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International Monetary Fund


Upon entry into the European Union, countries become members of the Economic and Monetary Union (EMU), with a derogation from adopting the euro as their currency (that is, each country joining the EU commits to replace its national currency with the euro, but can choose when to request permission to do so). For most of these countries, adopting the euro will entail major economic change. This paper examines likely economic developments and policy challenges for the five former transition countries in central Europe--the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia--that joined the European Union in May 2004 and operate under independent monetary policies but have not yet achieved policy convergence with the rest of the euro area.

Ms. Susan M Schadler

This paper highlights that 10 new members joined the European Union on May 1, 2004, in the biggest enlargement of the community since its inception. However, the core economic concern is the weak growth performance of Europe—and particularly of the 12 countries at the epicenter of European integration that use the euro as their common currency—relative to the rest of the world and especially the United States. The paper highlights that underlying this concern are the problems of sagging long-term trends in the growth of productivity, and the use of labor resources.

International Monetary Fund. External Relations Dept.

The establishment of European Economic and Monetary Union (EMU) will have important consequences for Central and Eastern European countries aspiring to join the European Union. Although participation in EMU is not a formal requirement for EU accession, it is reasonable to assume that, by the time of accession, new member countries will have satisfied the requirements of stage 2 of EMU, including convergence toward EMU reference values and adherence to the new exchange rate mechanism (ERM2) created for nonparticipating EU members. In a recent study, Implications of EMU for Exchange Rate Policy in Central and Eastern Europe, George Kopits of the IMF’s Fiscal Affairs Department examines the desirability for, and the ability of, the leading candidates in Central and Eastern Europe—Czech Republic, Estonia, Hungary, Poland, and Slovenia—to participate in ERM2 and eventually in EMU. Although this study focuses on these economies, Kopits suggests that the main points are applicable to other candidate countries as well and, in some respects, are relevant for all transition economies in the region.

International Monetary Fund. External Relations Dept.
SlNCE the dissolution of the Soviet Union, most of the former member states have retained the ruble as their national currency but have followed independent monetary policies. Such a combination is not sustainable. With mounting disarray in the ruble area, each state must now quickly adopt either a common monetary policy or a separate national currency.
International Monetary Fund. External Relations Dept.
For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.
International Monetary Fund. Research Dept.
The paper presents a model of optimum currency areas using a general equilibrium approach with regionally differentiated goods. The choice of a currency union depends upon the size of the underlying disturbances, the correlation between these disturbances, the costs of transactions across currencies, factor mobility across regions, and the interrelationships between demand for different goods. It is found that, while a currency union can raise the welfare of the regions within the union, it unambiguously lowers welfare for those outside the union. [JEL F33, F36]
International Monetary Fund. Research Dept.

The welfare effects of mitigating the costs of inflation are examined. In a model where money reduces transactions costs, a fall in inflation costs is equivalent to financial innovation. This can be caused by paying interest on deposits, indexing money, or “dollarizing.” Results indicate that financial innovation raises welfare in low-inflation economies while reducing it in high-inflation economies because of the offsetting indirect effect of higher inflation to finance the budget.