INCLUSION OF CENTRAL EUROPEAN COUNTRIES IN THE EUROPEAN MONETARY UNION

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1 INCLUSION OF CENTRAL EUROPEAN COUNTRIES IN THE EUROPEAN MONETARY UNION

2 INCLUSION OF CENTRAL EUROPEAN COUNTRIES IN THE EUROPEAN MONETARY UNION Edited by Paul De Grauwe UniversUy of Leuven Vladimir Lavrac Institute for Econotnic Research. Ljubljana SPRINGER SCIENCE+BUSINESS MEDIA, B.V.

3 A C.I.P. Catalogue record for this book is available from the Library of Congress. ISBN DOI / ISBN (ebook) Printed on acid-free paper AlI Rights Reserved il) 1999 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 1999 Softcover reprint of the hardcover 1 st edition 1999 No pact of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without written permission from the copyright owner.

4 Contents Contributing Authors... vii Abbreviations... ix Preface... xi Chapter 1:... 1 Introduction Challenges of European Monetary Union for Central European Countries Paul De Grauwe and Vladimir Lavrac Chapter 2: Are Central European Countries Part of the European Optimum Currency Area? Paul De Grauwe and Yunus Ah'oy Chapter 3: Slovenian and European Trade Structures Daniel Gros and Guy Vandille Chapter 4: Fiscal Consolidation in the Central European Countries and European Monetary Union Paul De Grauwe and Vladimir Lavrac Chapter 5: Exchange Rate Policy of Central European Countries in the Transition to European Monetary Union Giuseppe Tullio Chapter 6: Inclusion of Central European Countries in the European Monetary Integration Process Vladimir Lavrac Chapter 7: Integrating Central and Eastern Europe into the European Union: The Monetary Dimension Peter Backe Chapter 8: Echoing the European Monetary Integration in the Czech Republic Oldrich Dedek Chapter 9: Monetary Arrangements and Exchange Rate Regime in a Small Transitional Economy (Slovenia) Ivan Ribnikar Index v

5 Contributing Authors YunusAksoy University of Leuven Peter Backe Osterreichische Nationalbank, Vienna Oldrich Dedek Czech National Bank, Prague Paul De Grauwe University of Leuven Daniel Gros Center for Economic Policy Studies, Brussels Vladimir Lavrai! Institute for Economic Research, Ljubljana Ivan Ribnikar University of Ljubljana Giuseppe Tullio University of Brescia Guy Vandille University of Leuven vii

6 Abbreviations BIS... Bank for International Settlements BLEU... Belgium-Luxembourg Economic Union BoS... Bank of Slovenia CAP... Common Agricultural Policy CE countries... Central European countries CEE countries... Central and Eastern European countries CEFTA... Central European Free Trade Agreement CMEA... Council of Mutual Economic Aid CNB... Czech National Bank EBRD... European Bank for Reconstruction and Development ECB... European Central Bank ECU... European Currency Unit EFTA... European Free Trade Area EMS... European Monetary System EMU... European Economic and Monetary Union ERM... Exchange Rate Mechanism ERM II... Exchange Rate Mechanism 2 ESCB... European System of Central Banks EU... European Union GDP... Gross Domestic Product IMF... International Monetary Fund IFS... International Financial Statistics ILO... International Labour Organisation NAFTA... North Atlantic Free Trade Area NATO... North Atlantic Treaty Organisation NCBs... National Central Banks OCA... Optimum Currency Area OECD... Organisation for Economic Co-operation and Development PPP... Purchasing Power Parity SITC... Standard International Trade Classification TEU... Treaty on European Union VAT... Value-Added Tax ix

7 Preface The creation of the European Economic and Monetary Union (EMU) and the introduction of the euro is a historical event for the EU countries. The debates on the desirability of the EMU provoked a vast economic literature dealing with the theory of the optimum currency area, costs and benefits of the EMU, symmetric vs. asymmetric shocks, alternative mechanisms of adjustment in a monetary union and so forth. Until recently, for the Central European candidate countries for a full membership in the EU, these issues seemed to be too far away, as they concentrated on devising their own monetary and exchange rate systems suitable for their transition period. The challenges of the EMU for the Central European countries were practically not dealt with in both Western and Eastern economic literature. The present book aims to fill this gap, by focusing on the most direct issue of relevance for the Central European countries with respect to the EMU - why, how and when these countries are expected to join the EMU. The papers included in this volume study the relationship between the EU accession process of the Central European candidate countries and their involvement in the process of European monetary integration. The book focuses on two main issues: First, are these countries (now or possibly later) a part of the European optimum currency area, so that they should belong to the euro area in the near future? Second, if so, how and when should they undertake necessary adjustments in their monetary and exchange rate policies and join the ERM 2 and the EMU? This book contains the collection of working papers resulting from the research project "Inclusion of Central European Countries in the European Monetary Integration Process", which were presented at two workshops in Leuven in February 1997 and in Ljubljana in September This research project was financed by the European Commission through its ACE-Phare research programme. We would like to thank the European Commission for its financial support, which gave us a valuable opportunity to establish research links and exchange expertise between Western and Central European economists involved in the research on monetary integration in Europe. Finally, we would like to express our thanks to all those who in various ways contributed to this volume in its final form. Paul de Grauwe and Vladimir Lavrac xi