4 Reasons to Not Change Your Czech Crowns for Euros
The other day a friend asked me if they should exchange their Czech crowns for Euros. They were concerned about inflation and the political madness around us. At that moment I didn’t have an opinion. The question bugged me for a while. My main source of income is Czech crown-based. So after doing a bit of thinking, here are my reasons why I will keep my Czech crowns.
Reasons to not exchange your Czech crowns for Euros
- Debt to GDP: The debt of the Czech Republic is 42% of GDP vs 95% in the Eurozone. If the interest rates increase, it will be more expensive for governments to pay for their debt. If their debt is too high, they might not be able to pay it back and file bankruptcy.
From this perspective, I expect the CZ to be able to continue with their increasing Interest rates policy, while I don’t expect that from the eurozone due to the high debt levels in some countries, like Spain or Italy for example. - Interest Rates: The Czech National Bank (CNB) is rising rates. Currently, they are at 5.75%, while the European Central Bank (ECB) have them at 0%. We have mentioned before in this blog, that rising interest rates are a way to fight inflation.
Currently, the ECB is delaying rising rates, so they don’t damage the southern economies. While on the other hand, the CNB has been rising rates already since last year.
That being said, a new governor for the CNB, Ales Michl, has been appointed. During his appointment ceremony, he showed a bit of resistance to raising rates. So we will have to watch out for any shift in their policy, for this argument to keep being valid.
- Gold Reserves Trend: Although in terms of gold to currency CNB and ECB have similar amounts. CNB 22906 (million Euros/tonnes of gold) vs 29628 (million Euros/tonnes of gold). The data shows that the CNB is increasing its reserves, which is always a good thing.
Remember that fiat currencies are backed by the trust of the citizens. If at some point those would lose faith in them, exchanging currency units for gold would restore faith in the system.
In the graph below you can see the shift in the CNB policy. They started to increase their gold reserves in 2020 while the ECB has not moved in the last 12 years.
- Energy: The tension between Russia and the EU continues to increase. If at some point both parties do not reach an agreement and Russia stops its gas exports, the whole EU, including CZ, will suffer the consequences.
And this is how I expect it to roll out:
– If Russia stops its exports, the price of energy for the whole EU citizens and companies will skyrocket.
– If the prices skyrocket, the economic performance of the area will decrease. Companies will spend more on energy and their profits will decrease.
– If the performance decreases, the collected taxes of the states will be lower. Governments collect taxes based on the company’s profits, so if those are low the taxes are low too.
– If the collected taxes are lower and the countries have difficulties importing energy, the perceived risk by the market will increase, and so the gap in their budgets too.
-If that gap increases, they will have to issue more debt to cover up the difference.
-If the governments issue more debt adding to the perceived risk, the interest rates on their debt will increase.
– If the interest rates on their debt increase, the economic performance of the country will decrease, closing then, this circle.
If this happens, both CZ & EU will be affected. But, I think that CZ has more margin to absorb higher interest rates on its debt and defend its currency.
CZ debt levels are much smaller than those of the EU. Also, CZ is not dragging a bunch of insolvent countries with them, which in the end will be a problem for the Euro as a currency.
But isn’t the inflation rate higher in the CZ than in the rest of the EU?
That is a good point, the inflation in CZ is (13.2%) and in the EU is (8.1%), with a difference of 5% between them. However, due to the increasing interest rates in CZ, the crown has gotten around a 5% stronger than the Euro. Assuming that the average rate of 1 euro is 26 crowns, it compensates for the difference in inflation in both places.
See in the graph below, the lower the line the stronger the crown.
Wrapping up
Based on the reasons mentioned above. Nowadays, I feel much more comfortable holding Crowns than Euros. The CNB seems to be working towards fighting inflation. And, maintaining the purchasing power of its currency. While the EU seems to be in a very weak position that can end up in disaster. So as a Czech crown holder, I feel more protected.
Remember that this is not investment advice and you should evaluate the situation by yourself.
If you are interested in how energy prices and interest rates might affect the EU, listen to the interviews with Alasdair Macleod. He collaborates with many Youtube channels on monthly basis, just search for his name there.
And If this post brought you any value, share it so others can benefit from it too 🙂
The economic figures have been taken from Tradingeconomics
Image licensed by TamaraGoncharuk
