The Impact of European Monetary Union Enlargement on Central Banks
Hochreiter, Eduard, Atlantic Economic Journal
On May 1, 2004, ten additional countries will join the European Union (EU), eight of which are from Central and Eastern Europe. (1) This brings the total number of EU countries to 25. On the same date, these countries will also become members of the European Economic and Monetary Union (EMU). The new members, however, will enter the EMU with a derogation, as the immediate adoption of the euro is not possible according to the Maastricht Treaty. (2) Finally, it is often forgotten that EU entry also implies participation in the European System of Central Banks (ESCB). Of course, just as is the case with Denmark, Sweden, and the U.K., the new members will not be allowed to participate in monetary policy decision making until they have adopted the euro. Adoption of the euro is dependent upon the fulfillment of the Maastricht convergence criteria, i.e., the inflation criterion, the fiscal criteria on public deficit and debt, the interest rate criterion, and the exchange rate criterion. The latter criterion expects the country to participate for at least two years in the Exchange Rate Mechanism II (ERM II), which is a pegged exchange rate system with a horizontal band of +/- 15 percent or, by common agreement, with a narrower fluctuation band.
Many of the new EU entrants have already signaled that they aspire to adopt the euro sooner rather than later and quite a few hope to adopt the euro as soon as possible. Moreover, the majority of new members seem to prefer a shorter rather than longer time in the ERM II. In contrast, both the European Commission and the European Central Bank (ECB) have taken a more cautious line on the road map to the adoption of the euro, pointing inter alia to the possibility of continuing asymmetric structural shocks. There is also a potential conflict between the exchange rate and the inflation criterion as faster real growth leads to higher inflation due to the Balassa-Samuelson effect. In any event, monetary policy of the new EU member states is confronted with a number of quite serious challenges encompassing the institutional, technical, and monetary policy areas of central banking. At the same time, the ESCB is preparing for enlargement not only from an economic and technical perspective but also from an institutional perspective.
This symposium brought together three high-ranking experts from central banks from the Czech Republic, Estonia, and Slovenia for an exchange of views on the issues emanating from EU/EMU accession for their central banks. To complement, an academic economist discusses the challenges facing and the solution offered by the ESCB to maintain an efficient monetary policy decision-making process after enlargement.
All three countries presented in this symposium aspire to adopt the euro sooner rather than later. On current economic trends, however, they will not be likely to adopt the euro at the same time, in particular, due to different fiscal performances and adjustment paths. Estonia has maintained a currency board arrangement since 1992. Slovenia, pursuing a more intermediate exchange rate regime, has followed a (heavily) managed float since the country's independence and has supplemented this float with an intermediate monetary target. …