After a decade of transition from communist regime with centrally
planned economic system to democratic society with market economy
and after several years of negotiations on the European Union
membership, ten candidate countries from Central and Eastern Europe
signed the accession treaties at summit in Athen in April 2003. If they
conduct public referenda successfully and the present members states
complete the ratification, they will become members states in May 2004.
The membership in the European Union implies the prospect of eventual
membership in the Economic and Monetary Union. The consequent
question is: when exactly should they join? According to the Maastricht
Treaty, in order to become members of monetary union, new members
have to fulfil the convergence criteria. As academic and policy
discussions show, from the perspective of monetary policy and economic
reasoning, this question, so far, has no clear answer.
Politically, the majority of new members already expressed the intention
to fulfil the Maastricht criteria as soon as possible and to join between
2006 and 2008. The officials of the European Union and the European
Central Bank prefer a later entry date or tend to be neutral on the issue.
Further popular opinion recommends waiting until the euro area
consolidates its own monetary policy mechanism.
Among economists, the timing of the eastern enlargement of monetary
union is a controversial issue as well. Some argue the nominal
convergence set by the Maastricht Treaty to be far from sufficient to form
a monetary union with less developed economies. As long as the real
convergence in terms of prosperity, functioning institutions or reaction of
economy to economic shocks, is not achieved, a common monetary
policy stays undesirable. Opposition to these arguments points out that
the inclusion of peripheral members of the European Union with
characteristic similar to new members, so far, had no negative effects for
those countries or for the monetary union. Others oppose the eager ambition of an early accession to the euro area,
because economies of candidate countries members need a different
monetary policy, while catching-up the present members. They stress
some of the Maastricht criteria to be contradictory to the catching-up
process and advise to accept the higher inflation rates leading to real
appreciation of exchange rates. [...]
Table of Contents
Introduction
1. Legal Basis for the accession to the EMU
1.1 Maastricht Treaty
1.2 Scenario for the adoption of the euro
1.3 Institutional framework of the ECB after the EMU enlargement
1.3.1 Consequences of the enlargement without the reform of the Governing council
1.3.2 Models of the Governing Council Reform
1.3.3 Proposals of the ECB and the DWI
2. Optimal Currency Theory and Eastern Enlargement of the EMU
2.1 Benefits of monetary union for new members
2.2 Costs of monetary union for new members
2.3 Benefits and Costs and openness of economy
2.4 Balancing of Costs and Benefits
3. Nominal and Real Convergence
3.1 Maastricht criteria
3.1.1 Inflation criterion
3.1.2 Interest rate criterion
3.1.3 Public debt and budget balance criterion
3.1.4 Exchange rate criterion
3.2 Real convergence
3.2.1 GDP convergence
3.2.2 Institutional convergence
3.3 Balassa-Samuelson effect
3.3.1 Estimated size of the B-S effect in CEECs
3.3.2 Implications of the B-S effect accession countries
3.3.3 Implication of the B-S effect for monetary policy of the ECB
3.4 Are the Maastricht criteria contradictory to the catching up process?
3.5 Demand and Supply shock’s asymmetries
4. Exchange rate strategies prior to the EMU membership
4.1 Current exchange rate regimes
4.2 Which exchange rate policy is desirable in the run-up to the EMU entry?
4.3 Euro conversion rate
Conclusion
Research Objectives and Themes
The research explores the optimal timing and strategy for the accession of Central and Eastern European Countries (CEECs) to the Euro area, analyzing the challenges posed by nominal and real convergence criteria. It evaluates the legal, economic, and institutional requirements for membership while assessing the balance between the benefits of monetary integration and the potential risks of relinquishing independent monetary policy during a catching-up phase.
- Legal requirements and institutional reform of the ECB Governing Council.
- Application of the Theory of Optimum Currency Areas (OCA) to new member states.
- Analysis of nominal convergence (Maastricht criteria) versus real economic convergence.
- Evaluation of the Balassa-Samuelson effect and its impact on inflation and monetary policy.
- Assessment of exchange rate strategies and shock symmetries in the pre-accession period.
