Hansa vs Habsburg: Debt, Deficits and the Entry of Accession Countries into the Euro
AbstractPrice and output level convergence between new member states and the existing EU necessarily implies inflation and growth divergence for many years to come. That complicates the conditions for accession to the euro. In this Paper, we focus on debt dynamics for the eight new member states from Central and Eastern Europe. We find that the nominal Maastricht criteria are at best irrelevant, and at worst damaging for the duration of the catch-up process and well past any plausible test date for euro area entry. There are strong indirect effects of nominal criteria, however, which make it harder to achieve the fiscal criteria. Our results suggest all countries would find it harder to restrain debt growth within the euro, but that the magnitude of this effect varies substantially across countries, as do the debt dynamics outside the euro. If nominal criteria are suspended, the policy instruments required to achieve euro convergence are in the hands of the individual states and are affected by external policies only to the extent that there are growth, inflation or monetary spillovers from the euro area. This suggests that the principle of subsidiarity could be applied to euro membership, placing decisions over entry in the hands of individual member states.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4500.
Date of creation: Jul 2004
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Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- P27 - Economic Systems - - Socialist Systems and Transition Economies - - - Performance and Prospects
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- 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.
- Bas Aarle & Harry Garretsen & Cindy Moons, 2008. "Accession to the euro-area: a stylized analysis using a NK model," International Economics and Economic Policy, Springer, vol. 5(1), pages 5-24, July.
- 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.
- Bohn, Frank, 2006.
"Maastricht Criteria versus Stability Pact,"
Journal of Policy Modeling,
Elsevier, vol. 28(3), pages 247-276, April.
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