4. The Euro Area Enlargement

1
4. The Euro Area Enlargement
2
The Euro Area Enlargement

• The new Member States
• are large in population
• but are small in economic terms

2003 Population (millions) GDP (billion euros)
New Member States 75 413
EMU12 305 (24) 6828 (6)
EU15 381 (19) 8843 (5)
3
The Euro Area Enlargement

• Basic Statistics

4
The Euro Area Enlargement

• EU10 Country Profiles

5
The Euro Area Enlargement

• EU10 Country Profiles

6
The Euro Area Enlargement

• EU10 Country Profiles

7
The Euro Area Enlargement

• Nominal versus real convergence
• High divergence of real GDP per capita and of
  price levels
• Economic catch up leads to (Balassa Samuelson
  effect)
• high inflation OR
• nominal appreciation of the currency
• Real GDP Gap Economic Convergence Theory by
  Robert Solow

8
The Euro Area Enlargement
9
The Euro Area Enlargement

• Unemployment Rates

10
The Euro Area Enlargement
Inflation rates Because of catch up growth,
inflation rates in EU10 countries higher than in
EU15
11
The Euro Area Enlargement
Inflation rates
12
The Euro Area Enlargement
Long-Term Interest Rates
13
The Euro Area Enlargement
Long-Term Interest Rates
14
The Euro Area Enlargement

• Nominal versus fiscal convergence
• Central bank independence and convergence of
  inflation are prerequisites for joining EMU
• These increase the burden for government
  budgets.
• Budget deficits in many new Member States have
  increased a lot.

15
The Euro Area Enlargement
Government Deficit to GDP Ratio
16
The Euro Area Enlargement
Government Deficit to GDP Ratio
17
The Euro Area Enlargement
Government Debt to GDP Ratio
18
The Euro Area Enlargement
Government Debt to GDP Ratio
19
The Euro Area Enlargement
Government Deficit and Government Debt to GDP
Ratio
20
The Euro Area Enlargement
Exchange Rate Stability
21
The Euro Area Enlargement
Exchange Rate Stability ERM II
Denmark the Danish kroner joined the Exchange
Rate Mechanism II (ERM II) on 1 January 1999
and observes a central rate of 746.038
and narrow fluctuation margins (2.25)
vis-à-vis the euro. Estonia the Estonian kroon
joined the Exchange Rate Mechanism II
(ERM II) on 28 June 2004 and observes a
central rate of 15.6466 and standard
fluctuation margins (15) vis-à-vis the
euro. Estonia unilaterally maintains a
euro-based currency board. Cyprus the Cyprus
pound joined the Exchange Rate Mechanism II
(ERM II) on 2 May 2005 and observes a central
rate of 0.585274 and standard fluctuation
margins (15) vis-à-vis the euro. Latvia the
Latvian lats joined the Exchange Rate
Mechanism II (ERM II) on 2 May 2005
and observes a central rate of 0.702804
and standard fluctuation margins (15)
vis-à-vis the euro. Latvia unilaterally maintains
the exchange rate of the lats within a 1
fluctuation band around its central rate
vis-à-vis the euro.
22
The Euro Area Enlargement
Exchange Rate Stability ERM II
Lithuania the Lithuanian litas joined the
Exchange Rate Mechanism II (ERM II) on 28 June
2004 and observes a central rate of 3.45280
and standard fluctuation margins (15)
vis-à-vis the euro. Lithuania unilaterally
maintains a euro-based currency board. Malta the
Maltese lira joined the Exchange Rate
Mechanism II (ERM II) on 2 May 2005
and observes a central rate of 0.429300 lira
and standard fluctuation margins (15)
vis-à-vis the euro. Malta unilaterally maintains
the exchange rate of the lira at the central rate
vis-à-vis the euro. Slovenia the Slovenian tolar
joined the Exchange Rate Mechanism II
(ERM II) on 28 June 2004 and observes a
central rate of 239.640 and standard
fluctuation margins (15) vis-à-vis the
euro. The tolar will leave ERM II when Slovenia
adopts the euro on 1 January 2007. Slovakia the
Slovak koruna joined the Exchange Rate
Mechanism II (ERM II) on 28 November 2005
and observes a central rate of 38.4550
and standard fluctuation margins (15)
vis-à-vis the euro.
23
The Euro Area EnlargementBalassa Samuelson
Effect

• Traded goods sector (manufactured goods)
• Economic catch up implies higher productivity
  growth in traded goods sector
• Higher productivity leads to higher wages for
  worker in this sector
• Non-traded goods sector (services)
• As labour is mobile between the traded and
  non-traded goods sectors, wages in the services
  sector rise as well
• But productivity does not increase in the
  services sector. Consequently, prices of services
  rise. Inflation is higher than in the EU15
• Real convergence (higher productivity growth)
  conflicts with nominal convergence (to a common
  inflation level)

24
5. The EU Unemployment

• Basic Facts

25
5. The EU Unemployment

• Basic Facts

26
5. The EU Unemployment

• Basic Facts Duration of Unemployment

27
5. The EU Unemployment

• Basic Facts Young Unemployment Rate