EMU and the International Monetary System

5 Exchange Arrangements Between the EU and Countries in Eastern Europe, the Mediterranean, and the CFA Zone

Thomas Krueger, Paul Masson, and Bart Turtelboom
Published Date:
September 1997
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John Berrigan and Hervé Carré 

The creation of a single currency for the EU will be a major international event. While the introduction of the euro will mainly have an impact on EU countries, there will also be important implications for third countries. The scale of these implications will reflect the EU’s substantial presence in world trade and in the international monetary system. Many of the broader external aspects of the euro are considered elsewhere in this volume. This paper, however, has a narrower focus in considering the implications of the euro for present and future exchange rate arrangements between the EU and a specific subset of countries with which it has particularly close economic and financial links. Three groups of countries fall into this category. These are (1) the countries of Central and Eastern Europe (CEECs); (2) the non-EU countries of the Mediterranean; and (3) the countries located in French-speaking sub-Saharan Africa (the CFA zone). For each of these groups of countries, the EU is a principal trading partner, a major donor of development aid, and a counterpart in economic cooperation. Their links with the EU take various forms (e.g., Europe agreements, the Lomé Convention, and free trade agreements), and these links make their economies relatively sensitive to developments in the EU economy. Accordingly, the economies of these countries are likely to experience important indirect effects related to the introduction of the euro.

At present, there is no exchange rate arrangement between any of the countries concerned and the EU per se, although the possibility of such an arrangement is addressed in a Declaration1 annexed to the Treaty. Some of them have pegged their exchange rates unilaterally to the ECU, but they have never participated in or been formally linked to the ERM of the EMS. This situation is unlikely to change in the short term. The newly agreed exchange rate mechanism (ERM II), which will replace the present ERM at the time of the introduction of the euro, has been devised with a view only to the participation of existing EU member states not adopting the single currency from the outset. The objective of this paper is, however, to examine the more medium-term outlook for exchange rate arrangements involving these groups of countries and the EU in the new single currency environment.

As prospective EU member states, an exchange rate relationship involving the euro and the CEECs is likely to be high on the policy agenda in the coming years. The CFA zone already has an exchange rate arrangement with France and, to the extent that France is likely to adopt the euro, the implications for this arrangement will need to be considered. The Mediterranean countries are intensifying their trade links with the EU, which begs the question whether such links could lead in the direction of an exchange rate arrangement involving their currencies and the euro. In the following three sections of this paper, the prospects for an exchange rate arrangement with the euro will be considered separately with respect to the CEECs, the non-EU countries of the Mediterranean, and the CFA zone. A final section will draw some general conclusions.

Exchange Rate Arrangement for the CEECs with the Euro

The countries of Central and Eastern Europe2 are highly dependent on developments in the EU. This dependency reflects not only their proximity to the EU but also the close political, economic, and financial links developed between the two regions since the collapse of communism in the late 1980s.

More significantly, the EU has concluded wide-ranging Europe Agreements3 with 10 of the CEECs. These are Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia. All of these CEECs aspire not only to membership of the EU but ultimately to the adoption of the euro as a means to achieve their objective of full participation in EMU. The longer-term challenge is, therefore, how to organize the transition from their current exchange rate regimes to the irrevocable fixity of exchange rates against other euro area currencies, which would be implied by the adoption of the euro. While the Europe Agreements recognize the aspirations of the CEECs and provide assistance to these ends, the economic elements of the Agreements do not include an exchange rate arrangement. So, what are the prospects for exchange rate relations between the currencies of these CEECs and the euro?4

In their transition from centrally planned economies, the CEECs concerned have opted for different exchange rate regimes, ranging from complete fixity in the form of a currency board to a free float (see Table 1). The range of exchange rate regimes adopted reflects the extent of economic divergence within a relatively heterogeneous group of countries. The choice of regime also reflects differences in opinion among respective national policymakers on the appropriate exchange rate arrangement to ensure a smooth transition to a market-based system. It is beyond the scope of this paper to assess the economic performance of the 10 CEECs under their chosen exchange rate regimes. Suffice it to say, however, that each of them has enjoyed a measure of success, making it difficult to draw definitive conclusions on the optimal exchange rate regime for a transition economy. Consequently, it is unlikely that a standardized exchange rate arrangement with the euro would be appropriate for or acceptable to these CEECs. Instead, a rather diverse set of arrangements may be necessary.