Excerpt from the Book
1.3.1 Consequences of the enlargement without the reform of the Governing Council
At present, the central bank’s presidents from the Euro Area member states are represented in the ECB Governing Council with one vote each. There are also an additional 6 Executive Board members, bringing the total number of those entitled to vote to 18. Formally, the simple majority principle is applied in the ECB Governing Council with regard to monetary policy decisions; in actual fact, however, decisions are usually taken by consensus. Without reform, the influence of both the Executive Board and that of the larger member states in the ECB Governing Council would decrease significantly in the wave of the Euro Area's enlargement to 30 or more. The Executive Board, which is the body that provides leadership and guidance in the decision making process and which members do not represent the view of any member state, would find itself in a hopeless minority vis-à-vis 22 to 25 national central bank governors. This implies that after enlargement the national influences in GC will get much more consideration. Monetary policy decisions carried out by majority could then conflict with macroeconomic stability in the Euro Area as a whole, if central bank’s presidents represented in the ECB Governing Council were to base their voting behaviour primarily on the cyclical conditions prevalent in their own countries and if these, for example as a result of asymmetrically acting shocks, were to deviate substantially from the Euro Area's general cyclical development.
After enlargement of EMU, it would also take much more time to decide. Imagine that 25 governors and the president make an opening statement each of only 10 minutes so that about 5 hours have passed before discussion and voting can even begin. It will also make it much more difficult for the board to implement its preferred solution which implies that it will be more difficult in general to get any policy’s change accepted. Therefore, efficient decision-making following enlargement will require that the number of members on the ECB Governing Council is limited.
Summary of Chapters
Introduction: Provides an overview of the accession process for new member states from Central and Eastern Europe and outlines the key challenges regarding the timing of their entry into the Economic and Monetary Union.
1. Legal Basis for the accession to the EMU: Examines the legal requirements set by the Maastricht Treaty and investigates necessary institutional reforms for the ECB Governing Council to maintain efficient decision-making post-enlargement.
2. Optimal Currency Theory and Eastern Enlargement of the EMU: Defines the costs and benefits of monetary union for candidate countries based on the theory of optimum currency areas, including market integration and the potential loss of policy tools.
3. Nominal and Real Convergence: Analyzes the progress of CEECs regarding Maastricht convergence criteria, real economic convergence metrics, and the implications of the Balassa-Samuelson effect on their inflation paths.
4. Exchange rate strategies prior to the EMU membership: Evaluates historical and current exchange rate regimes in candidate countries and proposes appropriate strategies to navigate the run-up to formal EMU accession.
Conclusion: Summarizes findings regarding the net benefits for candidate countries and reiterates the necessity for strategic, case-by-case approaches to accession rather than a simultaneous "big bang" entry.
Keywords
Economic and Monetary Union (EMU), Central and Eastern European Countries (CEECs), Maastricht criteria, Optimal Currency Theory, Balassa-Samuelson effect, Real convergence, Nominal convergence, ECB Governing Council, Exchange rate regimes, ERM II, Shock asymmetry, Catching-up process, Macroeconomic stability, Monetary policy, European Union enlargement.
Frequently Asked Questions
What is the core subject of this research?
The research examines the economic and institutional feasibility of new member states from Central and Eastern Europe joining the Euro area, focusing on whether these economies satisfy the criteria for a successful monetary union.
What are the primary thematic pillars?
The study focuses on the legal requirements for entry, the applicability of optimal currency area theory, the achievement of nominal and real economic convergence, and the development of appropriate exchange rate strategies.
What is the research’s primary objective?
The goal is to determine the optimal timing and strategy for eastern enlargement of the monetary union, evaluating whether the current nominal convergence criteria sufficiently support the integration of developing transition economies.
Which scientific methodology is employed?
The author uses empirical indicators, including trade integration metrics, business cycle symmetry (VAR model), and institutional indices provided by the EBRD, to assess the net benefits and costs of monetary integration for each candidate country.
What topics are discussed in the main body?
The main body covers the legal framework (Maastricht Treaty), the institutional challenges of the ECB Governing Council, an evaluation of convergence criteria (inflation, interest rates, debt), the Balassa-Samuelson effect on inflation, and strategies for managing exchange rates prior to EU accession.
How is the work characterized by keywords?
The work is defined by themes such as monetary integration, nominal and real convergence, structural transition, ECB reform, and the trade-offs between macroeconomic stability and economic growth during the catching-up process.
How does the Balassa-Samuelson effect impact the research findings?
The study argues that productivity differentials in the tradable goods sector lead to higher inflation in catching-up economies, potentially causing a dilemma with the strict Maastricht inflation criteria, although the author suggests this impact on aggregate Euro area inflation is likely limited.
Why is the reform of the ECB Governing Council considered essential?
The author notes that without reform, the Governing Council would grow to an unmanageable size (up to 31 members) post-enlargement, leading to significant inefficiencies in decision-making and a potential bias toward national interests over Euro area-wide macroeconomic stability.
- Quote paper
- Jozef Vasak (Author), 2003, When should new members from Central and Eastern Europe Join the Euro Area?, Munich, GRIN Verlag, https://www.grin.com/document/19375
