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To Purgatory and Beyond: When and How Should the Accession Countries from Central and Eastern Europe Become Full Members of EMU?

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  • Buiter, Willem H.

Abstract

The Paper discusses how the EU accession countries should pursue full membership in the EMU: adopt the euro. The key messages are the following: 1) Even the largest of the accession countries is too small, too open and too vulnerable to speculative attacks to be a viable optimal currency area. 2) Achieving fiscal sustainability is a necessary condition for full EMU membership. It should also be sufficient. 3) Convergence, prior to the adoption of the euro, of an EMU candidate’s inflation rate to its euro area equilibrium inflation rate is helpful but not essential. 4) Real convergence is irrelevant for EMU membership. 5) Participation in ERMII is at best unhelpful. At worst it creates unnecessary risks of financial and macroeconomic instability. 6) The Maastricht criteria for EMU membership include the simultaneous achievement of three nominal objectives: (a) a nominal exchange rate target (to stay, for at least two years, within a ± 15% nominal exchange rate band centered on a fixed parity with the euro); (b) a short-term inflation target (inflation, for at least one year, to be no more than 1.5% above the average inflation rate of the three EU Members States with the lowest inflation rates); and (c) a target for a long-term (ten year) nominal interest rate (that rate not to be more than 2% above the average of the three EU Members States with the lowest inflation rates, for at least one year). This is two nominal targets too many. It overburdens the monetary authority and confuses the markets. 7) The two-year ERMII participation requirement should be dropped. Instead, upon achieving fiscal sustainability (and preferably also inflation convergence), the EMU candidate should be given a firm date and (exchange) rate for full EMU membership. This will provide a necessary focal point for the markets and will permit the smooth approach of the market exchange rate to the irrevocable conversion rate with the euro. It should be possible to move into full EMU membership directly from an unrestricted float. 8) Unilateral euroization, in the sense of the adoption of the euro as a parallel currency and joint legal tender alongside the domestic currency, is not inconsistent with the Treaty, if it does not involve the abolition of the national currency and the unilateral determination of the ultimate conversion rate of the domestic currency and the euro. In addition, it should be possible for the new EU members to negotiate consensual euroization (this could include the immediate disappearance of the domestic currency).

Suggested Citation

  • Buiter, Willem H., 2004. "To Purgatory and Beyond: When and How Should the Accession Countries from Central and Eastern Europe Become Full Members of EMU?," CEPR Discussion Papers 4342, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4342
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    Citations

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    Cited by:

    1. Filacek, Jan & Horvath, Roman & Skorepa, Michal, 2006. "Monetary Policy before Euro Adoption: Challenges for EU New Members," MPRA Paper 879, University Library of Munich, Germany.
    2. Rasmus Kattai & John Lewis, 2004. "Hooverism, hyperstabilisation or halfway-house? describing fiscal policy in Estonia 1996-2003," Bank of Estonia Working Papers 2004-04, Bank of Estonia, revised 10 Oct 2004.
    3. Kocenda, Evzen & Kutan, Ali M. & Yigit, Taner M., 2006. "Pilgrims to the Eurozone: How far, how fast?," Economic Systems, Elsevier, vol. 30(4), pages 311-327, December.
    4. Hughes Hallett, Andrew & Lewis, John, 2007. "Debt, deficits, and the accession of the new member States to the Euro," European Journal of Political Economy, Elsevier, vol. 23(2), pages 316-337, June.
    5. Vassilis Monastiriotis & Sotirios Zartaloudis, 2010. "Beyond the crisis: EMU and labour market reform pressures in good and bad times," LEQS – LSE 'Europe in Question' Discussion Paper Series 23, European Institute, LSE.
    6. Luboš Komárek & Martin Motl, 2012. "Behaviorální a fundamentální rovnovážný měnový kurz české koruny
      [Behavioural and Fundamental Equilibrium Exchange Rate of the Czech Koruna]
      ," Politická ekonomie, University of Economics, Prague, vol. 2012(2), pages 147-166.
    7. Willem H. Buiter, 2010. "Economic, Political and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council," Chapters,in: Currency Union and Exchange Rate Issues, chapter 3 Edward Elgar Publishing.
    8. Bulir, Ales & Hurnik, Jaromir, 2006. "The Maastricht inflation criterion: How unpleasant is purgatory?," Economic Systems, Elsevier, vol. 30(4), pages 385-404, December.
    9. Ashoka Mody & Franziska L Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund.
    10. Hochreiter, Eduard & Tavlas, George S., 2004. "On the road again: an essay on the optimal path to EMU for the new member states," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 793-816, October.
    11. Mikek, Peter, 2008. "Alternative monetary policies and fiscal regime in new EU members," Economic Systems, Elsevier, vol. 32(4), pages 335-353, December.
    12. Kutan, Ali M. & Yigit, Taner M., 2005. "Real and nominal stochastic convergence: Are the new EU members ready to join the Euro zone?," Journal of Comparative Economics, Elsevier, vol. 33(2), pages 387-400, June.
    13. Ayala, Astrid & Blazsek, Szabolcs, 2013. "Structural breaks in public finances in Central and Eastern European countries," Economic Systems, Elsevier, vol. 37(1), pages 45-60.
    14. John Lewis & Karsten Staehr, 2007. "The Maastricht Inflation Criterion: What is the Effect of Expansion of the European Union?," DNB Working Papers 151, Netherlands Central Bank, Research Department.
    15. Enrico Marelli, 2007. "Specialisation and Convergence in European Regions," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 4(2), pages 149-178, September.

    More about this item

    Keywords

    convergence; ERMII; EU accession; fiscal sustainability;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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