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Assessing the Impact of Enlargement on the Eurozone

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Abstract

The increased heterogeneity of the European market after the prospective joining of the acceding countries to EMU could imperil the latter’s stability. It is widely expected that following enlargement the optimality conditions of the eurozone will decrease, implying a more difficult stabilisation task for the governance authorities of EMU. Yet all this does not necessarily imply a possible disruption of EMU. In the paper two exercises are presented for assessing the impact of enlargement on the eurozone. The first one focuses on co-movement of some crucial variables for countries representative of acceding countries, on the one hand, and of EMU, on the other. The second exercise is aimed at identifying sign and level of correlations between the cycles of EMU- 12 and those of each acceding country, the assumption being that positive, high correlations can be considered as evidence of low risk of shock asymmetry and hence of optimality conditions. Cycles were singled out from the GDP series extracting from the latter the trends by means of the Hodrick-Prescott filter. The majority of the correlations proved positive, and in a number of cases also their level was quite satisfactory. The outcome of the exercises shows that acceding countries share with EMU a number of common structural features. In particular, the only threat posed to the stability of an enlarged EMU could come from divergences still present in the former Czechoslovakia, but combined the two Czech and Slovakia Republics, in terms of GDP produced, represent only one percentage point of EMU-12.

Suggested Citation

  • Praussello, Franco, 2004. "Assessing the Impact of Enlargement on the Eurozone," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 57(1), pages 11-39.
  • Handle: RePEc:ris:ecoint:0141
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    Keywords

    Enlargement; OCA; euro; EMU;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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