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European monetary integration after EU enlargement

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  • Gern, Klaus-Jürgen
  • Hammermann, Felix
  • Schweickert, Rainer
  • Vinhas de Souza, Lúcio

Abstract

Expectations about additional short-run gains from joining monetary union should not be too optimistic. Most of the expected gains from a monetary union are largely endogenous to credible, time-consistent domestic policies. Mere euro area membership is not a replacement for that. However, monetary integration has a role in supporting such policies and completing monetary integration, i.e., introducing the common currency can lock in the gains realized so far. The new member states made considerable progress with respect to the monetary and fiscal Maastricht criteria but inflation is still a concern in some countries and fiscal deficits are considerably too high for the majority of countries. However, experience with the run-up to EMU in the second half of the nineties shows that disinflation and fiscal consolidation can be achieved without major damage to growth. Additionally, structural real appreciation is unlikely to lead to an inconsistency of the inflation and the exchange rate targets. The experience with the currency board systems in Estonia, Lithuania, and Bulgaria reveals no evidence that the absence of an active exchange rate policy exacerbated the effects of external shocks. However, at the same time, the discipline demanded by the currency board system may have supported structural reforms. Hence, for countries which are determined to introduce the euro a currency board system may help to establish and maintain credibility within a consistent macroeconomic strategy. The experience with inflation targeting in Poland, the Czech Republic, and, more recently, Hungary shows that inflation targeting in general works successfully: it is not too soft because the Maastricht criteria guide the inflation target and it is not too rigid because new member states still need to establish credibility. The three countries should enhance the credibility of the inflation targeting regimes by thorough banking supervision and thorough fiscal policy. There is no generally superior exchange rate regime that provides a golden way to bridge the transition period to full EMU membership. While there is no reason to view monetary integration with rose-tinted glasses, there is also no reason to believe that joining the ERM II is sufficient to provide a safe haven with respect to financial stability. Even countries with sound and consistent macroeconomic policies and fulfilling all criteria - be it Copenhagen or Maastricht - will still run the risk that markets turn against them. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Discussion Papers with number 413.

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Date of creation: 2004
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Handle: RePEc:zbw:ifwkdp:413

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  1. Cukierman, Alex & Miller, Geoffrey & Neyapti, Bilin, 2001. "Central Bank Reform, Liberalization and Inflation in Transition Economies - An International Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2808, C.E.P.R. Discussion Papers.
  2. Eichengreen, Barry & Bayoumi, Tamim, 1996. "Ever Closer to Heaven? An Optimum-Currency-Area Index for European Countries," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt5dt9501s, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. Alexander, Volbert & von Furstenberg, George M. & Melitz, Jacques (ed.), 2004. "Monetary Unions and Hard Pegs: Effects on Trade, Financial Development, and Stability," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199271405, October.
  4. Fischer, Christoph, 2002. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 8/2002, Bank of Finland, Institute for Economies in Transition.
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  6. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
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  8. L�cio Vinhas de Souza, 2002. "Integrated Monetary and Exchange Rate Frameworks," Tinbergen Institute Discussion Papers 02-054/2, Tinbergen Institute.
  9. Lucio Vinhas de Souza & Holger van Eden & Albert de Groot & Gerbert Romijn & Elisabeth Ledrut, 2001. "EMU and Enlargement: A Review of Policy Issues," Macroeconomics, EconWPA 0012019, EconWPA.
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  12. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 346, July.
  13. Schweickert, Rainer, 1998. "Chancen und Risiken eines Currency Board Systems," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 1786, Kiel Institute for the World Economy (IfW).
  14. Ansgar Belke & Daniel Gros, 2001. "Real Impacts of Intra-European Exchange Rate Variability: A Case for EMU?," Open Economies Review, Springer, Springer, vol. 12(3), pages 231-264, July.
  15. Fabrizio CORICELLI & Bostjan JAZBEC & Igor MASTEN, 2004. "Exchange Rate Pass-Through in Acceding Countries: The Role of Exchange Rate Regimes," Economics Working Papers, European University Institute ECO2004/16, European University Institute.
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Cited by:
  1. Schweickert, Rainer & Šikulová, Ivana, 2004. "Der Weg der Slowakei in die Europäische Union : vom Spätstarter zum Starreformer?," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 3434, Kiel Institute for the World Economy (IfW).
  2. Rolf J. Langhammer & Rainer Schweickert, 2006. "EU Integration and its Implications for Asian Economies – What we Know and What Not," Kiel Working Papers 1264, Kiel Institute for the World Economy.
  3. Langhammer, Rolf J. & Schweickert, Rainer, 2006. "EU integration and its implications for Asian economies: What we do and do not know," Journal of Asian Economics, Elsevier, Elsevier, vol. 17(3), pages 395-416, June.
  4. Benner, Joachim & Gern, Klaus-Jürgen & Meier, Carsten-Patrick & Scheide, Joachim, 2005. "Low-speed recovery in euroland," Kiel Discussion Papers 420, Kiel Institute for the World Economy (IfW).

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