Adoption of euro: obstacle or engine of real convergence?

The article arrives to the following conclusions. First, the optimal currency area theory cannot deliver critical (objective) values of tests, whose passing would guarantee that costs of adoption of euro would be lower than the benefits. Second, several empirical observations strongly support the hypothesis that early adoption of euro by the Czech Republic would not incur any substantial losses. Third, several recent studies focused on testing the synchronisation of Czech business cycle vis-à-vis Eurozone do apply analytical techniques inappropriately, which implies biased results. Fourth, the Czech economy has enough experience with excessively volatile exchange rate. The greatest advantage of adoption of euro will consist in a replacement of exchange rate fluctuations and substantially higher stability of inflation. In quantitative terms, the weight of accession countries in Eurozone will be too small to influence the overall inflation and thus co-determine the European Central Bank monetary policy.

Keywords: optimum currency area, real convergence, adoption of euro, cost-benefit analysis, real appreciation