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The Economic Potential of a Larger Europe

The Economic Potential of a Larger Europe

Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald

The Economic Potential of a Larger Europe gives insights into past, present and future issues related to the ongoing EU enlargement process. Providing a unique forum for debate and a multiplicity of views and experiences from both high-profile academics and those who engage with enlargement on an implementation level, this book covers a wide range of topics that are key to a successful transition and integration process and thus to the provision of a prosperous growth environment within a larger Europe. Special attention is paid to monetary integration, notably entry into ERM II, on which representatives of the national central banks involved present their views.

Chapter 20: Fiscal discipline and the adoption of the euro for new members of the European Union

Fabrizio Coricelli


Fabrizio Coricelli1 1. INTRODUCTION Although achieving macroeconomic stability was not a requirement for EU entry, the candidate countries (CEECs from now on) have made remarkable progress in this field on the path to accession, as effectively summarized by the convergence of inflation rates to EU levels (see Figure 20.1). However, in the run-up to EU entry some clear inconsistencies have become evident in the policy frameworks followed by several candidate countries. Specifically, budget deficits soared as fiscal policies were loosened in several CEECs (see Table 20.1). At the same time, there is an increasingly favourable attitude towards postponing the adoption of the euro. The timing of euro area entry and fiscal discipline are related, as there is a widespread perception that a later Figure 20.1 Convergence in inflation rates 233 234 Stabilization of expectations Table 20.1 Consolidated general government balance (in % of GDP) 2001 2002 Ϫ0.65 Ϫ4.80 Ϫ6.74 1.19 Ϫ9.19 Ϫ2.70 Ϫ1.19 Ϫ6.70 Ϫ2.70 Ϫ7.20 Ϫ3.21 Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovak Republic Slovenia Source: EBRD. Ϫ0.86 Ϫ6.80 Ϫ5.11 0.68 Ϫ4.70 Ϫ1.95 Ϫ1.96 Ϫ5.50 Ϫ3.50 Ϫ7.30 Ϫ1.14 entry into the euro area will result in fewer restraints being put on fiscal policy. Furthermore, EU institutions, such as the European Central Bank and the European Commission, in fact seem to support the view that CEECs would be better off postponing entry in the euro area and not focusing too much on fiscal restraints. This view seems to imply that nominal...

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