Macroeconomic Policies for EU Accession

Macroeconomic Policies for EU Accession

Edited by Erdem Başçı, Sübidey Togan and Jürgen von Hagen

What macroeconomic requirements must Turkey meet in its quest to accede to the European Union? This book, with its distinguished contributors – well-known economists and policymakers – examines and analyses these macroeconomic challenges confronting Turkey. Although the focus is on the specific situation of Turkey, the lessons are informative for other candidate countries and the findings directly relevant to the process of European integration.

Chapter 8: Managing Capital Inflows: Eastern Europe in an Asian Mirror

Barry Eichengreen and Omar Choudhry

Subjects: economics and finance, financial economics and regulation


8. Managing capital inflows: Eastern Europe in an Asian mirror Barry Eichengreen and Omar Choudhry 8.1 INTRODUCTION The accession economies of Eastern Europe and the rapidly industrializing economies of East Asia are facing similar problems of managing capital inflows.1 Both regions are attractive destinations for foreign investment by virtue of their relatively low labour costs – which makes them competitive export platforms – and their rapidly growing domestic markets. The magnitude of financial flows to the two regions is fairly similar: the Institute of International Finance forecasts for 2005 were for private financial flows of $122 billion to Emerging Europe and $134 billion to Emerging Asia.2 Both regions maintain relatively stable exchange rates against their principal trading partners: Eastern Europe vis-à-vis the EU-15 and East Asia vis-à-vis the United States.3 Both have capital market regimes that are substantially open to financial flows. At the same time, outcomes in the two regions are visibly different. In Emerging Europe savings are insufficient to underwrite domestic investment; in most years the investment–savings gap translates into a current account deficit that is financed by capital inflows. (This was the case in 2003 and was again forecast to be the case in 2005, although Emerging Europe’s current account was actually in modest surplus in 2004.) In Emerging Asia, in contrast, savings more than suffice to finance the region’s investment. The result is a current account surplus, requiring private capital inflows to be more than absorbed into...

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