2/2000 Iikka Korhonen and Mare Randveer. Assessment of the Euro´s implications for European economic development

Working Papers of Eesti Pank. No 2, 2000

This paper assesses the impacts of Economic and Monetary Union and the euro on developments within the EU and globally. The emphasis is on euro-11 countries and the eight most advanced accession candidates in Central and Eastern Europe. The single currency completes the project for a single market in Europe, and overall, clear efficiency gains for participating countries are expected. Low, stable interest rates should spur investment and the single currency should promote the formation of large, liquid capital markets, eventually transforming the structure of financial intermediation within the euro area. Although participating countries achieved a high degree of nominal convergence in the 1990s, this process now appears to have ended. Moreover, the conduct of a common monetary policy becomes more problematic with countries at different phases in the economic cycle.

Accession candidates may use a variety of foreign exchange rate regimes before they join the EU, but ultimately their economic policies become a matter of common interest. Pressure to peg to the euro obviously increases as membership approaches, but there is compelling evidence that countries should hold back on pegging to the euro until they have achieved sufficient convergence to attain credibility for a policy of fixed exchange rates.

Authors: Iikka Korhonen, Bank of Finland, e-mail: iikka.korhonen [at] bof.fi; Mare Randveer, Tallinn Technical University

This study has been ordered by Eesti Pank and funded by EC Phare. The study was concluded in 1999.

Authors would welcome any comments on the present text. The views expressed are those of the authors and do not necessarily represent the views of the Bank.

Table of Contents

1.Introduction
2. The effects of EMU's third stage on the euro area, the EU and the global economy
2.1 Some effects of the euro on the euro area countries
2.1.1 Common money
2.1.2 Greater emphasis on fiscal policy
2.1.3 The move away from banks towards securities markets
2.2 Economic convergence and development inside the euro area
2.2.1 Divergence in inflation and output growth
2.2.2 Differing modes of monetary policy transmission
2.3 Some implications of the euro for the outside world
3. The impact of the third stage of EMU and the euro on CEE economies
3.1. Impact on foreign trade flows
3.1.1 Changes in demand for CEE products in the EU
3.1.2 Changes in the transaction costs of CEE foreign trade
3.1.3 Trends in CEE foreign trade with the EU
3.1.4 Areas of greatest impact
3.2 The impact on capital flows
3.2.1 The impact of the euro on portfolio and other investments to CEE countries
3.2.2 The impact of the euro on foreign direct investments to CEE countries
3.2.3 Trends in capital flows to CEE countries
3.2.4 Are CEE countries attractive investments?
3.3 The impact of the euro on foreign exchange regimes in CEE countries
3.3.1 Present exchange rate arrangements
3.3.2 Fixed or floating exchange rates?
3.3.3 Foreign exchange regime in the CEE countries before membership in the monetary union
Concluding remarks
Statistical Appendix

Assessment of the Euro's Implications for European Economic Development, Working Papers of Eesti Pank No 2, 2000 (PDF*)

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