mentioned real convergence criteria to be the most important. This results from concerns about a sudden price level hike following the euro introduction. This is also the main argument of opponents of the euro. This argument then affects views of both the political representation and the public on the euro introduction, with prevailing negative position.

In relevant literature (as detailed below), the price convergence criterion is interpreted as the comparison of the acceding country's price level with the average indicator for the euro area as a whole. The objective of the paper is to construct new indicator for this price level real convergence criterion that would be more appropriate compared to the traditional indicator. Then we compare the result of this new indicator with traditional indicator.The time series cover the period from accession to the European Union to 2013.

The aim of the paper is "only" to create an alternative way of measuring price convergence. Therefore, the paper does not cover either the mechanisms by which this convergence takes place (inflation channel, exchange rate channel), nor the dynamics of price convergence (and its barriers or even stop).

The first part of the paper presents the most significant literature in this area. It is followed by the description of applied methods. The third part of the paper assesses and discusses the measurement results. Finally, the key findings are summarized in the conclusions.

1. Literature review

The paper relies on conventional definitions of the economic convergence criteria (both nominal and real) of the monetary union member states, particularly from Economics of European Integration (Baldwin and Wyplosz, 2012) and Economics of Monetary Union (De Grauwe, 2007). Various findings relating to monetary integration were also drawn from International Economics (Krugman and Obstfeld, 2006). …

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