Pilgrims to the Eurozone: How Far, How Fast?

Evžen Kočenda, Ali Kutan and Taner Yigit

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: In our analysis, we examine the convergence of all recent ten European Union (EU) members to EU standards. Novel features of the paper include more complete measures of convergence, in particular fiscal convergence; a broader examination of inflation convergence with respect to the Maastricht benchmark as well as the European Central Bank’s inflation objective; and more appropriate tests of convergence that allow for structural breaks. The results indicate slow but steady per-capita real income convergence towards EU standards. Although evidence indicates significant inflation and interest rate convergence, fiscal convergence evidence is discouraging, indicating a lack of fiscal sustainability. An important policy implication of the results is that current fiscal practices may delay the new members’ entry into the Exchange Rate Mechanism II (ERM2) and hence their adoption of the euro. Our empirical results support the following recommendations: authorities need to (1) improve their budget institutions, (2) introduce further reforms to cut down government expenditures, and (3) consider adopting fiscal rules. Therefore, the countries with serious fiscal problems should not rush to enter the Eurozone.

Keywords: Convergence; European Union; integration; fiscal discipline; transition; Eurozone. (search for similar items in EconPapers)
JEL-codes: C23 E42 E61 F02 H60 P50 (search for similar items in EconPapers)
Date: 2005-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Pilgrims to the Eurozone: How far, how fast? (2006)
Working Paper: Pilgrims to Eurozone: How Far, How Fast (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp279

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