The European Journal of Comparative Economics

ISSN: 1824-2979

EJCE Year: 2008, December. Volume: 5 - Issue: 2

Is economic convergence in New Member States sufficient for an adoption of the Euro?

by Marie-Josť Rinaldi-Larribe

Start page: 269 - End page: 290

Keywords: New European Member States ; Euro ; Enlargement of EMU ; Maastricht criteria ; Central and Eastern European Countries ; CEECs ; Optimal Currency Area theory

Jel code: E52; E58; F15; F33

Abstract:

The New European Member States (NMS) are expected to adopt the euro as soon as they fulfil the Maastricht criteria, which means that their nominal convergence has been achieved; but the question is: should those new European members adopt the euro as soon as possible or should they join the euro zone later on, when the real convergence of their economies is well underway? In the mean time, what currency system should the new European members adopt before joining the euro zone? Besides, where exactly do these NMS stand in terms of nominal convergence? In terms of real convergence, is the Optimal Currency Area (OCA) theory relevant concerning the new European members? The OCA theory states that countries are more suited to belong to a monetary union when they meet certain criteria related to the real convergence of an economy: a high degree of external openness, mobility of factors of production, and diversification of production structures. According to this theory, if there is a clear convergence between business cycles of countries that are willing to join the monetary union and the business cycle within the currency area, then this tends to prove that these countries are ready to enter the currency area. In this paper, we shall see where NMS stand regarding the Maastricht criteria; then we will try to find out whether these NMS fulfil the criteria identified by the OCA theory, which are linked to the real convergence of an economy. Then, after having gone through a survey of the literature devoted to business cycles synchronisation, we will seek to determine if there is a clear correlation between those countries' business cycles and the European cycle, which would stand in favour of an early adoption of the euro in these countries.

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