Sunday, 20 July 2008

When Czech gets the Euro...

Q. What’s going to happen to these prices when the Euro comes in?
A. Nothing.

And here’s why…

Because a currency is a way of measuring price, value and wealth. It is not in itself price, value or wealth.

It doesn’t matter whether a beer is 25Kč or 1Euro. It still costs the same and there’d be no reason for the price to go up even if people suddenly decided to measure it in Dollars, Pounds or peanuts.

“But what about Portugal? They switched to the Euro and prices skyrocketed”. Doesn’t matter. Carlton won the 1987 grand final (Australian football) and the stock market crashed. But that doesn’t mean Carlton caused the crash, does it? Portuguese price rises weren’t caused by the currency. The currency just measured them.

I don’t claim to be an economist, but I suspect that the new taxes introduced at the same time had far more to do with price rises than anything else. The Czech Republic introduced and implemented most of the same taxes when it joined the EU in 2005.

So my prediction for when they eventually adopt the Euro is…nothing. The only thing that will change dramatically will be the banknotes and coins. Property prices won’t leap and neither will things like food, drink and accommodation. EU citizens have been able to buy Czech property for years now, and prices have risen, most noticeably in Prague, but this is to do with simple supply and demand, not the currency used for the transactions.

Now my simple chocolate-addled brain may have all this twisted around, and I guess the only way to really know for sure is to wait and see. But Czech government ministers are talking about 2013 now as the earliest possible date.

If you can’t wait that long, a good indicator might be the adoption of the Euro by Slovakia at the beginning of 2009. Slovakia’s economy is smaller than the Czech Republic’s and so is its population. But in lots of other ways, the countries are very similar.

My prediction is for things to continue on roughly as they have been for the last 15 years. That is, a slow and steady increase in living standards and individual wealth.

No matter what currency you measure it in.

Just for interest’s sake, in case you’re planning a visit or are curious how prices have changed at the cash register since you were here, here’s a quick list of some basic items and what they cost (in the part of the country that is not Prague).

Cheap beer in a pub 16Kč
Expensive beer in a pub 30Kč
Cup of coffee 25-30Kč
Lunch menu at restaurant 55-75Kč
Chicken schnitzel and chips 130Kč
Litre of fresh milk 19.90
Litre of Bio milk 24.90
Baguette with ham and cheese 24.90
Hot dog with ketchup 12Kč
Tram ticket 8-12Kč
Bus ticket Prague-Č. Krumlov 160Kč
Hostel dorm bed 300-350Kč
Cinema tickets 90-120Kč

Current exchange rates


tuckova said...

I wrote about the currency thing, too, though I took a much more personal and whiny view of it than you do! It's the drop of the dollar, more than the rise of the crown, that's hurting me. Though looking at your price list, maybe I should move to Olomouc.

Captain Oddsocks said...

You find Brno more expensive then, Tuckova? Last time I was there I had an excellent cup of coffee at the only place I could find open early on a Saturday morning. And then almost fell off my chair when they wanted about 45Kc for it. I thought it was just that cafe though.

Anyone who wants to read Tuckova's personal and whiny view (it's the best kind of whine-one with a creative solution attached) can find it here.

Michael said...

You're right about the effect of tax changes, but never overlook the power of unscrupulous shop owners and a population that is more used to whining about changes than to protesting about them. That said, I wouldn't care if they had the euro now as long as the exchange rate with the pound improved (42 crowns last year, 26 now!)

Captain Oddsocks said...

Yeah, I don't know, Michael.

There is that passive and accepting streak, but if there's an archetypical Czech out there somewhere, he or she is certainly not gullible and probably has a well-honed eye for value.

If I were a shopkeeper, I don't think I'd try any fancy tricks with the price-marking pen on Euro-day.

On the exchange rate, there was a front page article in the weekend paper here attributing the current strength of the Crown to currency traders. With the inference that if and when they decide to sell, we might not be seeing any more records set against the Euro for a while...

Might be best to get your Crowns at the last minute for this year's holiday ;-)

sansIcarus said...

Even though your analysis is on the money Oddsocks, I still think prices will rise, even minutely, as they did in other European countries. The reason is when shopkeepers are converting their prices they are much more likely to round up rather than round down.

I wouldn't call this unscrupulous, though, the goal of business is to make profit. For example, to stay at Poets' Corner when I was there cost 300czk, and according to that currency conversion link, that equals 13.05444 euros. In that case, would you swallow the loss, and charge 13, or round up to 13.50 or even 14? I realise the decimal in this example is quite small, and you might dismiss it out of hand, but at what point does it kick in?

Businesses do whatever it takes to increase profits. Petrol companies in Australia raise prices at the pump the second there's a tremor in the international market. Then, when the price of oil goes down they say things like "we expect this change to filter through to consumers within two weeks." The second half is understandable, but not when combined with the first.

Captain Oddsocks said...

Banks are another institution quick to pass on interest rate rises and slow to apply any cuts.

