Introduction of the euro in CEE countries – is it economically justifiable? The Croatian case

Abstract

This article analyses correlation of demand and supply shocks between the EMU and the CEECs in order to see whether there is some degree of business cycle coordination between them. The main interest is to investigate the impact on Croatia and compare it with other CEECs. Information on the correlation of demand and supply shocks between the EMU and CEECs is important if a country wants to join the monetary union, since synchronisation of business cycles and policy coordination will have a significant impact on willingness to enter the monetary union (unless the decision is a political one). We employ structural vector autoregression in order to identify demand and supply shocks and analyse their correlation, size and speed of adjustment. The results indicate that at the moment Croatia is far from ready for the common monetary policy of the EMU, while among other CEE countries Slovenia and Latvia have the closest connection between their business cycles and those of the EMU.

Should the EMU stop enlarging?

“…On the other hand, Broz (2010) shows that business cycle synchronization in the euro area members increased in the EMU period compared to the pre-EMU period. Similar results are also reported by Darvas and Szapáry (2008).…”

“…Pentecôte, Poutineau, and Rondeau (2015) Since synchronization of business cycles is weakened by new trade flows, ex post synchronization of business cycles for further EMU enlargement becomes questionable. (2010), Broz (2010) Business cycle synchronization in the euro area members increased in the EMU period compared to the pre-EMU period.…”

“…For that reason, ever since new member states started the EU accession process, researchers have been interested in how their economic structures can cope with more developed Western European economic structures. Tanja Broz (2010) compares shocks between the EMU and CEE countries and finds that there are differences in shocks and in the adjustment processes between the EMU and most of the CEE countries. Zsolt Darvas and György Szapáry (2008) find that among CEE countries Hungary, Poland and Slovenia have the most synchronized business cycles with the EMU, while the Baltic countries, due to shocks experienced during the 1998 Russian crisis, are not synchronized at all.…”

Emu: An Evaluation of the Asymmetric Shock Problem

“…Uncorrelated shocks also provide an assessment of the likelihood of an asymmetry in the system. Broz (2008) finds that the correlation of shocks of the 1995-2006-period is higher than in the 1995-98 period, even though it is lower than the 1999-2002 period, and argues that, although one can speak of a general convergence, the existence of the differences in the member states should be kept in mind. GDP growth correlation, when taken as an indicator of a possible asymmetric shock problem, shows that some members of EMU would be better off without EMU, while some new members of EU are more symmetric to the EMU average than the existing EMU members.…”

“…GDP growth correlation, when taken as an indicator of a possible asymmetric shock problem, shows that some members of EMU would be better off without EMU, while some new members of EU are more symmetric to the EMU average than the existing EMU members. (Demyanyk and Volosovych, 2005;Broz, 2008) So far it seems unclear if the EMU can be termed as an OCA. While there are some improvements in financial market integration, as argued by Frankel and Rose (1997), there is also evidence pertaining to an earlier trend of integration, thus making the effect of EMU on the integration debatable.…”