EU-enlargement and EMU - more challenges ahead

The European Union stands on the verge of an enlargement wave, which is without any historical precedent. Currently, negotiations are taking place with ten Central and Eastern European countries, Malta and Cyprus. These countries will have to incorporate the vast body of EU rules and laws (the so-called Acquis Communautair) that regulate the free movement of goods, services, capital and labour in the Internal Market. Moreover, they will have to foster the ability to function within this common market and withstand competitive pressures by developing full-fledged market economies and strong economic structures. This should form the basis for a successful economic integration into Europe. After EU accession, the final step in this integration process, as prescribed by the Treaty, would be the adoption of the single currency: the euro. Clearly, the accession process poses major challenges, in particular for the candidates in Central and Eastern Europe. As former communist plan economies, these countries focus on completing transition and making the necessary structural adjustments in their economies. Of course, these processes of transition and accession largely work in parallel. The purpose of this paper is to analyse the economic policy challenges involved and, in particular, to assess appropriate exchange rate regimes both before and after EU accession. As new Member States will be expected to eventually join monetary union, a key question is whether an early fixed peg to the euro in these strategies would be appropriate. The first part of this paper focuses on EU accession. An overview is given of the relative economic and structural position of Central and Eastern European candidates on the basis of the formal conditions for accession (the so-called Copenhagen criteria). Following from this assessment, major economic policy challenges in the process of catching-up are identified and set against actual exchange rate policies in candidate member states. The second part deals with the prospects for joining Economic and Monetary Union. It evaluates the readiness for euro adoption on the basis of legal requirements (the Maastricht criteria) and economic preconditions as prescribed by the optimum currency area theory. Subsequently, appropriate exchange rate regimes towards EMU are discussed, paying specific attention to the pros and cons of early euro adoption.