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On the Way of EMU Enlargement towards CEECs: What is the Appropriate Exchange Rate Regime?

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  • Maurel, Mathilde

Abstract

Focusing on a very rich panel of exchange rate regimes in transition countries, this Paper asks the question of the appropriate exchange rate regime for countries aiming at joining the EU, that is, subsequently, the EMU. Four arguments plead in favour of the adoption of a fixed exchange rate regime: (i) countries sharing the same currency inside a Currency Union (CU hereafter) trade well above the average, because of lower transaction costs; (ii) emerging countries are not able to manage counter-cyclical policies; (iii) in a world of increasing financial instability, only corner solutions are feasible; (iv) last, but not least, fixing CEECs currencies could be a necessary step in a global strategy of entering the EU, that is, subsequently, the EMU. This Paper examines the first of these four arguments, that is, the fostering of trade, and provides evidence that the extra trade implied by fixing the currency is in fact close to nil, as in Padko and Wall [2000]. One corollary is that the benefit from membership into the EMU, if any, cannot be explained by the transaction cost argument only. Besides fixed effects, the explanation of the level of trade integration is to be found in the external constraint. The latter is affected by trade (positively if intra-industry trade dominates), and by monetary and fiscal policy. Increasing government spending and manipulating the exchange rate or moving towards more floating regimes might make business cycles more symmetric, relax the external constraint, and finally favour further trade integration. Given that the co-variation of East-West business cycles is already dominated by intra- industry trade, one can conclude that joining the EU, that is, two years later, the EMU, is realistic and compatible with any exchange rate regime. Empirical evidence from Transition Countries shows that the exchange rate regime is not correlated with any fundamentals – better macro-economic performance, higher growth, or deeper trade integration – and should not allow to discriminate between candidate countries for entering the EU (as for other nominal criteria).

Suggested Citation

  • Maurel, Mathilde, 2002. "On the Way of EMU Enlargement towards CEECs: What is the Appropriate Exchange Rate Regime?," CEPR Discussion Papers 3409, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3409
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    References listed on IDEAS

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    Cited by:

    1. Stavros Degiannakis & David Duffy & George Filis, 2014. "Business Cycle Synchronization in EU: A Time-Varying Approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(4), pages 348-370, September.
    2. Roberta De Santis, 2004. "Has Trade Structure Any Importance in the Trasmission of Currency Shocks? An Empirical Application for Central and Eastern European Acceding Countries to Eu," ISAE Working Papers 43, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    3. Attila Csajbók (ed.) & Ágnes Csermely (ed.), 2002. "Adopting the euro in Hungary: expected costs, benefits and timing," MNB Occasional Papers 2002/24, Magyar Nemzeti Bank (Central Bank of Hungary).
    4. Jarko Fidrmuc & Iikka Korhonen, 2004. "The Euro goes East: Implications of the 2000–2002 Economic Slowdown for Synchronisation of Business Cycles between the Euro area and CEECs," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 46(1), pages 45-62, March.
    5. Peter Backé & Christian Thimann & Olga Arratibel & Oscar Calvo-Gonzalez & Arnaud Mehl & Carolin Nerlich, 2004. "The acceding countries’ strategies towards ERM II and the adoption of the euro - an analytical review," Occasional Paper Series 10, European Central Bank.
    6. Vincent Aussilloux & Michaël Pajot & Mathilde Maurel, 2003. "Enjeux commerciaux de l'élargissement de l'Union européenne ; suivi d'un commentaire de Mathilde Maurel," Économie et Statistique, Programme National Persée, vol. 363(1), pages 235-265.
    7. Afonso, António & Furceri, Davide, 2007. "Business cycle synchronization and insurance mechanisms in the EU," Working Paper Series 844, European Central Bank.
    8. Fidrmuc, Jarko & Korhonen, Iikka, 2006. "Meta-analysis of the business cycle correlation between the euro area and the CEECs," Journal of Comparative Economics, Elsevier, vol. 34(3), pages 518-537, September.
    9. Fidrmuc, Jarko & Korhonen, Iikka, 2004. "A meta-analysis of business cycle correlation between the euro area and CEECs : What do we know - and who cares?," BOFIT Discussion Papers 20/2004, Bank of Finland, Institute for Economies in Transition.
    10. Fidrmuc, Jarko & Korhonen, Iikka, 2003. "Similarity of supply and demand shocks between the euro area and the CEECs," Economic Systems, Elsevier, vol. 27(3), pages 313-334, September.
    11. Jarko Fidrmuc & Eduard Hagara, 2004. "Podobnosť ponukových a dopytových šokov v Európskej Únii a v pristupujúcich krajinách (implikácie pre Českú republiku a Slovensko) [Similarity of supply and demand shocks in the European Union and ," Politická ekonomie, Prague University of Economics and Business, vol. 2004(2), pages 153-164.

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    More about this item

    Keywords

    business cycle; eu enlargement; gravity equation; transition;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F30 - International Economics - - International Finance - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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