Table 1.Exchange Kate Regime of CEECs
BulgariaManaged float
Czech RepublicExchange rate pegged within fixed band against a basket comprising the deutsche mark (65 percent) and the U. S. dollar (35 percent)
EstoniaCurrency board with deutsche mark: 1 Kr = 8 DM
HungaryExchange rate pegged within crawling band to basket comprising the ECU (70 percent) and the U.S. dollar (30 percent)
LatviaExchange rate pegged to SDR: 0.8 LVL = 1 SDR
LithuaniaCurrency board with U.S. dollar: 4 LTL, = $1
PolandExchange rate pegged within crawling band to basket comprising the U.S. dollar (45 percent), the deutsche mark (35 percent), the pound sterling (10 percent), the French franc (5 percent), and the Swiss franc (5 percent)
RomaniaFree float
Slovak RepublicExchange rate pegged within fixed band to basket comprising the deutsche mark (60 percent) and the U.S. dollar (40 percent)
SloveniaManaged float
Source: IMF, Exchange Arrangements and Exchange Restrictions: Annual Report 1995.Note: CEECs that have “Europe Agreements” with the EU.
Source: IMF, Exchange Arrangements and Exchange Restrictions: Annual Report 1995.Note: CEECs that have “Europe Agreements” with the EU.

Negotiations with the CEECs on their prospective EU membership have focused on the need for structural improvements in their economies without particular reference to exchange rate arrangements. However, while the ERM II is not seen as the “natutal habitat” of exchange rate arrangements involving the CEEC currencies and the euro, participation in such a mechanism as members of the EU could have attractions for the CEECs. The credibility to be gained from a formal link to the euro through ERM II participation could offer significant advantages, for example, in terms of providing an anchor for macroeconomic policies, lowering interest rate premiums, and attracting capital inflows. Many of these CEEC countries already have unilateral exchange rate links with the ECU and the deutsche mark so that a bilateral link to the euro would seem to be a logical course of action. Moreover, the attractiveness of a link to the euro will increase as the new single currency evolves as an important international currency.

Given the diversity in their current regimes, any exchange rate arrangement involving the currencies of the CEECs with the euro must be adapted to the economic conditions of the countries concerned and to the policy commitments of the relevant national authorities. The transition path to the adoption of the euro would likely vary among the CEECs and a series of steps (implying possibly different exchange rate arrangements for each country, which would evolve over time as economic convergence is achieved) toward an increasingly stable exchange rate with the euro can be envisaged. In this context, the flexibility offered by the ERM II (in the form of bilateral parities against the euro with a relatively wide standard fluctuation margin, timely realignments, and the possibility of closer exchange rate links when appropriate) would be an important advantage. This flexibility allows one to conceive of a broad spectrum of exchange rate arrangements within the new mechanism, ranging from very loose pegs to progressively tighter arrangements, even including a currency board.

Support for any exchange rate arrangement involving the euro could be expected on two conditions. First, the arrangement would need to be consistent with the price stability objective of the ECB’s monetary policy. Second, the arrangement would need to buttress the CEEC countries’ commitment to stability-oriented macroeconomic policies and foster necessary structural adjustment. In sum, it is clear that the relevance and usefulness of exchange rate arrangements between the CEEC currencies and the euro would be assessed on the basis of their contribution to economic convergence as the means to achieve a successful catch-up and ultimately the adoption of the single currency. The flexibility within the ERM II would allow both of these conditions to be fulfilled by minimizing the necessity for large-scale foreign exchange intervention by the ECB and minimizing the risk that ERM II participation on some standardized set of terms might impede structural adjustment and the catching-up process.

Despite the advantages of ERM II participation for the CEECs, a cautious approach to establishing a hard peg with the euro would seen appropriate. The market-based systems in many of the CEECs are still in their infancy and time will be needed before they are fully effective. The structural adjustments required in these economies are daunting and derive not just from the need to adapt to market discipline but also from the need to diversify their production from the specialization characterizing their relations with the former communist bloc. As the transition to the market system is not complete, relative prices have not yet fully adjusted and there is no way of determining (even with the customary degree of uncertainty) the equilibrium level for their exchange rates. Moreover, the absence of relevant data and the dynamic nature of these economies would make any model-based calculations of an equilibrium rate particularly hazardous, as fundamental relationships within their economies remain difficult to determine and would be subject to significant change over relatively short periods of time. Without some understanding of equilibrium conditions, agreeing on a central parity for the CEEC currencies against the euro could in many cases be a rather “hit and miss” affair.

