1. Euro and Macroeconomic Stability New Issues Arising from the 2008 Financial Crisis towards the Euro Adoption in the Czech Republic Vladimir Tomsik Board Member November 25, 2008

2. Is Euro a shield? Has the single currency been helpful in resolving the 2008 financial crisis? Is Euro a shield for Europe against the external shock? The macroeconomic situations in Hungary, Iceland, or Belgium have shown that countries and their financial markets have been suffering from crisis no matter whether they are a member of the Euro zone or not. Macroeconomic stability cannot be introduced or imported via the adoption of Euro, but it must be based on stable and reasonable economic policy.

3. Traditional indicators So far the economists have analyzed following traditional indicators: Real and nominal convergence process Equilibrium real exchange rate appreciation Business cycle synchronization Macroeconomic shocks Sufficient flexibility of production factors, etc. The Czech Republic has been improving its macroeconomic stability in most of the analysed indicators. Nevertheless, the current macroeconomic situation shows that there are several issues that have not been reflected in the analyses yet.

4. New issues New issues that have not been reflected in our analyses in more details yet. „Beggar your neighbour“ - policy on deposit guarantees in the banking/financial sector Financial intermediation in domestic versus Euro currency (especially in mortgages)‏ Home versus host regulation, including lender-of- last resort questions Confidence in Stability and Growth Pact (there are 15 fiscal policies but only 1 monetary policy… !)‏

5. Stability outside the Euro zone Financial stability is possible in a small open economy given that domestic economic policy is reasonable This enables domestic interest rates to be similar or even lower than in the Euro zone (e.g. the case of the Czech Republic)‏ It prevents the share of FX loans in domestic economy to be high 3M interest rates

6. Instability outside the Euro zone National currency is obviously no guarantee against financial crisis High inflation and/or high fiscal deficits lead to high nominal interest rates This implies high share of FX loans and exposure of the domestic banking sector to problems with financing in case of a crisis in foreign markets 3M interest rates

7. Conclusions Recent cases in Hungary, the Baltic countries, Iceland or some members of the Euro zone (e.g. Belgium, Austria etc.) have shown that the point is to have reasonable and stable economic policy and prudential approach of domestic regulation Without it you cannot have stable economic environment disregarding whether the country is inside or outside the Euro zone

8. Thank you for your attention. Vladimir.Tomsik@cnb.cz