And you're right. There might be minor changes due to rounding up. Let's say in the order of 1 or 2 or even 3%. But the 10 or 20 or 30%price rises that people are talking about I find far-fetched.

There's recently been a run of cashed-up Western Europeans buying property in Slovakia for example. It seems like at least some of them are purely speculating on price rises and plan to sell again in twelve months for a quick profit.

I think they're going to be disappointed. Which is fine; nobody deserves to be disappointed more than a cashed up property speculator.

I have to take issue with your third paragraph, though, honourable Icarus. Not all businesses 'do whatever it takes to increase profits'. Not all restaurants serve hamburgers through drive-though windows, not all hotels rent rooms by the hour and not all hostels have a bar.

One small hostel in a struggling Central Moravian destination has even stopped taking reservations for one-night stays. Numbers (and therefore profit) are slightly down on last summer, but so are ridiculous complaints and the butthead tally. Normal guests and staff are both much happier and it's been well worth the foregone profit.

A different set of rules applies to big businesses driven by boards of directors and shareholder expectations. But most of them don't even do what they should be doing to increase profits, i.e. increase value and customer satisfaction.

For example, I'd still be shopping at the supermarket around the corner if the women didn't toss my groceries down onto the counter after scanning them.

Minute rises when the Euro comes in, probably. Anyone adding 10% or more will lose a lot of customers, unless they're a near monopoly with compliant competitors; like petrol companies, banks and energy providers. All of whom seem to be able to add 10% whenever they want anyway.

Regardless of currency.

Mark Webster said...

Hey, go easy on the property speculators!

Michael said...

How can you be a capitalist and not be unscrupulous? Hostel owners excepted, of course...

I lived in Italy right after they adopted the euro. There, once one shop or restaurant put up its prices the rest soon followed. Slightly more than rounding up too. But I agree, 20 - 30% is just scaremongering.

I would never say Czechs were gullible. Whiny, definitely. But never gullible.

Captain Oddsocks said...

There are plenty of capitalists with scruples. In a lot of cases, the most successful capitalists are the most scrupulous people, because they have the least need to be ruthless. Warren Buffett and Bill Gates spring to mind.

Plenty of unscrupulous people who weren't capitalists too. Josef Stalin, Pol Pot, Charles Manson, Kim Jong Il...Isn't it like Carlton and the stock market again? The two things may co-exist, but that doesn't mean they're connected by more than coincidence.

Why do the other restaurants follow the first to raise prices? Why not keep prices on hold, trumpet it far and wide then sit back and watch the crowds roll in.

Unless someone's uncle had a quiet word in your ear about what might happen if you didn't go along with the rest of the cartel...?

What did the customers do? Pay the higher prices or decide not to eat out so often?

@Mark W.
Nothing wrong with buying an old house or two or twenty and fixing them up for a profit. Absentee speculators who add no value and have no connection with/affection for the place who bothers me.

A good example is the restitution, when communist-confiscated property was returned to the descendants of the rightful owners.

All of a sudden someone who has never had two spare Crowns to rub together finds herself owning three houses at the other end of the country. Real estate agent waltzes in, offers 2 Million for the lot and the deal is done. Agent then turns around and sells the properties for 5 Million two weeks later.

That's the kind of cashed-up property speculator who deserves to be disappointed.

Mark Webster said...

Hey I just wish I was a "cashed up" speculator.
It will be interesting. I agree with you that there seems to be no good reason for a price rise notwithstanding the rounding up argument.
I guess the thing to hope for is that it happens at a time when wages are high and the Crown is low. (from the point of view of Mr and Mrs average)??

Captain Oddsocks said...

Mr. and Mrs. Average are loving the strong Crown, espeially as so many of them are heading off to Croatia on summer holidays just now.

The reason for not taking the Euro until 2013 is ostensibly because the current deficit is too high, but it also makes sense to delay while the Crown continues to strengthen.

Of course they can't come out and admit that for fear of upsetting exporters.

Mark Webster said...

Yeah, consumers here in New Zealand were lovin' the strong NZ dollar meaning plasma TV's and so on became a lot more affordable. House prices were at record highs and many people borrowed against their equity to finance new cars and TV's etc. Then the interest rates rose and the bubble burst and the Americans loaned a whole lot of money to people who couldn't pay it back and jobs started getting cut and people were forced to sell their homes.....

sansIcarus said...

You're right Captain: "whatever it takes" was a little too strong in the language category. I think what I meant was that the primary function of business is to generate profit, so that businesses are unlikely to take actions which would reduce profit unless they have a very good reason to.

Public perception is a good example of a reason that businesses may take an action which at first might seem detrimental to their operation. But as business need customers, sometimes they need to swallow a bullet and fork out some dough in order to ensure long-term survival.

Esigodini2 said...

The new Euro notes are all fine-and-dandy, but you can't fold them so that a hand looks like the back of someone's body. Save the Kc200 note.

Captain Oddsocks said...

:-) Hear, hear!