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Policy Options for Joining the Euro

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  • Alain de Crombrugghe

Abstract

Assuming the eventual adoption of the Euro, the paper reviews the run-up and the medium run issues on the path towards the Euro. It shows that various policy options are possible, especially with respect to the exchange rate regime and management. It also shows the limits of monetary policy when fiscal and income policies are not consistent with monetary policy. In the run-up phase of accession, the main constraints come from the recommendation to target a conversion exchange rate, while major gains can be obtained from an increase in money demand and a fall in interest rates once market expectations converge towards the conversion. In the medium run preparation, a fixed exchange rate extracts a high price in terms of high real interest rates and losses of competitiveness, unless fiscal policy is tight and wage settlement are market-based or kept under control. Floating exchange rates do not necessarily solve these problems but enable monetary policy to regain some of the effectiveness that it loses under fixed exchange rates. Eventually, a sound fiscal and income policy opens the way to a scenario of accommodating monetary policy and convergence towards the Euro. A political reading of the Maastricht conditions suggests that early adoption of the Euro is unlikely to be supported by the incumbents. It would then only make sense as a way out of a crisis.

Suggested Citation

  • Alain de Crombrugghe, 2001. "Policy Options for Joining the Euro," LICOS Discussion Papers 10301, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  • Handle: RePEc:lic:licosd:10301
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    File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp103.pdf
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    References listed on IDEAS

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    1. Lars E. O. Svensson, 1991. "The Simplest Test of Target Zone Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 655-665, September.
    2. Seppo Honkapohja & Erkki Koskela, 1999. "The economic crisis of the 1990s in Finland," Economic Policy, CEPR;CES;MSH, vol. 14(29), pages 399-436, October.
    3. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, April.
    4. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 161-193.
    5. Heliodoro Temprano-Arroyo & Robert A. Feldman, 1999. "Selected transition and Mediterranean countries: an institutional primer on EMU and EU accession," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(3), pages 741-805, November.
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    Cited by:

    1. Christian Fahrholz, 2003. "Strategic Exchange-Rate Policy of Accession Countries in ERM II," Eastward Enlargement of the Euro-zone Working Papers wp14, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Apr 2003.

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