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To Purgatory and Beyond: When and How Should the Accession Countries from Central and Eastern Europe Become Full Members of EMU?

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  • Buiter, Willem H

Abstract

The Paper discusses how the EU accession countries should pursue full membership in the EMU: adopt the euro. The key messages are the following: 1) Even the largest of the accession countries is too small, too open and too vulnerable to speculative attacks to be a viable optimal currency area. 2) Achieving fiscal sustainability is a necessary condition for full EMU membership. It should also be sufficient. 3) Convergence, prior to the adoption of the euro, of an EMU candidate’s inflation rate to its euro area equilibrium inflation rate is helpful but not essential. 4) Real convergence is irrelevant for EMU membership. 5) Participation in ERMII is at best unhelpful. At worst it creates unnecessary risks of financial and macroeconomic instability. 6) The Maastricht criteria for EMU membership include the simultaneous achievement of three nominal objectives: (a) a nominal exchange rate target (to stay, for at least two years, within a ± 15% nominal exchange rate band centered on a fixed parity with the euro); (b) a short-term inflation target (inflation, for at least one year, to be no more than 1.5% above the average inflation rate of the three EU Members States with the lowest inflation rates); and (c) a target for a long-term (ten year) nominal interest rate (that rate not to be more than 2% above the average of the three EU Members States with the lowest inflation rates, for at least one year). This is two nominal targets too many. It overburdens the monetary authority and confuses the markets. 7) The two-year ERMII participation requirement should be dropped. Instead, upon achieving fiscal sustainability (and preferably also inflation convergence), the EMU candidate should be given a firm date and (exchange) rate for full EMU membership. This will provide a necessary focal point for the markets and will permit the smooth approach of the market exchange rate to the irrevocable conversion rate with the euro. It should be possible to move into full EMU membership directly from an unrestricted float. 8) Unilateral euroization, in the sense of the adoption of the euro as a parallel currency and joint legal tender alongside the domestic currency, is not inconsistent with the Treaty, if it does not involve the abolition of the national currency and the unilateral determination of the ultimate conversion rate of the domestic currency and the euro. In addition, it should be possible for the new EU members to negotiate consensual euroization (this could include the immediate disappearance of the domestic currency).

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4342.

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Date of creation: Apr 2004
Date of revision:
Handle: RePEc:cpr:ceprdp:4342

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Keywords: convergence; ERMII; EU accession; fiscal sustainability;

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Cited by:
  1. Buiter, Willem H, 2008. "Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," CEPR Discussion Papers 6639, C.E.P.R. Discussion Papers.
  2. Rasmus Kattai & John Lewis, 2004. "Hooverism, hyperstabilisation or halfway-house? describing fiscal policy in Estonia 1996-2003," Bank of Estonia Working Papers 2004-04, Bank of Estonia, revised 10 Oct 2004.
  3. Luboš Komárek & Martin Motl, 2012. "Behavioural and Fundamental Equilibrium Exchange Rate of the Czech Koruna," Politická ekonomie, University of Economics, Prague, vol. 2012(2), pages 147-166.
  4. Hughes Hallett, Andrew & Lewis, John, 2007. "Debt, deficits, and the accession of the new member States to the Euro," European Journal of Political Economy, Elsevier, vol. 23(2), pages 316-337, June.
  5. Hochreiter, Eduard & Tavlas, George S., 2004. "On the road again: an essay on the optimal path to EMU for the new member states," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 793-816, October.
  6. Ashoka Mody & Franziska Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund.
  7. John Lewis & Karsten Staehr, 2007. "The Maastricht Inflation Criterion: What is the Effect of Expansion of the European Union?," DNB Working Papers 151, Netherlands Central Bank, Research Department.
  8. Evzen Kocenda & Ali M. Kutan & M. Taner Yigit, 2005. "Pilgrims to Eurozone: How Far, How Fast," Departmental Working Papers 0501, Bilkent University, Department of Economics.
  9. Enrico Marelli, 2007. "Specialisation and Convergence in European Regions," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 4(2), pages 149-178, September.
  10. Jan Filácek & Roman Horváth & Michal Skorepa, 2006. "Monetary Policy before Euro Adoption: Challenges for EU New Members," William Davidson Institute Working Papers Series wp853, William Davidson Institute at the University of Michigan.
  11. Evzen Kocenda & Ali M. Kutan & Taner M. Yigit, 2005. "Pilgrims to the Eurozone: How Far, How Fast?," CERGE-EI Working Papers wp279, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  12. Ayala, Astrid & Blazsek, Szabolcs, 2013. "Structural breaks in public finances in Central and Eastern European countries," Economic Systems, Elsevier, vol. 37(1), pages 45-60.
  13. Mikek, Peter, 2008. "Alternative monetary policies and fiscal regime in new EU members," Economic Systems, Elsevier, vol. 32(4), pages 335-353, December.
  14. Susanne Lütz & Matthias Kranke, 2010. "Beyond the crisis: EMU and labour market reform pressures in good and bad times," LSE Research Online Documents on Economics 53300, London School of Economics and Political Science, LSE Library.
  15. Kutan, Ali M. & Yigit, Taner M., 2005. "Real and nominal stochastic convergence: Are the new EU members ready to join the Euro zone?," Journal of Comparative Economics, Elsevier, vol. 33(2), pages 387-400, June.
  16. Bulir, Ales & Hurnik, Jaromir, 2006. "The Maastricht inflation criterion: How unpleasant is purgatory?," Economic Systems, Elsevier, vol. 30(4), pages 385-404, December.

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