Transcript Are the new EU members ready for the EURO? A comparison of

A comparison of costs and
benefits of membership in
the EMU
Presentation: Jan Pavec, Martina Sedláčková
Article: Furceri, Davide, Carras, Georgios: Are the new EU
members ready for the EURO? A comparison of costs and
benefits. Journal of Policy Modeling 28 (2006), 25–38.
Outline
 Introduction
 The
Convergence criteria
 Monetary union vs. Independent monetary
policy
 Methodology
 Results and conclusions of the paper
 Crisis
Introduction
5
of 13 New Member States have
already entered the eurozone
 The question of its costs and benefits
becomes actual again in Czech
Republic
 Should
we accept the common
currency?
The convergence criteria

Inflation rate must not be higher than 1.5% of the
unweighted arithmetic average of the tree Member States
with the lowest inflation

The ratio of the annual deficit relative to the GDP must
not exceed 3% at the end of the preceding fiscal year

Government debt-to-GDP ratio must not exceed the 60%

country shall keep its monetary exchange-rate within a
±15% range from an unchanged central rate

Long-term interest rates
Monetary union versus independent
monetary policy
 The
more synchronized the business cycles
are the lower probability of assymetric
shocks, the less negative impact of loss of
independent monetary policy
 The
assymetric shocks have an impact on all
countries inside the Monetary union
Monetary union versus independent
monetary policy
 The
higher correlation of business
cycles among the members of EMU is,
the easier are the actions of ECB in
case of shocks, as the impacts on the
Eurozone members will be similar
 Independent monetary policy would be
useful for the countries with lower
correlation
Methodology
 based
on New Keynesianism
 Three methods of measuring the
business cycles were using annual data
on the CPI and real GDP to estimate
various costs and benefits for 30
European Countries
 All the results were similar
Results
 The
higher is an output volatility after the
joining the Monetary Union, the higher are
the costs for the entering country
 Membership of the Monetary union has also a
stabilization costs, more uncorrelated the
higher the costs are, but it has a declining
tendency because of the integrated market
 Interestingly, there is not a big difference in
correlation between the old EMU Member
states and the other old EU Member States
(the UK, Denmark)
Results

If the country´s equilibrium of inflation rate is
higher than that of the EMU it is more beneficial
for the COuntry

but these benefits are reduced over time as the
new member states decline their inflation

Their positions become similar to those of the old
Member States

higher benefits for Turkey or Romania
Results
Results
 Countries
for which the benefits and high
price-stability benefits are the highest,
their costs for joining the Monetary
Union are high as well
 The countries for which the costs of
joining the Monetary Union are low they
will have a low benefits as well
The case of Czech Republic
Inflation
The case of Czech Republic
GDP
Discussion
 Do
you think that Czech Republic is ready
for a common currency? Is it prepared to
accept the Euro?
 What
can be another positive and negative
aspects of membership in the Monetary
union?
References

Furceri, Davide, Carras, Georgios. „Are the new EU members ready for the
EURO? A comparison of costs and benefits“. Journal of Policy Modeling 28
(2006), 25–38.

Schmid, Peter, A. „The crisis of European Monetary Union“. Theoretical and
Practical Research in Economic Fields 3 (2012), 112-123.
http://web.a.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=4bbf6603-e154414c-aac1-8306b35c5e41%40sessionmgr4003&vid=1&hid=4112 (07/03/2014)

ART. 140, Treaty of European union, 1992. http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:11992M/TXT:EN:HTML
(09/03/2014)

Tradingeconomics.com. (10/03/2014)
Appendix: Crisis situation
Appendix: Crisis situation

„Common currency is not the reason for the economic imbalances and
loss of competitiveness in Southern and peripheral countries“

the EMU is in deep economic crisis but that there is no currency crisis
although the common currency might have been favorable to the
economic imbalances within the Eurozone

The ECB has had its own instruments, but they cannot go forever

THE EU must implement strict rules associated with fiscal aid and
closer political union