War Boosts Euro’s Appeal for Czech Business as Government Stalls

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Market turmoil spurred by the war in Ukraine is increasingly pushing Czech businesses to abandon the koruna for euros, with industry seizing the chance to pressure the reluctant government to adopt the single currency.

The share of corporate loans in foreign currencies matched a pre-pandemic record in March, according to data published on Friday. Many exporters also pay local suppliers in euros, a trend that will likely expand after manufacturing behemoth Skoda Auto AS recently announced plans to stop using koruna in its accounting and financial reporting next year.

The Czech Republic has resisted taking steps to become a euro member, particularly after the economic turmoil wrought by the euro crisis a decade ago. The nation's central bank has also been protective of its independent monetary policy as an economic stabilizer.

The ex-communist nation largely avoided the fallout from the euro crisis, which triggered a decade of sluggish growth in the region, thanks to its low public debt, well-capitalized banks and nimble monetary-policy making.

But companies are adopting the currency of the Czech Republic's main trading partners, reinforcing their argument that it softens the blow of exchange-rate volatility and higher borrowing costs. Radek Spicar, the vice president of the Confederation of Industry, says paying billions of koruna on currency conversions and hedging is “throwing money out of the window.”

The main Czech manufacturing lobby group, which represents over 11,000 employers, has long been a major euro advocate since the country joined the European Union in 2004.

“It's better to be part of a bigger and more trusted currency bloc, which itself is a buffer against potential future shocks,” Spicar said in an interview.

Now that the Czech economy is being battered by record inflation and Russia's invasion of Ukraine has heightened geopolitical risks, Spicar is doubling down on his message that the costs of remaining outside of 19-member euro area -- including political marginalization -- exceed the benefits.

“Right now we're choosing not to be at the table where big decisions about the entire EU are being made,” said Spicar.

Czech Prime Minister Petr Fiala has refrained from taking steps toward euro adoption during his government's term that ends in 2025, but four out of the five ruling coalition parties are publicly in favor of euro-area membership.

Selling adoption to the public may be a challenge. Polls have shown that only about a third of Czechs support joining the euro, though no surveys have been published since before Russia's invasion of Ukraine. Czech reticence is similar in neighboring Poland and Hungary, where the share of corporate foreign-currency loans is declining.

By contrast, the Czechs' former federation partner, Slovakia, along with other ex-communist nations Slovenia, Estonia, Latvia and Lithuania joined the euro between 2007 and 2015, while Croatia and Bulgaria plan to do so too.