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EMU and Economic Policy in Europe

The Challenge of the Early Years

Edited by Marco Buti and André Sapir

EMU is a completely new policy regime which has significant economic implications and which, it is hoped, will ultimately enhance the role of Europe on the world stage. EMU and Economic Policy in Europe takes stock of the initial experiences of EMU and assesses the challenges which will have to be addressed in the early years of its existence to ensure its long-term objectives are successfully achieved.
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Chapter 15: EMU and Enlargement

Barry Eichengreen and Fabio Ghironi


Barry Eichengreen and Fabio Ghironi1 INTRODUCTION In this chapter we consider how Europe’s monetary union will evolve in the next five to ten years. We concentrate on what is likely to be the most important change in that period, namely, the increased number and heterogeneity of the participating states. While the current members of the monetary union will almost certainly continue to converge in terms of per capita incomes, it is probable that they will be joined in EMU by a number of Eastern European countries that have not yet been admitted to the EU itself.2 These new members will differ sharply from the incumbents in terms of their economic structures, their per capita incomes, and, potentially, their growth rates. We focus here on the implications of this development for the structure, organization and operation of EMU.3 This focus dictates what we take up and what we leave aside. Thus, we focus on prudential supervision and lending of last resort on the grounds that the addition of countries with recently-created and still underdeveloped financial systems will be among the most prominent consequences of the growth of EMU. We focus on the coordination of fiscal policies on the grounds that the fiscal positions and problems of the accession economies will differ from those of the incumbents. We focus on labour market flexibility on the grounds that the admission of these new members with large populations and relatively low wages will have potentially important labour market effects. We also...

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