A rough 50 years after its foundation, the European Union (EU) is preparing for the probably most ambitious challenge of its existence, the binding-back into the West of the once centrally-planned economies of Central and Eastern Europe (CEEC). Together with political and general economic efforts, European monetary integration also gains speed with as many as twelve CEEC queuing up for entry into the EU (not including Turkey, which has not yet officially begun entry negotiations), the first of them most likely joining the Union already two years after the physical introduction of the single currency, i.e. in 2004. Many of these countries are eager to also join Monetary Union (EMU) and show their ability to be ′good Europeans′ by adopting the Euro as soon as possible. Various statements by both CEEC-government officials and monetary authorities exemplify this very vividly.
This implies that the enlargement of EMU is already a relevant issue. By the time it becomes acute, positions and perspectives of both applicants and current members should be clear, if unnecessary delays and political irritations are to be avoided. The body of literature on the subject is thus as large as the questions of when, how and on what terms CEEC-accession will take place are pressing, and becoming more so as time progresses.
This study attempts to coherently examine the core issues related to EMU-enlargement, equally synthesising the various segmented approaches of the academic debate, and deduce normative conclusions as to what strategic outlook should seem appropriate to both CEEC and the current EMU-12: In what timeframe should accession most sensibly take place? How appropriate are the mechanics leading up to EMU, most prominently the Exchange Rate Mechanism (ERM-II) and the Maastricht criteria, and how should they be dealt with? What are the most likely problem areas and deficits that need to be confronted? Since there appears to exist a more or less stable consensus regarding the basic desirability of EMU for the CEEC, the paper will concentrate more on the run-up to full EMU, equally the road to the euro, and place special emphasis on the CEEC′s attitude towards the ERM-II.
Table of Contents
Introduction
1. THE GROUNDWORKS
1.1 The EMU-accession procedure
1.2 The ERM-II
1.3 Exchange rate regimes in the CEEC
1.4 The macroeconomic situation of the CEEC
1.5 EMU-accession strategies and timeframes
2. PHASE 2 – THE CEEC AND THE ERM
2.1 A common problem structure – goals of exchange rate regimes in transition countries
2.2 Which exchange rate regime for the CEEC?
2.3 Excurse: Currency crises
2.4 Adjustment capacity
2.4.1 Institutional capabilities
2.4.2 Fiscal policy
2.5 Which entry-rate?
3. PHASE 3 – THE CEEC AND THE EURO
3.1 Is an enlarged EMU an Optimum Currency Area?
3.2 How fit are the candidates?
3.3 Do the Maastricht Criteria still make sense?
3.4 Problem areas and possible dangers
3.4.1 Fiscal discipline and public investment
3.4.2 “Stability Culture” and the ECB
3.4.3 Dangers of premature entry
3.4.4 Political costs to the CEEC
Conclusion – How should they enter?
Objectives and Research Themes
This master thesis investigates the complex integration process of the Central and Eastern European Countries (CEEC) into the Economic and Monetary Union (EMU). It critically assesses the appropriate monetary and exchange rate strategies for these nations during the pre-accession and transition phases, aiming to determine whether a "fast-track" or a "medium-term" approach is more conducive to achieving economic stability and long-term integration success.
- Mechanics and suitability of the Exchange Rate Mechanism (ERM-II) for transition economies.
- Evaluation of the Maastricht Criteria in the context of emerging European markets.
- Analysis of country-specific adjustment capacities regarding fiscal and institutional reforms.
- Examination of potential risks associated with premature adoption of the single currency.
