The management of euro enlargement: Estimates for the degree of synchronization of the business cycles among European Union countries

Abstract

The objective of this study is to estimate the degree of synchronization of the business cycles for seven of the European Union (EU) new member countries with that of the Euro area and to assess the differences from the five most important economies in European Union (EU), respectively, its four peripheral economies. The more synchronized the business cycles are, the lower the costs for extending the Euro area will be, as the occurrence potential of asymmetric shocks will become lower, and it will be much more difficult to eliminate it without a proper monetary policy. The business cycles have been deduced based on four technical filters and on a composite method which allowed the identification of the first principal component. The obtained results outline the growth path of the new member countries' cyclic correlation with the Euro area during the period 2005 to 2011, if compared to the period 1998 to 2004, along with the increase of the degree of financial and commercial integration with the economies which use euro as their currency. Among the ECE economies, Hungary, the Czech Republic, Slovakia and Slovenia are strongly correlated with the Euro area, their level being comparable with the one recorded by most of the peripheral economies, except Greece. Bulgaria, Romania and Poland which are less correlated with the Euro area, so that the accession to the Euro area will be more expensive for them. Key words: Principal component, business cycle, Pearson correlation, euro area, rolling-window correlation.