It is just not something that makes newspaper headlines. And it was the only time during the interview that the usually controlled Mr Tuma showed any emotion.
“Part of the explanation is the world today is quite different in terms of monetary policy from [when the] ERM [was invented]. Monetary policy was based primarily on exchange rates – pre-euro currencies were implicitly pegged to the deutschmark,’’ says the thin-lipped governor.
“Today you can hardly find any [pegged exchange rates]. Floating or currency boards [are most common].”
There is another reason for his dislike of the ERM. The Czech National Bank chose inflation targeting in 1998 as the framework for its monetary policy. The employees of the bank and the financial markets are now well accustomed to this. Changing it to a currency target could lead to upheavals and misunderstandings.
Hoping for flexibility
Mr Tuma is hoping that a European Central Bank statement in December 2003, which failed to say that joining the ERM was a prerequisite, might mean some flexibility. He also said European heads of state could shorten the time period to be spent in the “waiting room” of ERM.
However, his objections do not translate into anti-euro rhetoric. The Czech Republic is becoming ever more bound into the common market, as about 80% of foreign direct investment comes from the EU and around 70% of its exports go there. As a result, “political and economic integration would be so strong that [in future] we would obey the rules of the ECB anyway”, says Mr Tuma.
Lithuania, Estonia and Slovenia joined ERM II at the end of June and are expected to meet the criteria in 2007.
But accession countries of a larger size are facing a very different scenario, as Vienna-based RZB bank pointed out recently: “Protracted high budget deficits that will probably not meet the Maastricht deficit criteria of less than 3% of GDP before 2006 have pushed the prospect of adopting the euro for these countries back to 2009 or 2010 as long as the technical requirements for becoming a member of the eurozone remain unchanged.”
Awkward areas
The main macroeconomic problem for the Czech Republic is a budget deficit of about 5.4% of GDP in 2003 and rising government debt.
Credit rating agency Standard & Poor’s estimates net general government debt will increase to close to 37% of GDP in 2004 from about 30% in 2003. Reducing the deficit to under 3% – the aim for 2007, with a view to joining the euro – involves structural reforms to do with health, pensions, education and social security.
These are all politically awkward areas and are difficult to tackle, especially given that Prime Minister Vladimir Spidla resigned in late June and a new government, probably also a coalition like its predecessor, has yet to be formed.
When it comes to regulation, Mr Tuma is in negotiations with the finance ministry about how it should change. So far, both sides have reached agreement on the creation of a single regulator at the end of the decade, but they have yet to agree whether this should be the central bank, or a super-regulator like the UK’s Financial Services Authority, or some other different model based on regulation in other countries.
“Any solution should be based on our [expertise] at the central bank, to use the know-how of the staff and to use the infrastructure of the central bank,” he says
Policy change
Since monetary policy probably will be transferred to Frankfurt by the end of the decade, this seems a sensible use of resources. However, chances are Mr Tuma will no longer be at the central bank. He admits that he finds monetary policy more rewarding and likes its rationality, as opposed to the often more controversial task of supervision. But is it intellectually more interesting?
“I wanted to say so but I am not sure [whether] it would be offensive to colleagues in banking supervision,” he says. One cannot imagine this contained person being that worried. On the other hand, one could imagine colleagues being worried about incurring his displeasure.
“He has kind of a natural authority,” said a former adviser. “You wouldn’t dare give him back work which was not good enough.”
Another reason for Mr Tuma to move on is that he is not a career central banker. An economist by training, he has worked in that capacity in the ministry of industry and trade and at a bank, lectured on macroeconomics at Charles University in Prague, was a board director at the London-based European Bank for Reconstruction and Development representing his country, as well as Slovakia, Hungary and Croatia, and regularly publishes articles on monetary policy and other economic issues.
“I will certainly not serve the state the rest of my life. Money is important to me. I am not a saint. We have three kids: one eight-year-old and three-year-old twins. I need to provide education for them and for them to feel well. But I don’t need to make millions and millions,” says the green-eyed, lean governor. His small Caesar salad and fish main course should keep him that way, helped by some competitive squash games, cross-country skiing and jogging.
One would guess, however, that he would like to be re-appointed for a second term. He joined the central bank as a vice-governor in February 1999 and was appointed governor in December 2000 on his predecessor’s resignation. His term ends in February 2005 and by law he can be re-appointed once.
The job has been relatively easy, bar a few years dealing with an appreciating currency, which reached just below 29 koruna to the euro in summer 2002. It is now 31.75 to the euro.
The economy is growing steadily, with rates of 3.1% in 2003 and a forecast 3.5% this year. Forecast inflation of 3.3% in 2004 means the Czech National Bank will have to continue raising rates. At the end of June, it raised them 25 basis points to 2.25%.
Optimistic forecasts
Meanwhile, Mr Tuma, dressed in a fitted pinstripe suit, says he is optimistic about 3%-4% growth in the economy and low inflation, but pessimistic about there being sufficient reforms in the public sector in the next few months. He takes guarded umbrage at the accusation that he has not spoken out enough about the need to lower the budget deficit.
“[I have been] quite critical on fiscal policy. Another point is that I don’t think it’s my mandate to be too critical on fiscal policy, if I want to keep my independence on monetary policy,” he says.
“But with some reservations. Everyone says something should be done with the pension system and health reform, but I would not say what.”
The Czech Republic is not the only accession country with problems on this front. Poland and Hungary have large government deficits and debt to GDP ratios of close to 60%. But even Italy and Greece managed to achieve convergence and join the euro, albeit with a host of one-off tax and other special measures.
Other than his small outburst about ERM II, Mr Tuma is a man of few words. His former adviser at the central bank says the governor tells a tale of being invited into a Tibetan monastery by an old monk for tea. As the monk did not speak English, let alone Czech, they gazed at each other for 20 minutes, drank tea and smiled. On his return, the governor told his adviser he had had a nice conversation with the monk.