Excerpt from the Book
A COMMOM PROBLEM STRUCTURE - GOALS OF EXCHANGE RATE REGIMES IN TRANSITION COUNTRIES
Countries of Central and Eastern Europe in the process of EU-accession share a number of factors that have a bearing on their exchange rate policies. First, they are characterised by growth rates faster than those of EU countries, and attendant current account deficits. Fast productivity growth in the tradables sectors together with lower wages and non-tradable prices than in the EU implies an equilibrium appreciation of the real exchange rate, the infamous Balassa-Samuelson effect. Second, current account deficits imply an accumulation of foreign debt. Debt in the CEEC is already skewed towards foreign rather than domestic liabilities. Furthermore, in some cases, namely Poland, there is a large stock of foreign currency deposits. These factors expose countries to adverse effects of exchange rate swings.
Third, because of their rating as emerging markets, the CEEC remain exposed to volatile flows of short-term capital that may suddenly reverse without necessarily as much as a fundamental disequilibrium. Fourth, the countries still face relative price adjustments beyond the Balassa-Samuelson effect due to the changing economic structure. The potential inflationary impact of these changes is unstable, because they are closely linked to the timing of domestic reforms and liberalisations. Finally, these countries have relatively small domestic markets. The overwhelming majority rely heavily on exports and imports for growth and investment. A loss of competitiveness translates therefore fairly rapidly into a deterioration of the balance of payments for these countries.
Summary of Chapters
Introduction: Outlines the ambitious challenge of binding the former centrally-planned economies of Central and Eastern Europe into the Western European monetary framework.
1. THE GROUNDWORKS: Details the procedural basics of the EMU-accession process, the role of the ERM-II, and provides an overview of the current macroeconomic situation and exchange rate regimes of the CEEC.
2. PHASE 2 – THE CEEC AND THE ERM: Analyzes the goals for exchange rate regimes in transition countries, evaluates institutional and fiscal adjustment capacities, and discusses the risks of currency crises.
3. PHASE 3 – THE CEEC AND THE EURO: Examines the candidacy of the CEEC within the Optimum Currency Area framework, questions the ongoing relevance of the Maastricht Criteria, and addresses risks like fiscal discipline and political costs.
Conclusion – How should they enter?: Synthesizes the findings, arguing against a "one-size-fits-all" approach and emphasizing the critical role of country-specific adjustment capacities.
Keywords
EMU, CEEC, ERM-II, Maastricht Criteria, Monetary Integration, Exchange Rate Regimes, Transition Economies, Balassa-Samuelson Effect, Currency Crisis, Fiscal Policy, Institutional Reform, Structural Adjustment, Convergence, Stability Culture, Euro Accession.
Frequently Asked Questions
What is the core focus of this thesis?
The work examines the strategic path for Central and Eastern European Countries to join the Economic and Monetary Union, focusing on the run-up to the Euro.
What are the primary themes discussed?
Key themes include the institutional and economic readiness of candidate countries, the appropriateness of the ERM-II, and the potential risks of premature integration.
What is the main research objective?
The study aims to determine the most sensible timeframe and strategic outlook for CEEC accession, evaluating whether current mechanisms like the Maastricht Criteria remain fit for purpose.
Which methodology is employed?
The author uses a synthesis of academic debate and institutional analysis, comparing the experiences of transition economies with established European monetary integration theory.
What does the main body address?
The body analyzes the "Phase 2" transition involving the ERM-II and the "Phase 3" transition to the single currency, focusing on adjustment capacity and potential hazards.
What characterises the key terminology?
The work is defined by terms such as "Balassa-Samuelson effect," "Endogeneity of benefits," "Adjustment capacity," and "Optimum Currency Area."
Why are the Maastricht Criteria potentially problematic for the CEEC?
The author argues that these criteria were designed for Western Europe and may not account for the structural productivity-related inflation typical of catching-up transition economies.
What is the "vehicle" theory mentioned in the text?
It refers to the endogeneity approach, suggesting that joining the currency union itself acts as a vehicle to promote business cycle and trade pattern convergence.
- Quote paper
- Ulrich Machold (Author), 2002, Monetary aspects of enlargement - Central and Eastern Europe, EMU and the ERM-2, Munich, GRIN Verlag, https://www.grin.com/document/9451
