Exchange Rate and Monetary Developments in Accession Countries

In the last two years there has been an unprecedented surge in discussions on the readiness and willingness of EU accession countries (ACC) to join EMU and introduce the euro. In 2002 most national central banks published their strategies towards the euro. They opted for rather early adoption of the euro after their countries became EU members. However, professionals in the field of economics have not reached consensus. There are also voices warning against the so-called fast-track approach. The focus of this chapter is primarily the validity of the arguments for and against early introduction of the euro in the ACC. After introducing a brief overview of discussions on the euro in Section 6.1, we will then define and compare various measures of nominal and real convergence (Section 6.2). Section 6.3 describes in detail the exchange rate developments in selected ACC with emphasis on real exchange rate trends. Section 6.4 will highlight some issues of inflation dynamics, convergence in price levels and implied challenges for monetary policy. Exchange rate regimes in the pre-accession period, the length of the period itself, as well as the relevance of the OCA theory will be discussed in Section 6.5. An overview of exchange rate strategies before the introduction of the euro will be presented in Section 6.6.