Attention must also be paid to the fact that the CEEC countries are catch up economies where productivity, particularly in the manufacturing sector, is likely to grow faster than that in the EU countries. While a successful catching up in the context of a hard exchange rate peg is not precluded, the implied productivity differential with other euro area countries would ordinarily be reflected in an exchange rate appreciation in the CEEC currencies and could provoke exchange rate tensions in the context of a hard peg. Similarly, the positive expectations effects linked to EU membership could also create exchange rate tensions, as an expansion in aggregate demand ahead of supply potential in the economy creates a need for a temporary real exchange rate appreciation to contain inflationary pressures. In this latter respect, the ERM experience of Spain and Portugal is revealing. Accordingly, while the ability to maintain a hard peg against the euro would differ from one CEEC to another, a strong case can be made for adopting a flexible approach to ERM II participation for the CEECs in general.

Given the specific characteristics of the CEEC economies, exchange rate surveillance will be of particular importance in the context of their participation in the ERM II. EU membership would mean that these CEECs would be subject to the multilateral surveillance procedures provided in the Treaty.5 These procedures—to be enhanced in the context of new convergence programs required under the Stability and Growth Pact—will help to ensure a macroeconomic framework consistent with whatever exchange rate arrangement the country might have in place. However, the addition of a regional dimension to the individual efforts of the CEEC countries would bring important benefits. Given the difference in levels of development between many of the CEECs and the EU in general, there is much to recommend an exchange of information and of best practices between transition economies themselves as a supplement to the standard EU surveillance procedures. A regional surveillance framework might, therefore, be expected to improve the prospects of a successful and rapid transition for the CEECs. In this context, there would be considerable merit in extending the existing dialogue established between the individual CEECs and the EU to a similar dialogue among the applicant CEECs, with a view to developing a flexible framework of regional cooperation and surveillance.

Non-EU Mediterranean Countries In Search of Freer Trade

In 1995, all 15 EU countries and 12 non-EU partner countries from the Mediterranean region (Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, the Palestinian Authority, Syria, Tunisia, and Turkey) adopted the Barcelona Declaration. The Declaration established a so-called Euro-Mediterranean Partnership comprising three elements: a political and security arrangement, an economic and financial arrangement, and an arrangement in the area of social, cultural, and human affairs. Within the framework of economic and financial cooperation, the EU has entered into bilateral “Euro-Mediterranean” association agreements with Tunisia, Israel, and Morocco, and is about to do so with Jordan. Similar agreements are currently being negotiated with Algeria, Egypt, and Lebanon, and an interim agreement has been concluded with the Palestine Liberation Organization on behalf of the Palestinian Authority. Three other Mediterranean countries have close links to the EU: Cyprus and Malta have association agreements and Turkey a customs union. These latter three countries have applied for membership in the EU6 and negotiations on Cyprus’ accession to the EU are expected to commence soon.

Unlike the case of the CEECs, the intensification of links between the EU and these 12 Mediterranean countries is not in general expected to lead to their membership in the Union. Nevertheless, the Barcelona Declaration aims to establish a Euro-Mediterranean free trade area by the year 2010. Regional integration is an essential element of the Barcelona process, so trade between the two groups of countries would be expected to intensify in the coming years. In this respect, Table 2 indicates the significant trade linkages that already exist, and more particularly the importance of the EU as a major trading partner for these countries. Although these countries presently have a higher share in total extra-EU trade (some 9 percent) than do CEECs, this is likely to change if the rapid expansion of EU trade experienced by those countries over the last couple of years persists. This underlines the importance of the Euro-Mediterranean Partnership, which provides for the gradual dismantling of tariff and nontariff import restrictions over the next 12 years—particularly on the side of the Mediterranean countries—and the expected intensification of Euro-Mediterranean trade. The partnership also provides for a harmonization of statistical standards, customs procedures, market regulations, financial sector development, and investment mechanisms that will stimulate a more efficient allocation of resources, and the transfer of know-how and investment. As a result, the international competitiveness of these Mediterranean countries is expected to improve and the regional cooperation—now quite limited—is expected to be stimulated. With the strengthening of EU-Mediterranean trade links, and at a later stage of links between individual Mediterranean partners, the need for economic dialogue as foreseen in the Euro-Mediterranean Agreements will become apparent.

Table 2.Weight of EU in Trade of Mediterranean Countries, 1995
CountryImports from EU

(As percent of total)
Exports to EU

(As percent of total)
Source: Eurostat. Euro-Mediterranean Bulletin on Short-Term Indicators, 1997.
Source: Eurostat. Euro-Mediterranean Bulletin on Short-Term Indicators, 1997.

