EMU Accession Research Articles

When should the Central Europeans Join EMU?

This article first considers why central European countries wish to join EMU soon. The main reasons are the risk of macroeconomic instability they face outside the euro zone if they wish to grow quickly. At the same time, central Europe is highly integrated with regard to trade with EMU, so it is little exposed to asymmetric shocks that would require a realignment of exchange rates. Finally, it is argued that there is no cost in terms of slower growth from EMU accession, so that there is no trade-off, as has been claimed, between nominal convergence to EMU and real convergence to EU average GDP levels. Second, the article assesses whether central European accession to EMU would be disadvantageous to current members. It concludes that accession cannot increase inflationary pressure on existing EMU members, also as claimed, but that slow growing members of EMU might suffer increased unemployment, unless they increase the flexibility of their labour markets. Incumbent members may also be unwilling to share power with central Europeans in EMU institutions.

From Hard Currency Policy to Monetary Union

In the wake of monetary integration in Europe, Austria abandoned the tested hard currency policy (HCP) for joining EMU as a member. The final target of monetary policy and real sector adjustment needs are similar in both regimes, and the HCP may therefore be viewed as a convenient, training camp, for later EMU accession. Georg Winckler devoted a number of essays on the critique, but also on the analytical foundation, of the HCP. The current paper takes up some of the strands developed by him, and reviews the implications on Austria's monetary strategy of the changeover to EMU. At EMU level it was required to newly establish credibility and accountability of the monetary authorities. Towards this end, the ECB emitted harsh signals to be committed to its primary task of maintaining price stability, and it was therefore held accountable for neglecting real sector developments as well as potential threats of deflation. This is unjustified, given the circumstances the ECB has been faced with since its inception, including the marked swings in the dollar value of the euro. The ECB could be blamed, however, for the lack of transparency with regard to its monetary strategy (which it declines to be, inflation targeting): it resorts to a rather vaguely defined final monetary target, it does not observe an intermediate target, and it is by no means clear what purpose the reference value for money growth does serve. The paper concludes that in Europe there is no immediate danger that the goal of price stability could unintentionally end up in deflation.

A Calibrated Structural Model of the Czech Economy

The paper presents a structural model framework for a small open economy.The model, based on optimising households and firms, has been calibrated on Czech macroeconomic data in order to develop an analytic framework suitable for analysing key policy questions related to the Czech Republic s anticipated EMU accession.In order to be able to use the model for assessing both pre- and post-accession policy issues, two versions of the model fixed and flexible exchange rate versions were developed.The suitability of the two alternative models for policy analysis was subsequently tested on a series of impulse response exercises.The dynamic responses of the two models to selected shocks and policy experiments are plausible.Hence these results suggest that the presented analytic framework can serve as a good starting point for analysing complex policy issues facing the Czech Republic. Key words: monetary policy, monetary union, EMU accession JEL classification numbers: E52, E20, E31, F41

Convergence in Per Capita Income Levels, Productivity Dynamics and Real Exchange Rates in the EU Acceding Countries

During a catch up process – such as the one that thecountries acceding to the EU are undergoing – there emergesa fundamental economic link between nominal and realvariables which surfaces in the dynamics of the realexchange rate (the ``Balassa–Samuelson effect''). Thisarticle analyzes some of the implications of this process forthe acceding countries addressing three main issues.First it focuses on the empirical measurement of convergencebetween acceding countries and EU-member states. Thenit analyzes the economic fundamentals of a catch up processarguing that for this process to be self-sustained, it must bebased on differential productivity growth whereby productivityin the acceding countries grows faster than that in the incumbents.Thirdly, an attempt is made to test empirically theBalassa–Samuelson effect in the EU acceding countries. Finally the article discusses some of the policy implications of thedichotomy ``real-cum-nominal convergence'' on the way to EUand EMU accession.

EU and EMU Accession - Whether and How the Decisions Differ?

The author presents the criretia of and prospects for the EU candidate countries joining the European Monetary Union. Enlargement taken as a decided question, she considers EMU accession the “second gate” for candidates. The status of Denmark and the UK are seen as exceptions, the way of which new members may not follow - thus their sooner or later joining the EMU is an obligatory task. The candidates have to meet the convergence criteria, regarding which stress is put on the difference of nominal and real convergence. So, during the at least two years preparing period between EU and EMU accession, strictly supervised “convergence programmes” would be conducted. Financial and economic liberalisation criteria of accession are also expressed. The author presents the main points of the past three stages of introducing EMU, according to which the question for new members of when to join the EMU can be more precisely answered. She focuses on the balance of interests of members and candidates, the trap of early accession, the case of asymmetric, country-specific shocks and also on the problem of giving up national exchange-rate policies. She concludes for new members that the consideration of the ability of fulfilling the above criteria is indispensable for determining a realistic plan of joining the EMU.

The forex regime and EMU expansion

This paper provides evidence that the choice of the foreign exchange regime is not of first order importance for achieving high output growth. It is argued that due to the forward looking nature of the foreign exchange market, exchange rate stability hinges on the current and anticipated coherency of monetary and fiscal policies. We demonstrate this empirically on a panel including potential EMU accession countries. By means of rank regression analysis we uncover the partial links across the regime specifics of the representative country versus the German regime during the 1990s.

The Approach to EU and EMU Membership: The Implications for Macroeconomic Policy in Applicant Countries

Many commentators have noted the fact that the so-called 'Eastern enlargement; of the EU is unique, in the sense that never before have countries which are so much poorer than the EU been admitted. Furthermore, they are being admitted to an EU which is far more internally liberalised (the single market) and intergrated (EMU) than previously. Finally, the applicant countries are far more liberalised internally and open internationally than was the case with the previous enlargement to relatively poor countries (the so-called 'Southern enlargement' of the 1980s). We believe that this unique combination of circumstances is likely to generate unanticipated problems for the applicant countries in their conduct of macroeconomic policy in the run-up to EU and later EMU accession. The problems we predict stem from the combination at one time of the following factors: 1.) Expected rapid growth in the applicant countries (far faster than the EU itself); 2.) Real appreciation resulting from the well known Harrod-Balassa Samuelson effect; 3.) Free capital movements; 4.) The need to satisfy the Maastricht criteria and join EMU within ten years. These factors are likely to lead to high current account deficits, which it will be dificult for the authorities to limit to prudent levels. We describe the underlying pressures in Section 2, discuss suitable macroeconomic policy responses in Sections 3 and 4, and conclude in Section 5. At the core of our analysis lies an attempt to combine what we know about the macroeconomics of rapidly growing poorer countries with the standard presecriptions of the Mundell-Flemming model and the institutional requirements of the pre-EU and pre-EMU accession periods.