Should the EMU stop enlarging?

Abstract

The aim of this research is to assess what would happen with the business cycle synchronization in the Economic and Monetary Union (EMU), if all new EU member states introduced the euro. In addition, the paper aims to explore how business cycle correlations have evolved over time. The assumption is that, if business cycles in the EMU members are not correlated and the state of integration remains as it is, the ECB's one-size-fits-all policy will require members to follow policies which are politically difficult to implement. Hence, we are analyzing whether the EMU should stop accepting new entrants in order to stop deteriorating mutual business cycle correlation. Results based on correlations of shocks between the EMU and individual countries and their sizes show that correlation of supply shocks would remain relatively high if all members introduced the euro, but low correlation of demand shocks, different sizes of shocks and transmission of shocks still remain as significant problems.