Like the CEECs, the Mediterranean countries operate a wide range of exchange rate regimes (see Table 3). The diversity in arrangements reflects the differences in underlying economic conditions in terms of resource allocation, inflation, trade, and financial integration as well as different priorities among policymakers in the conduct of macroeconomic polices. In addition, a particular feature of Mediterranean partner countries is that their terms of trade are highly volatile. This is because some of them (in particular Algeria, but also to a limited extent Egypt and Syria) are oil exporters and face fluctuating world prices, while others have a relatively high concentration of their trade in a small number of sectors (e.g., over 50 percent of Egyptian, Moroccan, Syrian, and Tunisian manufacturing exports are concentrated in textiles and clothing). The expected strengthening of trade with the EU as well as with other Mediterranean countries is likely to reduce the vulnerability of the Mediterranean countries to external shocks. In the meantime, however, the high volatility of the terms of trade provides a strong argument that an immediate locking of the exchange rates to the euro would probably be premature.

Table 3.Exchange Rate Regime of Southern Mediterranean Countries
AlgeriaManaged float
CyprusExchange rate pegged to currency basket
EgyptManaged float
IsraelManaged float
JordanExchange rate pegged to U.S. dollar
LebanonFree float
MaltaExchange rate pegged to currency basket
MoroccoExchange rate pegged to currency basket
SyriaExchange rate pegged to U. S. dollar
TunisiaManaged float
TurkeyManaged float
Source: IMF, Exchange Arrangements and Exchange Restrictions: Annual Report 1995.
Source: IMF, Exchange Arrangements and Exchange Restrictions: Annual Report 1995.

The economics of these Mediterranean countries share many common features with the economies of the CEECs. They are catch-up or emerging economics, they are engaged in a process of liberalization, and they recognize the benefits of open competition and a market-based economy. Moreover, the implementation of the Euro-Mediterranean agreements is likely to require further structural reform. In such circumstances, the economies of the Mediterranean countries are likely to be relatively dynamic. Similar arguments to those made in the case of the CEECs would recommend that the Mediterranean countries should not be constrained to move toward a hard exchange rate peg to the euro from the outset, in particular to preserve sufficient flexibility to adjust the real exchange rate.

None of the bilateral agreements between the EU and individual Mediterranean countries—neither those concluded nor those under negotiation—include an exchange rate arrangement, and apart from the few countries that might become EU members it is presently not expected that relations will develop in this direction. However, as these countries continue to integrate with the EU, they may find the euro increasingly attractive as a vehicle currency and as a reserve asset. Moreover, the euro might also be attractive to these countries as an anchor for their exchange rate policy.

Change in Peg for the CFA Zone from the French Franc to the Euro

Although the EU per se has no exchange rate arrangement with the CFA zone of sub-Saharan Africa, one member state—France—maintains a special monetary link with these countries. The central element of this special link is a fixed exchange rate against the French franc and, as France is expected to adopt the euro as its new currency, there may be implications for the CFA zone.

The CFA zone comprises two separate monetary unions with their own respective single currencies. These monetary unions are the UMOA (Union Monétaire Quest Africaine) in the west of the zone and the UDEAC (Union Douanière des Etats de I’Afrique Centrale) in Central Africa. Each of the monetary unions has its own central bank. The BCEAO (Banque Centrale des Etats de I’Afrique dc I’Ouest) issues a single currency—the CFA franc—for the seven countries of the UMOA (Benin, Burkina Faso, Côte d’lvoirc, Mali, Nigeria, Senegal, and Togo). As indicated, the CFA franc has a fixed exchange rate with the French franc. Recently, the seven countries in this union added an economic dimension to their monetary links. The BEAC (Banque des Etats de I’Afrique Centrale) issues a separate currency for each of the six countries of the UDEAC (Cameroon, Central African Republic, Chad, Congo, Gabon, and Guinea). These six countries have a monetary agreement among themselves and with the French authorities. Despite having distinct currencies, they also share the same fixed exchange rate with the French franc.

The monetary agreements between the BCEAO and BEAC and the French authorities are identical and are based upon the following general provisions:

  • the fixity of exchange rates against the French franc;

  • a guarantee from the French treasury of full convertibility of their currencies to French francs;

  • the pooling of foreign exchange reserves by all of the CFA countries; at least 65 percent of the reserve assets of the BCEAO and the BEAC are deposited with the French treasury; and

  • participation of the French authorities in the formulation of monetary policy in the CFA zone as a counterpart to the guarantee of convertibility.

