engleski

Convergence of transition countries' monetary policies with those of the EU and its importance for adjustment to the EMU

The process of transition from a planned to a market oriented economy has reached an advanced stage for some transition countries, which enables them to start thinking of becoming a member of the European Union. Related to that are also the issues concerning EMU membership. In order to become an EMU member candidate countries have to meet the Maastricht criteria and participate in the ERM II for two years prior to their entry in the EMU, which implies that these countries will peg their currencies to the euro in that period. We show that the expected path towards the membership in the EMU contains inconsistencies that will be difficult to overcome for transition economies. The nature of transition process is contradictory to some requirements for the EMU. The presence of strong Balassa-Samuelson effects may not allow transition economies to meet the Maastrict criterion on inflation and nominal exchange rate stability at the same time, both of which have to be met to enter the EMU. We also consider the optimality of fixing transition countries exchange rates to the euro from the perspective of the theory of optimum currency areas. The theoretical considerations and empirical findings up to the present time do not provide a clear conclusion that transition economies of Central and Eastern Europe form an "optimum currency area" with the EU. Notwithstanding that, we assume that the euro peg would be beneficial and then check whether this exchange rate arrangement is feasible. In order to keep the euro peg stable and sustainable transition countries will have to align their monetary policies with those of the ECB. Their ability to follow the leadership of the ECB and desirability thereof are assessed by an empirical study on the convergence of transition countries' monetary policy with those in the EU. Using cointegration analysis to measure convergence, and taking Germany as a proxy for the EU, we find out that the transition economies of Central and Eastern Europe have exerted weak or non-existing convergence on monetary policy conducted in the EU. This finding implies that transition economies will have to put much more effort in trying to follow the leadership of the ECB if they are to make the euro peg sustainable. It also requires us to reconsider the desirability of convergence on the euro area monetary policy. Due to the restructuring nature of transition economies, these economies might have very different needs from relatively stable economies of the euro area. Consequently, fixing the exchange rates to the euro might not be an appropriate strategy, because it constrains their ability of using an autonomous monetary policy to respond to the challenges of completing transition and meeting the requirements for the future membership in the EMU. Our analysis shows that the currently expected path towards the EMU should be taken with some reservations and might need some modifications in the case of transition countries that are still in the process of restructuring.

Transition; Monetary convergence; EU; EMU

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