Prospects for EMU Enlargement: What Will Be the Consequences of a Fiscal Union?

Abstract

Following the currency crises of the 1990s, most Asian countries believed that the European Union was their model of integration to prevent future speculative attacks. Ironically, the European Monetary Union (EMU) at present is confronted with two major problems. One is possible speculative attacks during the new members' transition to the EMU. The other is the policy mix problem. This paper combines the two current issues with which the EMU is confronted and explores what the consequences of the new members' accession will be if there is a fiscal union in the euro area. A dynamic game simulation approach is adopted to study the interaction among an accession candidate, the European Central Bank, and a prospective single fiscal authority in the EMU. The simulation results indicate that a fiscal union in the EMU may be helpful in promoting international policy coordination prior to EMU enlargement and then improving the macroeconomic stability of the accession candidate and the euro area. The result also can be a warning to East Asian governments considering their future policy based on European experience.