The Challenges of EMU Accession Faced by Catching-up Countries: A Slovak Republic Case Study

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The Challenges of EMU Accession Faced by Catching-up Countries: A Slovak Republic Case Study

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Anne-Marie Brook

Abstract

The Maastricht criteria for accession to the euro area can be difficult for any economy to achieve, not least because of the challenges posed by the “impossible trinity”, which suggests that it is not possible to target both a stable exchange rate and stable inflation at the same time as maintaining free capital mobility. But for poorer economies which are catching up to the living standards of the wealthier EMU members, the challenges are magnified. This is because economies with very high productivity growth may have larger Balassa-Samuelson effects, resulting in higher steady state inflation rates as well as gradually appreciating equilibrium real exchange rates. While some nominal appreciation is permitted during ERM-II membership, the rules do not make it easy to signal the magnitude of expected appreciation. This may lead to poorly anchored exchange rates, making the catching-up economies more vulnerable to the challenges of the impossible trinity. Moreover, countries that have recently introduced fully-funded pension pillars which involve high transition costs, may find it difficult to meet the Maastricht criteria for government finances. It is unclear whether recent changes to the Stability and Growth Pact will alleviate the short-term fiscal pressure on countries that have improved the long-term sustainability of their government finances at the cost of short-term deterioration to their fiscal deficits. The example of Slovakia is used to illustrate these points, and a number of policy guidelines are proposed to minimise the risks. This Working Paper relates to the 2005 OECD Economic Survey of the Slovak Republic (www.oecd.org/eco/surveys/slovakia).

Problèmes posés aux pays en phase de rattrapage par l'adhésion à l'UME : La République slovaque
Toute économie peut éprouver des difficultés à répondre aux critères de Maastricht pour adhérer à la zone euro, surtout en raison des problèmes posés par l’«impossible trinité», selon laquelle il n’est pas possible de poursuivre à la fois les objectifs de stabilité du taux de change et de l’inflation tout en maintenant la liberté des mouvements de capitaux. Cependant, pour les économies plus défavorisées qui sont en train de rattraper le niveau de vie des membres les plus riches de l’UME, les difficultés sont encore amplifiées. Cela s’explique par le fait que les économies dont la croissance de la productivité est très rapide peuvent enregistrer des effets Balassa-Samuelson plus marqués, se traduisant par des taux d’inflation constamment plus élevés ainsi que par une appréciation progressive des taux de change réels d’équilibre. Si une certaine appréciation nominale est autorisée durant la phase de participation au MCE-II, les réglementations applicables ne permettent pas aisément d’indiquer l’ampleur de l’appréciation attendue. Cela peut se traduire par une instabilité des taux de change et rendre les économies en phase de rattrapage plus vulnérables aux défis de l’impossible trinité. De plus, les pays qui ont instauré récemment des piliers de système de retraite par capitalisation entraînant des coûts de transition élevés pourraient éprouver des difficultés à respecter les critères de Maastricht en matière de finances publiques. On ne sait pas encore si les modifications récentes du Pacte de stabilité et de croissance allègeront la pression fiscale à court terme sur les pays qui ont amélioré la viabilité à long terme de leurs finances publiques au prix d’une détérioration à court terme de leurs déficits budgétaires. L’exemple de la Slovaquie est utilisé pour illustrer ces points et un certain nombre d’orientations de politique économique sont proposées pour minimiser les risques. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de la République slovaque, 2005 (www.oecd.org/eco/etudes/slovaquie).

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Paper provided by OECD, Economics Department in its series OECD Economics Department Working Papers with number 444.

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Date of creation: 21 Sep 2005
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Handle: RePEc:oec:ecoaaa:444-en

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-06-03 (All new papers)
NEP-CBA-2006-06-03 (Central Banking)
NEP-IFN-2006-06-03 (International Finance)
NEP-MON-2006-06-03 (Monetary Economics)
NEP-TRA-2006-06-03 (Transition Economics)

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Václav Žďárek & Jaromír Šindel, 2007. "Real And Nominal Convergence And The New Eu Member States - Actual State And Implications," Prague Economic Papers, University of Economics, Prague, vol. 2007(3), pages 195-219. [Downloadable!] (restricted)
Václav Žďárek, 2009. "Challenges for the new EU member states on the road to the Eurozone," International Economics and Economic Policy, Springer, vol. 6(2), pages 157-177, July. [Downloadable!] (restricted)

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