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Financial and Monetary Integration in the New Europe

Convergence Between the EU and Central and Eastern Europe

Edited by David G. Dickinson and Andrew W. Mullineux

Potential new entrants to the European Union from Central and Eastern European countries face many challenges to achieve financial convergence with the existing EU nations. Using detailed case studies from Bulgaria, the Czech Republic, Latvia, Lithuania and Poland and analysis of cross country data from these regions, Financial and Monetary Integration in the New Europe looks at the key issues for applicant countries as they negotiate the terms of their membership in the European Union. Of major concern to these countries is the financial sector and its implications for economic growth and the conduct of macroeconomic policy. The book examines, in particular, monetary and exchange rate policies, banking regulation and financial market efficiency. The overall impact of building a market driven financial system on economic development is also explored.
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Chapter 11: Joining EMU as an irreversible investment

Convergence Between the EU and Central and Eastern Europe

David G. Dickinson and Jean-Baptiste Desquilbet


David G. Dickinson and Jean-Baptiste Desquilbet INTRODUCTION The Central and Eastern European (CEE) and the European Union (EU) countries are conducting their negotiations for the former to join the latter. A key issue is the assessment of the benefits of accession for both sides. Certainly from a political perspective there is considerable enthusiasm for the project. From an economic point of view there is also substantial evidence that membership of the EU will significantly benefit the CEE economies. One influential study which considers this is Baldwin et al. (1997).1 They argue that the trade aspects of enlargement are important and positive but, much more significant is a reduction in the risk premium and hence real interest rates in CEE countries. As they point out, accumulation effects (from increases in the capital stock) are much larger, in the long run, than allocation effects (from more efficient use of current resources). Beyond reductions in real interest rates, we have much evidence to suggest that improved trade opportunities can have a major beneficial impact on growth (for example, see Baldwin and Seghezza 1996; Cameron et al. 1998; Coe et al. 1997). Another potentially important channel is through foreign direct investment (FDI) and the resulting productivity improvements. Membership of the EU is seen as one way of making the CEE countries more attractive as production bases for multinational enterprises. Certainly later entrants to the EU such as Spain, Portugal and Ireland seem to have benefited from this effect. Hence FDI may be particularly...

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