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European monetary integration after EU enlargement

  • Gern, Klaus-Jürgen
  • Hammermann, Felix
  • Schweickert, Rainer
  • Vinhas de Souza, Lúcio

Expectations about additional short-run gains from joining monetary union should not be too optimistic. Most of the expected gains from a monetary union are largely endogenous to credible, time-consistent domestic policies. Mere euro area membership is not a replacement for that. However, monetary integration has a role in supporting such policies and completing monetary integration, i.e., introducing the common currency can lock in the gains realized so far. The new member states made considerable progress with respect to the monetary and fiscal Maastricht criteria but inflation is still a concern in some countries and fiscal deficits are considerably too high for the majority of countries. However, experience with the run-up to EMU in the second half of the nineties shows that disinflation and fiscal consolidation can be achieved without major damage to growth. Additionally, structural real appreciation is unlikely to lead to an inconsistency of the inflation and the exchange rate targets. The experience with the currency board systems in Estonia, Lithuania, and Bulgaria reveals no evidence that the absence of an active exchange rate policy exacerbated the effects of external shocks. However, at the same time, the discipline demanded by the currency board system may have supported structural reforms. Hence, for countries which are determined to introduce the euro a currency board system may help to establish and maintain credibility within a consistent macroeconomic strategy. The experience with inflation targeting in Poland, the Czech Republic, and, more recently, Hungary shows that inflation targeting in general works successfully: it is not too soft because the Maastricht criteria guide the inflation target and it is not too rigid because new member states still need to establish credibility. The three countries should enhance the credibility of the inflation targeting regimes by thorough banking supervision and thorough fiscal policy. There is no generally superior exchange rate regime that provides a golden way to bridge the transition period to full EMU membership. While there is no reason to view monetary integration with rose-tinted glasses, there is also no reason to believe that joining the ERM II is sufficient to provide a safe haven with respect to financial stability. Even countries with sound and consistent macroeconomic policies and fulfilling all criteria - be it Copenhagen or Maastricht - will still run the risk that markets turn against them.

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Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Discussion Papers with number 413.

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Date of creation: 2004
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Handle: RePEc:zbw:ifwkdp:413
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  1. Fischer, Christoph, 2002. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Discussion Paper Series 1: Economic Studies 2002,19, Deutsche Bundesbank, Research Centre.
  2. Lucio Vinhas de Souza, 2002. "Integrated monetary and exchange rate frameworks: are there empirical differences?," Bank of Estonia Working Papers 2002-2, Bank of Estonia, revised 12 Oct 2002.
  3. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
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  12. 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.
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  15. Lucio Vinhas de Souza & Holger van Eden & Albert de Groot & Gerbert Romijn & Elisabeth Ledrut, 2001. "EMU and Enlargement: A Review of Policy Issues," Macroeconomics 0012019, EconWPA.
  16. Marc Zelmer & Andrea Schaechter, 2000. "Adopting Inflation Targeting; Practical Issues for Emerging Market Countries," IMF Occasional Papers 202, International Monetary Fund.
  17. Michael R. Pakko & Howard J. Wall, 2001. "Reconsidering the trade-creating effects of a currency union," Review, Federal Reserve Bank of St. Louis, issue May, pages 37-46.
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  19. Fabrizio CORICELLI & Bostjan JAZBEC & Igor MASTEN, 2004. "Exchange Rate Pass-Through in Acceding Countries: The Role of Exchange Rate Regimes," Economics Working Papers ECO2004/16, European University Institute.
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