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Paper was presented at a conference on “Countries in Transition: Experiences and Challenges of European Union Membership,” in Sofia, Bulgaria, November 18–19, 2005 organized by LAREfi Universite Montesquieu Bordeaux and Sofia University. The views expressed are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its Management. Helpful comments were received from D. Demekas, C. Duenwald, P. Grasmann, N. Gueorgiev, H. Hatanpaa, H. Hirschhofer, D. Kanda, E. van der Mensbrugge, A. Mody, D. Moore, F. Rozwadowski, P. Sanfey, C. Sdralevich, and P. Thomsen.
The economic criteria for EU accession have been defined as “existence of a functioning market economy, and the capacity to cope with competitive pressure and market forces within the Union” (two of the five so-called Copenhagen criteria). So far, Bulgaria, Croatia, and Romania have been qualified as functioning market economies. There are no quantitative benchmarks and much of the assessment is based on judgment. Upon membership, the nominal convergence criteria related to joining the monetary union and adoption of the euro are more specifically defined (see Schadler and others, 2005).
SEE is here defined to include Albania, Bulgaria, Bosnia and Herzegovina, Croatia, FYR Macedonia, Romania, and Serbia and Montenegro. Because Serbia and Montenegro have different monetary regimes, they are at times analyzed as separate economies, although they form a union.
The countries covered are listed in Table 1, ranked in the order of progress with the various accession steps. The process involves a Feasibility Study, which makes a judgment on a country’s preparedness to negotiate a Stabilization and Association Agreement (SAA). The SAA includes provisions on trade and other policies to gradually align policies towards EU standards. Membership negotiations are the last phase before accession and involve negotiations on how to adopt EU standards in different policy areas (or chapters).
ERM2 is an arrangement that links the currencies of the prospective members of the monetary union to the Euro by establishing a +/- 15 percent band for exchange rate fluctuations around an agreed central parity.
The index measures on a scale from 0 to 4 progress in various structural reforms related to transition to a market economy.
The criteria are subject to some interpretation. For example, if the fiscal deficit and debt are declining towards the required levels, there may be some room for interpretation in, for example, allowing a higher deficit. In practice, the exchange rate criterion has been more strictly interpreted than the official limits. Appreciation and upward adjustments in parities are tolerated more easily than downward adjustments of the rate. Statements by the Economic and Financial Committee (EFC) suggest that stability is interpreted to require movements within a +/- 2.25 percent band instead of the allowed maximum fluctuation of +/- 15 percent (for a discussion, see Schadler and others, 2005).
The ECB Convergence report for 2004 calculated the reference inflation rate as 2.4 percent and interest rate 6.4 percent.
The definition of public sector can vary across countries (e.g., inclusion of municipalities), making this data only broadly comparable across countries.
Czech Republic, Hungary, Poland, Slovak Republic, and Slovenia