Eurozone Expansion: Certain Risks for Countries Catching Up

Stanislava Janáèková

Eastern European Economics, 2004, vol. 42, issue 2, 6-44

Abstract: Accession countries are bound by European Union rules to enter the eurozone after they have fulfilled the Maastricht criteria. Yet for many years, the eurozone will not constitute an optimum currency area for the new members. There are additional risks connected with low relative economic levels--as well as low relative price levels--of the new candidates. Catch-up will require fast productivity growth and will entail inflation rates well above present eurozone targets. The shares of the new countries in the Harmonized Index of Consumer Prices will be relatively low but in sum, and together with present eurozone members with higher-than-average inflation, they could pose a threat for the European Central Bank's (ECB) low-inflation policy. Restrictive steps by the ECB would, in turn, slow down growth in the new countries. For this reason, adoption of the euro should not be undertaken too hastily, without regard for the needs of the catch-up process.

Date: 2004
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