Macroeconomic Challenges for Macedonia toward European Union and European Monetary Union membership - Copenhagen and Maastricht Criteria

In this paper we have analyzed the major macroeconomic challenges that Macedonia might face for becoming part of European Union countries, which are related to the capacity of Macedonian economy for meeting the prerequisites specified by European Commission in Copenhagen and Maastricht. In the context of Copenhagen criteria,using data from European Bank for Reconstruction and Development, we have analyzed the ability of Macedonian economy to cope with competitive pressures within EU structure. For this purpose, the main challenges of Macedonia toward EUmembership are: strengthening the competition, strengthening of suitable capacity ofhuman capital in the country, strengthening of non - bank financial institutions,reduce the shadow economy and built up a better infrastructure. The challenges that Macedonia has to solve will certainly result in progress related to market economy functionality and better prerequisites for strengthening private sector competitiveness. In the context of Maastricht criteria, using data from International Financial Statistics (IFS), National Bank of the Republic of Macedonia (NBRM) andState Statistical Office of RM, the study is focused on the Treaty provisions with regard to development in prices, fiscal balances and debt ratio, exchange rates and long terminterest rates. In this respect, economic developments in Macedonia are reviewed from a backward - looking perspective, covering in principle the past ten years.Economic convergence of Macedonia as a country under review in this paper is, also,examined in the context of the regular two - year cycle, which is in line with therequirements of article 122 (2), in conjunction with the article 121 (1) of the Treaty ofthe European Commission. In order to capture the convergence criteria, in the context of the influence of the real exchange rate, the study attempts to explore the pass through effect of exchange rate on inflation. We use quarterly data from 1998 to 2008 and employed Vector Autoregression and Granger Causality test of exchange rate on inflation. The results show that changes in exchange rate 'are causing' changes in the producer prices and retail prices, thus confirming the high import dependability of the domestic production