The agreements themselves must be seen against the background of the substantial economic cooperation aid provided by France to the CFA zone, although there is no formal linkage between the agreements and the aid. The involvement of the French authorities in the agreements is of major significance. The French francs needed for convertibility of CFA francs are provided by the French treasury under a specific budget line and not by the Bank of France. Although the future status of this type of arrangement has yet to be decided in the context of EMU, the essentially budgetary nature of this exchange rate arrangement appears to make it compatible with the requirements of the Treaty. Accordingly, the introduction of the euro will merely entail the replacement of the French franc as the peg and an arithmetical adjustment in the exchange rate of the CFA countries. The new fixed exchange rate against the euro will be derived from the conversion rate of the French franc against the euro. In this way, the current arrangements governing the CFA franc zone will continue largely as they are now. There will be no need for change in the exchange rate regime as long as the French (budgetary) authorities are ready to guarantee the convertibility of the CFA franc by providing the necessary resources and as long as the member countries of the CFA zone are willing to maintain the agreements.

Although the introduction of the euro will not of itself imply a change of exchange rate regime for the CFA countries, they may be affected to the extent that the path of the euro exchange rate may differ from that which would have been followed by the French franc exchange rate. Some have argued that, irrespective of underlying economic conditions in the EU, the euro will appreciate strongly in the early years of EMU as the ECB seeks to reinforce its credibility by adopting a relatively tight monetary policy stance. Of course, a sharp and sustained appreciation of the euro—implying a corresponding appreciation of the franc CFA—could present problems of competitiveness in the CFA zone as a whole, with negative consequences for economic growth and development. Others have argued, however, that high unemployment rates in the EU will require the ECB to adopt a relatively accommodating monetary policy stance, implying a depreciation in the euro in the early years of EMU. A weak euro would probably contribute to higher economic growth in the CFA zone but could have negative consequences for inflation performance. In fact, it is difficult to predict with any certainty the likely path of the euro in the early years of EMU. However, one could equally argue that concerns over the euro exchange rate are exaggerated. Given that the ECB will inherit the credibility of its constituent national central banks and the similarities between the monetary policy regime to apply in the euro area and the regime currently applying in most EU countries—and notably in France—the shift from a peg against the French franc to a peg against the euro may not be particularly dramatic for the CFA zone.

Whatever the implications of the introduction of the euro may be, the CFA zone has been profoundly influenced by the EMU project in general. The protracted economic slowdown and recession in the CFA zone countries from the mid-1980s to the mid-1990s was provoked by a severe overvaluation of currencies. This overvaluation reflected the inconsistency of a fixed exchange rate peg against the relatively stable French franc and imbalances in their domestic macroeconomic policy mix. The impact of their overvalued currencies on economic activity was compounded by persistent protectionism in trade relations within the CFA zone. The scale of the recession forced an economic regime change. Facing a choice between dismantling existing monetary arrangements or building upon them, they opted to maintain the existing arrangements but to intensify their regional integration. The seven countries of the UMOA decided in January 1994 to add an economic element to their monetary union, and so became the Western African EMU (UEMOA). The six members of the UDEAC-BEAC followed this lead and in October 1996 signed conventions making operational a new economic Treaty built upon their existing arrangement. This union was renamed the Central African Economic and Monetary Community (CEMAC). These moves toward greater economic integration acknowledged the inappropriateness of sharing a single currency without a single market and the need to have freer trade within the CFA zone. In addition, the countries recognized the need for greater compatibility between their other economic policies at the national level and the single regional monetary policy. In this latter context, they agreed to establish a cooperative scheme involving regional surveillance of their economic policies.

The new Treaties were clearly inspired by the EMU project. The Maastricht Treaty embodies a new consensus among EU countries on the benefits of stability-oriented macroeconomic policies in terms of economic growth and development. This consensus also underlies Article 3a of the Treaty, which states that

…the activities of the Member States and the Community shall include…the adoption of an economic policy which is based on close coordination of Member States’ economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition.

The CFA countries are adopting a similar stability-oriented approach to macroeconomic management. Exchange rate stability and guaranteed convertibility should attract inward investment by reducing uncertainty. In addition, CFA producers will have access to each other’s markets without exchange rate risk. There are also advantages of a more systemic nature. The credibility of a monetary union in a single market will require a common approach to budgetary discipline in order to ensure balanced economic growth in the entire zone. The positive implications of such a fundamental regime change should not be underestimated.

