Economic Crisis and Structural Changes in the Integration Process of Eastern European Countries

Abstract

This paper investigates the integration process of Czech Republic, Hungary and Poland towards EMU, in the light of the recent global financial and economic crisis. It has been said that these transition economies, which represent the three largest in the group of Central and Eastern European Economies that have entered the EU in 2004, have been stricken by the crisis events differently on their way to unification and more deeply than the euro area countries. The aim of this study is to establish whether the process has been characterized by structural breaks that could have had permanent effects on the convergence of the three countries’ economies towards the fulfilment of the criteria required by the Maastricht Treaty. Stochastic convergence is defined on the well-known and widely used concepts of unit roots and cointegration. Hence, the question amounts to asking whether the countries of interest result to share the same common stochastic trends with the euro area countries in inflation rates and interest rates, before and after the recent financial and economic crisis, even if there have been significant changes in the mean and in the trend. In other words, we ask whether the catching up progress of the transition economies in comparison with the old member states, has been interrupted by the breaking out of the financial and economic crisis, or has continued in spite of the exogenous events. In the empirical analysis for Czech Republic, Hungary and Poland we use EU15 countries as reference countries. The results show that Poland is suffering more the consequences of the recent crisis than the other two countries, in its integration process towards the adoption of euro. Though they are all stochastically converging, the path to convergence has become harder and longer after the crisis, and characterized by significant structural breaks for the three countries of interest.