Euro adoption essay

Adoption of euro currency for new EU accession countries (Table 1) has proved to be at center stage for EU monetary integration. As Schadler (2005) acknowledges, euro adoption for new EU accession country is the most important event in EU history. However, contrary to this Schadler’s opinion there need to be a clear examination of the opportunities that these countries will derive from euro integration, as well as challenges they shall be exposed to (Read, 2001). After weighing both cases, then ascertaining whether or whether not the adoption shall be meaningful to these countries becomes an easy task.

In this regard, the perceived benefit or loss in monetary integration can only be seen in terms of the economic analyses. The debate of euro adoption by CEE new member states, begs the question of; to what extent the issue is being tackled or rather simplified. The question is necessitated in the sense that these new EU accession countries have transformation economies in dynamic change, their social and economic environments are fundamentally different from those of the established market economies of the eurozone.

Although, accession nations make up of 7% of EU GDP, the Eurosystem could deliver no good to accession countries within their first years of adoption. This can be well illustrated by looking at the Maastricht criteria (Schadler, 2005) that stipulates that monetary membership requires that: annual inflation in a candidate country not to exceed the average of 3 top performing European Union member countries in terms of price stability by over 1.

5% in the year before examination, the annual government deficit to less than 3% of GDP, long-term interest rate should be 2%, and not exceed the reference value which is defined by the average long-term interest rates as per European Union monetary system, exchange rates should be maintained constant with normal fluctuation margin provided by ERM; and the country should have a less than 60% public debt. Going by this Maastricht is a criterion that was tailored for the EU-12 countries, accession countries do not fit there (Schadler, 2005).

By this countries abandoning their currency and adopting euro (Read, 2001), they shall have higher inflation result in strong wage pressures and erode competitiveness in this countries. Also there is likelihood that asset price can bubbles due to the relatively underdeveloped financial markets. Emergence of a boom-bust cycles as a result of negative real interest rates. Therefore the process of adopting euro can hamper the process of catching up for these countries. This is in a view of tight fiscal and monetary policies aimed at settling inflation criteria can materialize at expense of actual income convergence.

As a result, there shall be a need to meet the deficit criterion which implies that the restructuring of heavy industries and necessary investments in human capital shall be postponed. All these hardship and problems aside, its evident some accession countries have been performing better on the basis of Maastricht criteria such as the Slovakia, Czech Republic, and Slovenia with a the impact of productivity growth on the inflation differential relative to Germany ranged from 0. 9 percent to 1. 3 percent, while in Hungary and Poland the range is higher to 3.

5 percent. In my views, the courtiers should have worked out on the catch up strategy first before their desire to adopt Euro. Nevertheless, benefits and challenges are worth to be looked at. Benefits According to Schadler (2005) states that the adoption of euro by these countries shall result to increase in growth rates, thus boosting real convergence of GDP with the EU average. Although the estimates indicates a temporary growth-rate falls of between 0. 3% to 0. 8% points, but it indicates that it shall be followed by gains of 0. 2% to 0.

4% points in the later year. Moreover, the long term benefits of euro adoption shall result to a 20% to 25% raise in GDP due to: first, lower interest rates, leading to higher investment accompanied by lower costs of public debt servicing. Second, Possible stimulus for structural reforms through the disciplining impact of ERM participation on domestic policies. Third, elimination of exchange rate risks and lower foreign trade transaction costs. Fourth, Better environment for Foreign Direct Investment (FDI) due to increased credibility and a trade generation impact.

Fifth, increased macroeconomic stability and further convergence of business cycles. And lastly, possible stimulus for structural reforms through the disciplining impact of ERM participation on domestic policies. These growth in GDP translate that there is a widened opportunities for business performance, though it may be limited due to stiff completion from developed economies with competitive advantage. In regarding trade activities, the accession countries exports to the larger region of European Union shall account more than 65% of their total exports.

This high level is in line with expansion of market by waiver of restrictive policies. While the imports accounts up to 4% of the total European Union imports (Schadler, 2005). Expected negative impacts The challenge posed by the current Maastricht rules is not fitting the specifics of these countries. Thus, employment, the growth, social cohesion and real convergence are in danger. Generally it implies that the nations within the accession countries that adopts euro are likely to face economic and social convergence risk.

The challenges when viewed from an economic perspective, pushing inflation under the equilibrium level shall hinder growth; negatively affect employment, real convergence, wage convergence and productivity growth. Moreover, the accession countries as required to adhere to EMU, they shall be required to have stricter fiscal criteria that shall deprive vital public investments and the infrastructure development projects giving a negative impulse to growth and convergence.

The negative implications from a social point of view can be seen in terms of the welfare risks attached to the application of non-fitting criteria which results to ‘welfare deficit’, yet there is need of step up welfare and employment policies but hampered by use of fiscal tightening. Evidently, accession countries still undergo the structural adjustments in their economies which pose a big challenge to their monetary policy. For instance, the process of bring down high inflation that challenges inevitability of a real appreciation that in turn slow rate of growth to income per capita.

For example, Czech Republic would need o grow at a rate of 11 percent to catch up with Greece or Portugal. As a consequence, a process that aims at catching up shall lead to appreciation of the real exchange rates. Additionally, there is a challenge of dealing with asymmetric shocks and excessive capital inflows due to improved investments from mature economies as a result of liberalized trade. Though, this capital inflow as a result of increased FDI enhances economic growth, but volatile short-term capital inflows may be harmful to exchange rate policy in regard to fixed exchange rate regime.

While on the other hand, high dependency on foreign capital inflows could be exposed to asymmetric shocks since accession countries have exposure to a few countries (Read, 2001). Conclusion In conclusion, the intention of adopting euro by accession countries to greater extend shall be both beneficial and challenging based on the EU formulation policies. However, on the positive scale adoption shall stimulate business growth as a due to creation of a single market, raised environmental standards, business education levels shall rise and shall move economy from labor intensive to capital intensive.

Furthermore, infrastructural developments are likely to improve, reduced currency transaction fee, removed trade impediments and the resulting economies of scale for the CEE exporting companies getting access to a single market will no doubt benefit accession countries. However, a few mentioned challenges can be minimized using 3 step approach. In order to attain a meaningful monetary integration, accession countries ought to carefully examine the perceived impacts.