The optimal strategy for monetary union accession countries

Abstract

"The European Monetary Union consists of 16 member states, is inhabited by 321 million people and has a joint GDP of 22.9 trillion Euros. It is one of the largest economic areas in the world. In the next years the Eurozone will growth further, eight remaining new EU member states will join after their fulfillment of the Maastricht criteria. This makes accession rather sequential, Slovenia joined in 2007, Slovakia in 2009 and Estonia is about to join the Eurozone in 2010. However, these rules open the opportunity for a new EU-member state to postpone membership of EMU in violating the Maastricht criteria like Sweden. The contribution of my Ph.D. thesis is to derive channels of the impact of an EMU accession on the macro-economy. To this aim, I analyze the effects of accession on stability, growth and the geographical structure within theoretical models. The static effects of accession are quantified within a computable equilibrium model. In the conclusions I answer the question whether there are economic reasons for a new member state to avoid EMU membership. The thesis is organized in three parts reflecting three perspectives of accession. Within the first main chapter, the effects of accession on stability are analyzed within a dynamic general equilibrium framework (DSGE). After a short discussion of the effects of monetary arrangements on the stability of an economy, I analyze the well-known arguments of the theory of optimum currency areas. Thereafter the model is used to analyze the transmission of shocks within the monetary union. The second main chapter of the thesis is related to static effects of accession. I show that in five new member states gains from accession outpace costs. Nevertheless, the gain from accession varies among accession countries and economic activities. Overall, small open economies tend to benefit to a greater extent than medium-size, more closed economies. In the third main chapter of the thesis a multiregional growth model is developed. In this model further integration leads to more efficient financial markets which foster growth. Nevertheless, like in all new economic geography (NEG) models, there could be the outcome of a catastrophic agglomeration. Capital could move from poor accession countries to rich western Eurozone countries. To prevent such a catastrophic agglomeration, financial markets should show a minimum degree of development. The conclusion of the thesis supports the accession of new member states to the Eurozone. I argue that the consequences of EMU accession will be either neutral or positive for the accession countries. Since these countries tend to be more instable, they could gain from an equalization of shocks within the Eurozone. The static effects outpace the costs of accession. Within the last years we saw huge progress in the integration of new EU-member states into the international financial system. A catastrophic agglomeration should therefore be unlikely. However, market capitalization remains low and bank lending is less profitable than in western EU-countries so that a risk remains which could justify a postponement of accession." (Author's abstract, IAB-Doku) ((en))

Cite article

Baas, T. (2010): Unter welchen Bedingungen ist ein Beitritt zu einer Währungsunion optimal? Eine Analyse stabilitätspolitischer Konsequenzen, statischer Effekte und wachstumstheoretischer Implikationen einer Osterweiterung der Europäischen Währungsunion. Potsdam, 303 p.