The Approach to EU and EMU Membership: the Implications for Macroeconomic Policy in Applicant Countries

Many commentators have noted the fact that the so-called 'Eastern enlargement; of the EU is unique, in the sense that never before have countries which are so much poorer than the EU been admitted. Furthermore, they are being admitted to an EU which is far more internally liberalised (the single market) and intergrated (EMU) than previously. Finally, the applicant countries are far more liberalised internally and open internationally than was the case with the previous enlargement to relatively poor countries (the so-called 'Southern enlargement' of the 1980s). We believe that this unique combination of circumstances is likely to generate unanticipated problems for the applicant countries in their conduct of macroeconomic policy in the run-up to EU and later EMU accession. The problems we predict stem from the combination at one time of the following factors: 1.) Expected rapid growth in the applicant countries (far faster than the EU itself); 2.) Real appreciation resulting from the well known Harrod-Balassa Samuelson effect; 3.) Free capital movements; 4.) The need to satisfy the Maastricht criteria and join EMU within ten years. These factors are likely to lead to high current account deficits, which it will be dificult for the authorities to limit to prudent levels. We describe the underlying pressures in Section 2, discuss suitable macroeconomic policy responses in Sections 3 and 4, and conclude in Section 5. At the core of our analysis lies an attempt to combine what we know about the macroeconomics of rapidly growing poorer countries with the standard presecriptions of the Mundell-Flemming model and the institutional requirements of the pre-EU and pre-EMU accession periods.EMU, EU, Macroeconomic policy

When Should the Central Europeans Join EMU?

The paper first considers why central European countries wish to join EMU soon. The main reasons are the risk of macroeconomic instability they face outside the euro zone if they wish to grow quickly. At the same time, Central Europe is highly integrated as regards trade with EMU, so it is little exposed to asymmetric shocks that would require a realignment of exchange rates. Finally, it is argued that there is no cost in terms of slower growth from EMU accession, so that there is no trade-off, as has been claimed, between nominal convergence to EMU and real convergence to EU average GDP levels. Second, the paper assesses whether Central European accession to EMU would be disadvantageous to current members. It concludes that accession cannot increase inflationary pressure on existing EMU members, as has been claimed, but that slow growing members of EMU might suffer increased unemployment, unless they increase the flexibility of their labour markets. Incumbent members may also be unwilling to share power with Central Europeans in EMU institutions.currency unions, currency areas, monetary policy, economic growth, economic union, monetary union, European Union, enlargement

Labour Markets and Wages Policies During Economic Transition

This article discusses among others the Pazos-Simonsen Mechanism - short term wage controls as a means of abrogating existing wage contracts, short serm wage controls as a mechanism for co-ordinating expectations and short term wage controls in semi-heterodox stabilization programmes as well as medium term wage controls in semi-shock Stabilization Programmes in Post-communist economies.price control, wage control, post-communistic economies, transformation

The Stability and Growth Pact - Essential and Unfeasible

The arguments for fiscal as well as monetary rules in a monetary union aiming at low inflation, the main weaknesses in the Stability and Growth Pact, and proposals for its reform are reviewed. Our own proposal for reforming the SGP is put forward: a requirement for eurozone Member States to enact entrenched legislation which would forbid budgets that led to public debt exceeding a certain proportion of GDP. Countries which failed to enact such provisions or which rescinded them could not remain in the eurozone. This would solve the key “enforcibility problem” that the SGP faces, without centralizing fiscal power in the European Commission. However, effective reform proposals are unlikely to be politically acceptable, and the SGP is likely to continue to be a dead letter. This suggests that the EMU was implemented prematurely.fiscal rules, Stability and Growth Pact, Economic and Monetary Union

Investment in Post-communist Economies. Real Facts and Keynesian Myths

If official statistics are to be believed, the fall in output in the transition economies of Central and Eastern Europe has probably been the largest anywhere in peacetime in modern history (failed harvests could cause even larger falls in agricultural societies, and such effects were felt on a national level as late as 1854 in Ireland). This fall in output was certainly noticeably larger than that which occurred during the Great Depression of the 1930s (compare Tables 7 and 8-10), although it was smaller than that during World War II in countries which served as battlegrounds (France in 1944, Germany and Japan in 1945). It is therefore important to know what the cause of the post-Communist depressions was. Two main explanations have been put forward, the first posits a sharp reduction in the level of aggregate demand as the cause, the second suggests a dramatic change in the structure of demand, to which supply was unable to respond sufficiently rapidly.transition economies, Central and Eastern Europe, investment

Institutional Transplants in the Transformation of Poland's Economy and Polity

The collapse of communism faced Poland and other former Soviet bloc countries with the need for a massive “institutional refit”, as regards both economic and political institutions. This paper describes where some of the key new institutions were derived from (either in the form of transplants from other countries, revivals of pre-communist domestic institutions or completely new local “institutional innovations”), and proposes some tentative views as to why the particular developments we observe took place, and whether they corresponded to needs at the time. In the case of transplants, we attempt to explain why these were copied from one particular country rather than from others.Institutional economics, institutional transplants, legal systems, transition,Poland

What Went Wrong? The reasons for the Failure of Stabilization in Russia in 1992

In this paper we examine four main kinds of reason for Gaidar's team failure in Russia: 1) problems arising from the process of designing the programme; 2) failures of implementation; 3) problems arising from Russia's economic structure; 4) problems arising from Russia's political structure.Gaidar, Russia, stabilization, reforms

The Wig and the Pith Helmet - the Impact of "Legal School" versus Colonial Institutions on Economic Performance (second version)

The difference between common law and French civil law countries fails to have a statistically significant effect on economic growth, whereas the difference between British and French colonies has a strong effect when the two pairs of institutional variables are included separately in regressions. Moreover, when both pairs of variables are included together, the impact of the difference in legal school becomes highly insignificant, whereas the difference in colonial origin continues to be highly significant. Throughout we control for fundamental environmental and historical variables. Thus, we find that certain objective markers of historically based institutional differences do have an important impact on economic growth. We also find evidence that the incidence of malaria is endogenous to economic development. Our results have implications for the "geography vs. institutions" and "policies vs. institutions" debates on the deep determinants of economic growth.institutions, development, legal origins, colonial period, geography

Investment and Finance in De Novo Private Firms: Empiracal Results from the Czech Republic, Hungary and Poland

In this paper we use a survey of 281 Czech, Hungarian and Polish newly established small private firms in order to shed some light on the constrains these firms face in the credit market. The results of our survey show that imperfections in capital markets in Central European economies do not seem to actually inhibit the growth of Central European transition economies studied, but they provide quite a large amount of financing and do so from a remarkably early stage of the existence of firms. Financial intermediation works reasonably well as far as de novo private firms in the three Central European transition economies studied, but they provide quite a large amount of financing and do so from a remarkably early stage of the existence of firms. Financial intermediation works reasonably well as far as de novo private firms are concerned: loss-making de novo firms have a lower probability of getting credit than profitable ones. Banks protect themselves against the risk of a deteriorating pool of borrowers by requiring collateral for their loans. We do not find convincing evidence concerning the existence of adverse selection. Loss-making firms are not ready to pay higher interest rates than profitable firms and are not more likely to ask for credit than profitable firms.http://deepblue.lib.umich.edu/bitstream/2027.42/39622/3/wp236.pd