Introduction

Since its emergence in 1999, the Euro zone area (as a proxy for the EU) has established itself as a major global economic power. From the financial and monetary point of view it has been a remarkable success. The credibility of the European Central Bank (ECB) has been established rather quickly, owing, inter alia, to the positive long-track record of some of the member countries central banks, such as the Bundesbank. In addition, the eurozone has proved to operate as a shelter during the current world financial crisis. But some of its weaknesses have also been better revealed during this crisis.

It goes without saying that the main indicator of this success is the low inflation rates in the single currency area during the past decade. The euro’s share in total identified official holdings of foreign currency exchange increased from 18% to over 26% between 1999 and 2007 and the medium to long term trends tend to suggest that it will grow further.

However, on other fronts, in particular the real economy, the adoption of the euro has failed do deliver expected results. Economic growth and employment have been considerably inferior to the US economy. And this, in spite of the fact that the 1999-2007 period has been, largely, one of macroeconomic stability, with low inflation and interest rates. Also, the euro has not worked that well in bringing prices of the same products and services together across the euro zone.

These weaknesses are best exposed nowadays, at a time of an unprecedented global financial crisis. The intensification of financial turmoil together with the impairment of the functioning of credit markets would restrain economic activity in the near future. Both households, with good credit histories, and businesses, confront themselves with diminished access to credit. The more prolonged the current financial crisis becomes, the deeper it would affect the real economy, impacting on output and unemployment. From the euro zone economy’s point of view two issues stand out. First, does the MU have the adequate mechanisms in place to deal with crisis like this?

Second, how fast would the MU economy recover, following these shocks? Are its markets (i.e. goods and services, money and labour) resilient enough to have a quick recovery? Complex decision mechanisms required getting an MU-wide consensus, the absence of some sort of a Central Fiscal Authority, which would have made possible a more effective coordination with monetary policy, and rigid labour markets would likely impair both the timing response to the crisis as well as the recovery process.

Most of the issues related to the functioning of the eurozone are found in the optimal currency area theory. Some of the euro zone economic challenges have been highlighted since its inception; others have emerged with the subsequent expansion of the euro zone. More recently Slovenia joined the single currency in 2007, Malta and Cyprus in January 2008, and Slovakia entered the EMU in January 2009. However, for the remaining NMSs there is an increasing uncertainty regarding the timeline of joining the euro zone. Most of the NMSs are a long way from fulfilling the Maastricht criteria, and the current global macroeconomic environment of increasing inflation and reduction in GDP growth creates additional uncertainty.

Expanding the euro zone further presents additional challenges. Currently, the eurozone has a population of 320 million and the remaining 8 NMSs would add another 100 million. This would exacerbate some of the existing problems, such as health care and aging costs, for instance, and raise issues on the required levels of public debts and fiscal deficits.

From an economic point of view, the challenges the NMSs face are threefold. The first set pertain to internal macroeconomic conditions: achieving sustainable inflation, reduced exchange rate volatility, prudent fiscal policy. The second set addresses the current global macroeconomic conditions, and the effects of the financial crisis. Third, a set of conditions relate to the institutional underpinnings of innovation and competitiveness –education being a paramount ingredient herein. Obviously, the three sets of challenges are interlinked and this is what makes it more difficult for the NMSs to fulfil the Maastricht criteria. It has been argued that the Maastricht criteria were devised for a different group of countries facing different problems in the 1990s and that some of these should be relaxed for the new countries joining the EMU.

The prevailing view, both in the academia and in official circles has advocated strict compliance with the Maastricht Treaty’s convergence criteria, ruling out any relaxation of those. The concerns are more related to the long-term stability of the euro area, in this respect the macroeconomic stability of the new entrants is paramount. Moreover, it may not be in the interest of some NMSs to join EMU in the near future. Their economies need the flexibility of exchange rate to address their structural problems. With their monetary policy run by the ECB, the economic convergence with the rest of the euro zone countries would be harder to achieve. But there is another argument, too, which would highlight the benefits of a faster track of accession, which would look at dynamic costs and benefits for the countries involved and for the eurozone as a whole.


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