Pilgrims to Eurozone: How Far, How Fast

In our analysis, we examine the convergence of all recent ten European Union (EU) members to EU standards. Novel features of the paper include more complete measures of convergence, in particular fiscal convergence; a broader examination of inflation convergence with respect to the Maastricht benchmark as well as the European Central Bank’s inflation objective; and more appropriate tests of convergence that allow for structural breaks. The results indicate slow but steady per-capita real income convergence towards EU standards. Although evidence indicates significant inflation and interest rate convergence, fiscal convergence evidence is discouraging, indicating a lack of fiscal sustainability. An important policy implication of the results is that current fiscal practices may delay the new members’ entry into the Exchange Rate Mechanism II (ERM2) and hence their adoption of the euro. Our empirical results support the following recommendations: authorities need to (1) improve their budget institutions, (2) introduce further reforms to cut down government expenditures, and (3) consider adopting fiscal rules. Therefore, the countries with serious fiscal problems should not rush to enter the Eurozone.(This abstract was borrowed from another version of this item.)