The Eastern Enlargement of the Eurozone.
This book is a collection of 12 papers presenting the results of the research project, 'Strategies for Joining the European Monetary Union', undertaken by the Centre for Social and Economic Research (CASE), the Warsaw-based international research and policy advisory organisation. Research for the book commenced in the pre-accession period but the publication was completed only after the enlargement of the European Union (EU) in 2004, when a number of new EU member states started to consider accession to the European Monetary Union (EMU). Since the new EU member states in the pre-accession period accepted the EMU as a part of the acquis communautaire, they are obliged to adopt the euro as soon as they fulfil the convergence criteria. Although they all hope that the accession to EMU will provide a tangible impetus to growth, membership in the EMU will have both benefits and costs. The benefits will be gains in trade and faster growth as the costs associated with exchange rate risks are removed. The costs will be loss of monetary sovereignty and the freedom to set interest rates to suit their specific economic conditions. Countries need to understand these issues. In any case, since the decision about the enlargement of the Eurozone has been already made, discussion on how to manage the process in optimal way is highly relevant.
The volume provides a comprehensive analysis of the theoretical, empirical and political issues that may come into play during the enlargement of the Eurozone. The first group of papers addresses theoretical and practical ramifications of EMU enlargement: the theory of optimum currency area and its implications for the Eurozone, the degree of trade and economic integration of new member states with the EU and the Eurozone, the degree of progress in nominal and real convergence already achieved by the new member states, the additional benefits from trade creation and investment in new member states that can accrue from their adoption of the euro, the nature of shocks experienced by the new member states, their labour market and fiscal challenges, dilemmas associated with the EMU-II mechanism and the choice of the final euro conversion rate, and the question of when and how to join the EMU. The last are two of the most crucial issues for the new EU member states.
A second group of papers deals with the functioning of an enlarged Eurozone and discusses such questions as the role of counter-cyclical fiscal policy, the future of the Stability and Growth Pact, the voting mechanism in the governing board of the European Central Bank (ECB), and the extent to which a single interest rate fits the economic realities of countries with different rates of productivity growth. Based on their findings, the authors propose policy recommendations both for new member states on how to manage their accession to the EMU and for the European Commission and the ECB on how to manage the enlargement of the Eurozone in an optimal way.
The volume opens with a paper by Jacek Rostowski that discusses the arguments of both new and old member states for and against fast EMU enlargement. The first new EU member state--Slovenia--will join the EMU in 2007. Lithuania had previously planned to join the EMU in 2007, and Latvia and Estonia have announced 2008 targets. There are different interests guiding old and new EU members, and Rostowski predicts that old member states will stiffen their resistance to early EMU enlargement. Arguments presented in the paper may help to shed light on the case of Lithuania, whose formal request to join the Eurozone in 2007 was rejected in May 2006, as its inflation rate was marginally (0.1%) above the reference value based on the lowest three rates in the EU (rather than in the Eurozone) in the assessment month. This analysis is further developed by Marek Dabrowski in his paper discussing strategies for EMU enlargement. He correctly points out that the eastern enlargement of the EU will not be complete until the new member states join the EMU. Based on an extensive review of the economic and political-economy arguments, Dabrowski argues for fast EMU enlargement and calls on old EU member states to encourage new members to join the EMU as quickly as possible. A delay in EMU enlargement beyond the next couple of years may create a two-speed Europe, slowing down both nominal and real convergence. It is argued that EMU enlargement will help real and nominal convergence and will assist the new EU member states in catching up to their richer peers. Even if economies of the new EU member states are still considered to be insufficiently suited for membership in a currency union, Dabrowski believes that the euro would facilitate their convergence as they trade more intensively with the old members of the EU. On the other hand, a strict application of the Maastricht inflation criterion, calculated as the simple arithmetic average of the three best inflation performers in the EU (instead of EMU) can conflict with the exchange rate stability criterion, since in an open economy exchange and inflation rates cannot be controlled simultaneously. These strong statements are supported by empirical arguments regarding exchange rates, real and nominal convergence, international trade, and wage flexibility provided in the earlier, more technical, chapters of the book.
In sum, the volume presents a great variety of high quality articles. The selection of contributions is well balanced and covers a substantial array of issues. The volume makes an important contribution to the discussion of the potential costs and benefits of EMU enlargement and provides a comprehensive economic analysis of the theoretical, empirical and political issues that will affect the success of Eurozone enlargement. This is an excellent book that should be read both by theoretical economists and policy makers, especially in the new EU member states.
United Nations Development Program, Europe and the CIS Bratislava Regional
Centre, Bratislava, Slovakia
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|Publication:||Comparative Economic Studies|
|Article Type:||Book review|
|Date:||Jun 1, 2007|
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