There were, however, arguments against the present monetary and exchange rate arrangements. First, it must be acknowledged that nearly 50 years of a fixed exchange rate has not resulted in much-needed economic development in the CFA zone. While the CFA countries have a much better record of price stability than do neighboring countries, they have experienced a similarly mediocre economic growth rate. The unavoidable conclusion to be drawn is that the choice of an appropriate monetary policy/exchange rate regime alone is not the key to successful economic development. Many other factors matter just as much. Indeed, the main benefit of the current exchange rate regime is that it offers a framework for a regional approach to economic development. The economic development of sub-Saharan countries must be based on the principles of a free-market system and a stability-oriented macro-economic framework. These countries have shown the political will to proceed further with regional integration based on these principles and must be supported in their endeavors by the international community. If successful, this regional approach could be extended to other parts of Africa.

The European Commission recently issued a “green paper” on the relationships between the EU and African countries, with the intention of triggering a public debate on the future of development assistance. Some basic requirements for improving assistance between the EU and these countries—notably through deeper monetary and macroeconomic cooperation—were identified.7 Among these requirements were the need to:

  • merge—when feasible from a legal and institutional point of view—different financial assistance instruments into a single regional instrument. When this is not possible, one might improve the visibility and objectivity of coordination among instruments and donors by including agreed criteria for conditionality, especially macroeconomic conditionality. In any case, criteria should be agreed with the recipients. This approach would foster competition among recipients based on “good governance” conditionality.

  • set up a regional surveillance framework to assess compliance with the agreed criteria. The CFA Treaties provide for multilateral surveillance of economic policies along the lines currently employed by the EU and the IMF. If, as expected, regional surveillance succeeds in delivering stability-oriented macroeconomic policies and improved prospects for economic growth and development, it should be seen as a possible precedent for other African countries.


The introduction of the euro will have important international implications. Given the likely economic size of the euro area, its stability-oriented macroeconomic policy framework, and the eventual depth of its financial market, the euro can be expected to evolve into a major international currency. As such, the introduction of the new currency will be of particular significance to those countries with which the EU has particularly close economic and financial links. In this paper, the implications for three groups of countries—the CEECs, the Mediterranean countries, and the CFA zone countries—have been reviewed.

The economic conditions and aspirations of each of these groups of countries vary significantly. At one extreme are the CEECs, which aspire to full EU membership—implying ultimately the adoption of the euro. However, the starting points of the CEECs in terms of economic development and macroeconomic policy framework are not the same. In particular, they operate an array of different exchange rate regimes, ranging from managed floating to a currency board. The transition of these economies from their current regime to adoption of the euro could be managed through the new ERM II, which will operate with a high degree of built-in flexibility. However, a pragmatic approach will be needed in deciding on any exchange rate arrangement involving the CEEC currencies and the euro. At the other extreme are the countries of the CFA zone, whose exchange rate relationship with EU comes indirectly via a fixed exchange rate against the French franc. The introduction of the euro will not in itself imply a change in exchange rate regime for these countries. A fixed exchange rate against the euro will be derived from the conversion rate of the French franc against the euro. Between these extremes are the Southern Mediterranean countries, which are unlikely to seek an exchange rate arrangement with the euro in the foreseeable future. However, the euro may become increasingly attractive to these countries as a vehicle currency and/or reserve asset as their integration into the global economy progresses.

The authors would like to thank O. Bodin, C. Ghymers, B. Kaufmann, J. Kröger, and R. Wissels for helpful comments.

Declaration No. 5 on monetary cooperation with non-Community countries, which states that“the Community shall be prepared to cooperate with other European countries and with those non-European countries with which the Community has close economic ties.”

For the purposes of this paper, the term CEECs refers only to Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia, which have signed formal agreements with the EU.

Europe Agreements provide the framework for membership negotiations with the relevant CEECs and cover a broad spectrum of issues, including those of an economic and financial nature.

The assumption is, of course, that immediate participation in the euro area on entry to the EU will not be an option for the CEECs.

See provisions of Article 103. These provisions have been reinforced in the context of the Stability and Growth Pact, which will enter into effect from January 1, 1999.

Although Malta has recently decided to put its application on hold.

The green paper also considered the institutional aspects of assistance and possible reform of the conditionally aspects of aid in close coordination with the other donors.

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