Ready for Euro? Evidence on EU new member states

Abstract

This article estimates optimum currency area (OCA) index for the EU New Member States (NMSs). We find that, as compared to the current Euro area countries, the NMSs meet OCA conditions largely and in this respect, are likely good candidates for Euro adoption.

Acknowledgements

The author thanks Martin Cincibuch, Fabrizio Coricelli, Jarko Fidrmuc, Dana Hájková, Luboš Komárek, Michal Skořepa and seminar participants at the Czech National Bank (CNB) for helpful comments. The views expressed in this article are not necessarily those of the CNB. This article has been supported by Czech National Bank Research Project No. A2/2003.

Notes

¹ Horváth and Kučerová (2005) find that the OCA criteria also largely explain the real exchange rate variability.

² We label this set of countries as NMSs, despite Bulgaria and Romania are expected to join EU in 2007–2008.

³ The data in this section were obtained from the IMF's online IFS, the EIU, the OECD's Monthly Statistics of Foreign Trade and, exceptionally, various central bank websites.

⁴ The data on dissimilarity of export commodity structure end in 2002, as we were unable to obtain more recent figures. Also, for some countries the data were not available on a quarterly basis. Nevertheless, the commodity structure of exports generally tends to be quite stable over time. It is also important to note that this variable is calculated vis-à-vis Germany, as figures for the euro area as a whole simply do not exist.

⁵ This statement is conditional on the extent to which the Euro area forms an OCA. Obviously, this is beyond the scope of this article.