miroslav singer : the czech republic outside emu – a success story born from painful lessons. a czech view on resolving the euro crisis speech by mr miroslav singer, governor of the czech national bank, as part of the omfif ( official monetary and financial institutions forum ) golden series on world money, reform club, london, 28 june 2011. * * * a horrible end is better than endless horror. lieber ein ende mit schrecken als ein schrecken ohne ende. ferdinand von schill ( 1776 – 1808 ) ladies and gentlemen, as we all know, the eurozone is facing serious problems at the present time. it is my opinion that there are important lessons to be learned from the collapse of the bretton woods system in the early 1970s. the czech policy authorities learned these lessons – often the hard way – first of all after the split of czechoslovakia 1993, and again during the financial and currency crisis that hit the czech republic later in the same decade. in my speech today i will recall these lessons and examine how they can be applied in order to minimise the costs of resolving the eurozone debt crisis. before going any further, however, i ’ d like to draw your attention to four basic – and surprising, perhaps even shocking – facts about the czech republic. first of all, it may come as a shock to some of you to learn that the czech republic is not an eastern european country. in fact, its capital, prague, lies more than 90 miles west of vienna. in the words of a famous londoner – the actor michael caine – “ not a lot of people know that ”. what is more, the czech economy is further west than you might think not just geographically, but also economically. this brings me to shocking fact number two. despite tepid real growth averaging 3 %, the czech economy has grown by 10 % on average in recent years thanks to appreciation of its exchange rate. therefore, the czech economy has multiplied in size more than 4. 5 times since 1993 in nominal terms in euros. consequently, it could have bought on average more than 7 % p. a. of the core european countries ’ real gdp over the last 18 years. and now for shocking fact number three. despite, or maybe thanks to, our first - hand experience with financial crisis ( bad loans exceeded 40 % of gdp in the late 1990s ), no bailout has been needed and no taxpayers ’ money has been used to save any czech

##zone. let me start with a few observations. the eurozone ’ s mechanisms have supported economic divergence rather than convergence. the rules are not only wrong, they are manifestly and idly ignored regardless of their quality. to see this, consider for example that the eurozone ’ s debt exceeds the maastricht debt criterion by one - half, and its deficit exceeds the deficit criterion by a factor of almost two. only three eurozone countries – finland, luxembourg and bis central bankers ’ speeches estonia – fulfil the maastricht criteria. the belief that eurozone membership has disciplining consequences after joining has been proved unsubstantiated. as in the case of the czech crisis of the 1990s, political and economic policy authorities have made numerous u - turns at state and eu level during the crisis. there have been volte - face, for example, on bank bailouts and the necessity for them, on the need to relax monetary policy in europe, on the state of the eu financial sector, on the no - state - bailout clause, and on the sufficiency of the current greek package. in addition, several false myths have been propagated, for example on the consequences of greek bankruptcy for the german and french banking sectors and on the need for the ecb and central banks to have positive equity. in fact, numerous central banks have negative equity yet have no problems operating if they are credible enough. the real capital of a central bank is its credibility and reputation, not a figure on its balance - sheet. credibility and reputation are virtues that thrive on consistent and credible policies and communication. another myth is that the eurozone cannot survive a greek default. why not? is it insolvent? are there significant trade dimensions between greece and the eurozone? according to available dtcc data – which is incomplete but very probably covers the majority of cross - border transactions – even cds that are now so often mentioned should not present a systemic problem for the european financial system. note that cds on greek debt are higher than a year ago, but the euro is stronger than at the peak of last summer ’ s greek crisis. the markets do not appear to think that greece is that fundamental to the survival of the eurozone. finally, it is implied that if we solve the debt problem, greece and portugal are saved. they are not. competitiveness is the real issue for these countries. no economy can survive and thrive unless it is competitive.