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Implementation of the Euro in the Czech Republic

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Implementation of the Euro in the Czech Republic Implementation of the Euro in the Czech Republic Thesis by Nguyen Le Zuzana Submitted in Partial Fulfillment of the Requirements for the Degree of Bachelor of Science in Business Administration State University of New York Empire State College 2016 Reader: Tanweer Ali I, Zuzana Nguyen Le, hereby declare that the material contained in this submission is original work performed by me under the guidance and advice of my mentor, Tanweer Ali. Any contribution made to the research by others is explicitly acknowledged in the thesis. I also declare that this work has not previously been submitted in any form for a degree or diploma in any university. Zuzana Nguyen Le, 24.4.2016 Acknowledgement I would like to express my deepest gratitude to my mentor, Mr. Tanweer Ali, for his precise guidance and his patience. I also want to thank all of my close friends who had to listen to my complaints during this stressful period. Especially, I am most grateful for my Thesis-writing-buddy, Dinh Huyen Trang, without whom I would have spent much more time writing the thesis. Our sessions full of food and concentration gave me the needed motivation to finish the work. So thank you. Last but not least, I owe my big thank to my family that supported me and gave me the most possible comfort environment to concentrate. Table of Contents Introduction ........................................................................................................................... 1 History ...................................................................................................................................... 2 Motives Leading to the European Economic Integration ................................................. 2 Stages of European Economic Integration ............................................................................. 4 Free Trade Zone ............................................................................................................................................ 4 Customs Union (CU) .................................................................................................................................... 6 The Common Market .................................................................................................................................. 7 Economic and monetary union .............................................................................................................. 7 Political union ................................................................................................................................................ 8 The Czech RepuBlic Becoming a MemBer of the European Union ..................... 10 The Euro ................................................................................................................................ 12 Maastricht Convergence Criteria ............................................................................................ 14 Fulfillment of the Convergence Criteria in the Czech RepuBlic .................................... 16 Impacts of Implementing the Euro in the Czech RepuBlic .................................... 22 Direct Benefits from Implementing the Euro ..................................................................... 24 Direct Costs from Implementing the Euro ........................................................................... 27 Indirect Benefits and Costs ....................................................................................................... 31 Impacts of Financial Crisis on the Euro Introdution in the Czech RepuBlic ... 36 The Mortgage Crisis in the US .................................................................................................. 38 Impacts of the GloBal Financial Crisis on the Czech RepuBlic ....................................... 39 Comparison Between the Czech RepuBlic and Slovakia ........................................ 41 The Introduction of the Euro in Slovakia ............................................................................. 41 The economic comparison Between Slovakia and the Czech RepuBlic ..................... 44 Gross Domestic Product ......................................................................................................................... 44 Foreign Direct Investment (FDI) ........................................................................................................ 45 The Overall Financial Situation .......................................................................................................... 46 Inflation rate ................................................................................................................................................ 47 Unemployment rate ................................................................................................................................. 48 Conclusion ............................................................................................................................. 50 Abstract The Czech Republic is a member of the European Union since 2004 and yet is not a member of the Eurozone. Until recently, the date of the euro adoption was not fixed, however, from 2014 the Czech government declared an active support for creating conditions for the euro adoption. How will adoption of the euro affect the Czech Republic? Will it help or harm the Czech’s economy? This thesis aims to analyse the issue of the euro adoption in the Czech Republic. There is no doubt that implementing the new currency is a huge change that will effect the country a lot, thus, there are a lot of arguments for and against the project. Another aspect will be a comparison with Slovakia, as a country that already entered the Eurozone, because these two countries are quite similar, there is a shared tradition, therefore, the experience of Slovakia with the euro can be useful for the Czech Republic. The differences between the countries’ economy are shown on the statistical tables. To obtain required information to support my work I mostly read academic journals, books from various libraries, and some credible sources on the Internet. In my opinion, this topic is a current issue and it concerns a lot of people and their lives. There is no certain result yet but it will definitely affect the country in many ways. Introduction Economic and monetary union together make the fourth phase of the economic integration of the European Union. These two terms are different, but they complement each other. The economic union has a status of coordinated cooperation in the field of trade, economic, monetary, fiscal, social, and structural policy. On the other hand, monetary policy is a form of cooperation developing a free movement of capitals. The aim of this cooperation is a creation of fixed rates, providing for full convertibility of the members’ currencies, followed by replacement of national currencies by the common currency – the euro. Euro has become a significant player in the world monetary system right after the dollar and the yen. Currently, there are already 19 countries using the euro as their currency out of the 28 member states of the European Union. The aim of this work is to help with the question, when is the convenient time for the Czech Republic to adopt the euro. There will be also a mention about the impacts of the global financial crisis on the Czech Republic. Furthermore, information about the advantages and disadvantages of membership in the monetary union will be provided as well as the comparison between the Czech and Slovak economy because experiences of Slovakia with the single European currency can be useful for the Czech Republic. 1 History Motives Leading to the European Economic Integration The beginnings of modern European integration are fit into the fifties of the twentieth century. However, the unification efforts of various European countries can be found much earlier in history. Mostly it was rather because of the rulers’ desire to own larger territory than to get the nations closer and economic cooperation. From history, there was already a ruler, the first Holy Roman Emperor - Charlemagne, who tried to unite territories. Charlemagne, also known as Charles the Great or Charles I, was King of the Franks. Around the year 800, he initiated an attempt at recreating the Roman Empire. This empire included today's France, Belgium, Luxembourg, Switzerland, West Germany, and Netherlands, which are (except Switzerland) five out of six founding members of the current European Community, only Italy missing. Charles I also introduced a single currency in his empire, which came in the form of euro after 1200 years. (Dinan, 2007) George of Podebrady was King of Bohemia and leader of the Hussites. Around 1462, he suggested to create the European confederation of the states, which would face together against the Turks. Under the reign of Napoleon Bonaparte, the French empire expanded on Belgium, Netherlands, and part of Italy. There was also an effort of a single currency and a single right. World War I was from 1914 to 1918. The National Revival in Europe led to belief that every nation has to have its own state. After signing the Treaty of Versailles, new ordering of Europe was created which the Germans did not like. (BERGER, 2013) In 1940, Winston Churchill, the Prime Minister of the United Kingdom, and Jean Monnet, French political economist and diplomat, proposed creation of Anglo-French Union. The 2 proposal represented a common defense policy against war, a common foreign
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