Entering the Eurozone

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1 Entering the Eurozone Three problems with the Accepted View Mojmír Hampl,, Czech National Bank Euro50 Group Meeting Budapest July 1-2, 2008

2 Accepted View A candidate economy meets the Maastricht criteria as interpreted by the EC the entry of this economy into the EA will be beneficial both to this economy and the EA no reason to delay the entry. Example: Based on this assessment (showing that Slovakia fulfills the Maastricht criteria), the Commission proposes that Slovakia adopts the euro in (Commission s Press Release, 7 May 2008)

3 ECONOMIC: The Maastricht criteria are weak and incomplete. LEGISLATIVE: The Maastricht criteria are used in a peculiar way. POLITICAL: The domestic decision on the date of entry is a political decision.

4 ECONOMIC: The Maastricht criteria are weak and incomplete. Some important aspects of readiness are captured by the Maastricht criteria (e.g., real convergence as a mix of inflation and exchange rate appreciation). BUT other important aspects are (a) covered sketchily only, allowing fulfillment by deceit - especially flexibility of public finance (b) completely absent - harmonization of economic cycles - low probability of asymmetric shocks - flexibility of the labor market market

5 Don t worry - membership in the euro area will enforce improvement of domestic economic policies anyway. NO! Before entry, bad domestic economic policies have visible costs (e.g., depreciation of currency). After entry, the costs show in less visible ways (e.g., sluggish growth). Entry is advisable only after domestic economic policies have been reliably put in order. More generally: entry is in the interest of both the candidate and the EA only after the candidate meets super-criteria (Maastricht + many others). BUT the Commission and the ECB have a mandate to use in their Reports the Maastricht part only.

6 LEGISLATIVE: The Maastricht criteria are used in a peculiar way. E.g., within the inflation criterion: - best performing in terms of price stability interpreted as having the lowest inflation - sustainability of fulfillment has been assessed in a stricter way since the 2006 Report (assessment of outlook in the months ahead ) In the recent debates on the entry of Slovakia, there have been multiple attempts to use additional criteria.

7 Where the wording leaves room for interpretation, the room must be used in a way that is economically sensible and consistent over time (to maintain equal treatment). Whatever we think about the power or completeness of the Maastricht criteria, the official assessment must stick strictly to the current wording and avoid the use of any additional criteria that would go beyond the Treaty.

8 POLITICAL: The domestic decision on the date of entry is a political decision. Entry into the euro area will always imply not only benefits, but also some costs and risks. Alas, there is no aggregate reference value for this mix of apples and oranges. Elected politicians, not economists, must make the decision. (After all, the final decision to let the candidate economy into the euro area is also made by elected politicians the European Council.)

9 Implications All member states should keep checking that the official assessment of a candidate - makes economic sense, - is consistent over time, - does not overstep the mandate given by the Treaty. If the domestic decision to ask for entry into the euro area is based on the full range of super-criteria, then this decision may come long after meeting the weak and incomplete of Maastricht criteria. Given that the domestic decision is political, central banks should have no role in it beyond providing data and expert analysis.

10 Thank you for your attention.

11 Sentence and chart used since 2006 The average inflation rate in the Czech Republic during the 12 months to October 2006 was 2.2 percent, below the reference value of 2.8 percent, and is likely to remain below the reference value in the months ahead.

Miroljub Labus. Monetary and Exchange Rate Policy Part 2. Introduction into Economic System of the EU. Faculty of Law, Belgrade

Miroljub Labus. Monetary and Exchange Rate Policy Part 2. Introduction into Economic System of the EU. Faculty of Law, Belgrade Miroljub Labus Monetary and Exchange Rate Policy Part 2 Introduction into Economic System of the EU Faculty of Law, Belgrade R.Baldwin and C.Wyplosz: The Economics of European Integration, Ch.16 and 17