Challenges for the new EU member states on the road to the Eurozone

Abstract

This paper analyses the process of nominal and real convergence in the new Member States of the European Union (NMS). The importance of nominal and real convergence is underlined in connection with a successful catching-up. The NMS economies experienced robust economic growth in recent years, which had a positive impact on the convergence process. Although this favourable development of real convergence is accompanied by a simultaneous price (nominal) convergence, the comparative price level is still biased towards lower level in comparison with the per capita income. The regression analysis shows interdependence between the comparative price and the income per capita level. This basis enables to evaluate potential benefits and risks connected with joining the euro. The benefits connected with elimination of exchange rate risks and reduction of transaction costs can be compared with the disadvantages associated with the loss of an independent monetary policy and an adjusting exchange rate mechanism. Attention is paid to a potential impact on nominal and real convergence of the observed countries. There are some risks for these countries connected with the common monetary policy, which is adjusted more to the conditions of stabilized advanced economies, forming the core of the Eurozone. These risks can be overcome on the basis of a fast labour productivity growth, accompanied by an adequate policy, ensuring the macroeconomic stability. The rapid productivity growth is raising the relative price level. The Maastricht dilemma, i.e. the fulfilment of two objectives during the stay in ERM II (the price stability and the exchange rate volatility) under on-going nominal convergence enforces an appropriate monetary and fiscal policy. However, such strict policies may slow down the economic growth. Another possible measure for keeping the price stability is a relaxation of the fluctuation band (its full exploitation to the upper and bottom limits), or a change of the central parity (revaluation).